A new kettle of fish

February 16, 2023

Salmon fish farm. Bergen, Norway.

This week we will be discussing a new addition to the portfolio, SalMar (Ticker: SALM NO), and the latest developments in the salmon farming industry.

The global salmon market was estimated to be a US $50 billion industry in 2020 and expected to grow at 3.7% a year to reach $76 billion by 2028. The growing disposable income in emerging countries and subsequent changes in dietary habits are some of the main drivers behind this growth. Consumers of salmon are more often from the middle- and upper middle-classes who are generally less sensitive to economic slowdowns and less likely to dramatically change their spending patterns, particularly in food purchases. In addition, the health benefits of eating salmon rich in Omega-3 over red meat are well-documented. As a protein, its feed conversion ratio (i.e., the kilograms of feed needed to increase the animal’s body weight by one kilogram) is one of the best among the protein sectors.

Global Alpha received the SalMar shares as part of the cash and share deal that SalMar made to acquire our previous holding in the portfolio, Norway Royal Salmon. The combined entity creates the second-largest salmon farmer in the world.

Both parties have operations in Northern and Central Norway. With this new acquisition, synergies will come from improved utilization of available biomass i.e. the total weight of the fish. SalMar will implement their best-in-class practices at the existing Norway Royal Salmon operations in Norway to improve biological challenges. Gaining increased access to smolt (juvenile salmon) will give SalMar additional benefits stemming from vertical integration such as increasing the quantity of harvested fish, which will optimize the utilization of the processing facility.

However, before the deal closed, the industry received some unexpected news. On September 28, 2022, the Norwegian government announced the most significant change to date to the salmon industry’s regulatory framework by imposing a 40% resource tax on salmon and trout farming in Norway. This would take the marginal tax rate of producers from 22% to 62% if implemented in the initially proposed form. A resource tax is already levied on oil and gas, hydropower operations, and profits generated using Norway’s natural resources.

The major salmon producers were quick to respond to the government’s proposal:

  • SalMar: “Earlier this year, SalMar bought its relative share available for a fixed price for the capacity adjustment in the traffic light system. 1,223 MAB tonnes for a total consideration of NOK244.6 million. SalMar has chosen to use the opportunity to terminate the purchase. This is due to the resource rent tax the Government has now announced.” 
  • Leroy Seafood (LSG NO): “In 2022 Leroy purchased 614 tonnes maximum allowable biomass under the so-called traffic light system at a total value of NOK123m. Leroy has decided to cancel this purchase. Increasing the tax rate from 22% to 62% creates unreasonable framework conditions for the industry in Norway, changing the scope and incentives for investments in areas other than maintenance capex. All major new investments in the Group’s value chain in Norway must regrettably be put on hold pending the decision of the Storting, the Norwegian parliament.” 
  • Mowi (MOWI NO): “In light of the Norwegian government’s proposal for a 40% resource tax on Norwegian aquaculture, and a resulting total tax of 62%, Mowi is cancelling its acquisition of 914 tonnes MAB for a total value of NOK183m. The government’s tax proposal means that Mowi can no longer justify the purchase price. Mowi respectfully advises the government to reconsider its resource tax proposal.” 

In addition to suspending purchases, the biggest salmon producers were notably absent from the first auction of biomass capacity since the government proposed the resource tax, even though these same producers bought capacity at the previous auction in 2020.

More recently, shares of the Norwegian salmon producers have been reacting to headlines from politicians. They first rose after Geir Pollestad, deputy leader of the Norwegian Center Party, told a local newspaper that the party was open to modifying the tax. However, finance minister Trygve Vedum said shortly afterward that the original proposal of a 40% tax should remain. With the governing parties losing popularity, and amid growing concerns about the over-reliance of regions on the salmon industry for employment, we foresee a compromise will be reached and a modified version of the original proposal will be implemented.

Supply growth should remain muted given increased biological challenges and stricter regulations. We see support for salmon prices and demand for salmon is likely to remain strong despite the challenges. These social and environmental aspects are further reasons why exposure to the salmon industry is attractive and we will continue to follow as developments unfold.

Global Alpha Capital Management Ltd.
February 16th, 2023