Increased input costs start to bite

The fish processing industry in Estonia serves both the domestic and export markets with some companies focusing more on one than the other, while others offer different products to the two markets. M. V. Wool started its processing operations in 1988 supplying marinated eel to domestic customers and has since grown to one of the biggest family-owned companies in Estonia. The main raw material has changed from eel to salmon and trout sourced in Norway which accounts for about three quarters of the company’s turnover.

Meelis Vetevool, the son of the founder, and chairman of the board, is easing the third generation of the family that founded M.V. Wool into place. Hendrik Rajangu, Mr Vetevool’s nephew, has been rotating through the different departments in the company and is currently the sales manager. Sales cover the salmon and trout items which are produced in a dedicated factory established just outside Tallinn in 2010, but also a range of items produced from other fish species, such as mackerel, herring, and hake.

A processing plant each for the export and domestic markets

The latter products are manufactured in another plant some 40 km away from Tallinn. It is difficult to produce everything in one factory, explains Mr Vetevool, which is why we built the new plant to handle the trout and salmon products. A further reason was that the new plant was certified to the IFS standard as the production was intended for export (as well as the domestic market), while the older factory produces exclusively for the domestic market and has a HACCP plan in place but does not require IFS certification.

Salmon is sourced fresh in Norway to the tune of 3,000 tonnes a year or three trucks a week on average. Import volumes are higher in the second half of the year particularly in the approach to Christmas. Trout volumes are smaller, and this species is imported both from Norway and from Finland. In Finland the season when trout is sold extends from end September to January and for the rest of the year the company relies on the Norwegian product. A lot of the salmon is produced under private labels, but on the domestic market the company sells under its own brand. Salmon is still M.V. Wool’s single biggest product but the development in prices over the last year has had the company reeling. “Prices are crazy” , says Mr Vetevool, “we can really not work with this price level.” The company traditionally buys salmon on the spot market as its calculations have shown that over time they are lower than fixed contracts. But in 2022 the Fish Pool Index average weekly price was EUR8.20/ kg, compared with EUR5.75/kg in 2021, a 43 increase. Nobody could expect prices this high, says Mr Vetevool, who personally believes that the increase is because there is no longer a free market for raw salmon. For an individual processor, however, there is not much to be done about it.

Salmon prices are likely to increase in 2023

The Norwegian government has introduced a ground rent tax of 40 which will affect salmon farming companies producing more than 5,000 to 6,000 tonnes of salmon.

Mr Vetevool is uncertain how the new tax will affect the market price for salmon and will wait to see what happens in the New Year. He anticipates that prices will be very high. He recalls that in spring 2022 volumes were down in both Scotland and Chile and the price for salmon as shown by the Fish Pool Index soared reflecting the shortage of fish on the market. After a few weeks prices came down again, but with the new tax the situation is more uncertain. It is likely to be painful for the company since only fresh raw material is used in the production. Only in dire emergency will they switch to frozen fish or frozen fillets. Ultimately, it is the consumer who is the final arbiter of the price. In April and May 2022 when salmon fillets were retailing at EUR35/kg consumers deserted salmon on a large scale. Processors are squeezed between big producers of salmon and big retail chains, both of whom exert price pressure on the processor. We have learned to navigate between the two, says Mr Rajangu, and in 2022 we increased our prices twice and in January 2023 they will go up again. We have a strong position on the Estonian market and with regard to exports, our quality to price ratio is good compared with other exporters, but there is no escaping the influence of raw material prices. Producing the raw material themselves is not an option, firstly because Estonia does not have the geography to produce salmon and even farming trout is tricky, and besides, competing with Norwegian producers would be difficult.

And producing on land calls for massive investments, finding the financing for which would be difficult. The company experimented a couple of times with salmon from land-based farms, but discovered that the taste was different from the sea-raised product and so did not continue. Quality is very important for us, says Mr Vetevool, we cannot use a cheaper product if it compromises on quality

Rural factory provides jobs for many

The factory where products for the domestic market are manufactured dates back to 1988. Since then, as the company grew, it expanded gradually until 2010 when the new plant was built, and salmon and trout processing was moved there. The site is located 100 m from the sea and employs some 35 people making it the biggest employer in this rural area. This is one of the reasons why we keep it, Mr Vetevool says, as people need to work. Locally caught Baltic herring and sprat is not processed by the company, though small volumes are sold at the company shop on the premises of the new factory. But small quantities of common bream, perch, carp and African catfish farmed in Estonia are used by the company in the production. What is important is to have a stable supply of the raw material. The season for bream, for example, is September, October, November. This is when the quality is best so the company buys enough for the whole year and freezes it.

The impact of covid on the company was mixed. On the one hand measures were taken to secure the health and safety of the workers and in terms of markets the Horeca sector closed. On the other hand sales to supermarkets increased. The war, on the other hand, is much worse, emphasises Mr Vetevool, because of the increase in energy prices. This affects us directly but also indirectly because it pushes up the prices of all our inputs, packaging, logistics, you name it. At the start of the year where we could get 2 m of packaging foil for a certain price, now we get only one for the same price. Food ingredients such as sugar, salt, oil, vinegar etc. have also increased, some have doubled in price others are up 3-4 times. Taken together there has been a huge increases in our costs, he states, with no respite in sight. Mr Ranjanku predicts that the hard part is yet to come. In January and February and good cheer of Christmas is behind them consumers will be looking to save. There are ways to make food cheaper, says Mr Vetevool, the government could help, for example, by reducing VAT on food (currently 20) as they have done in Poland, where it has been removed altogether. Kairi Šljaiteris from the Ministry of Rural Affairs confirms that there are a few items on which VAT has a reduced rate such as medicines, books, some cultural services (and hotels! Mr Vetevool adds), but otherwise VAT is 20 and there are no plans to reduce it on food.

M.V. Wool

Angerja tee 32 Hürü, Saue vald 76911 Harjumaa

Estonia

Chairman of the Board: Meelis Vetevool meelis@mvwool.eu

Sales Manager: Hendrik Rajangu hendrik@mvwool.eu

Activity: Fish processing Facilities: 2

Soaring costs threaten companies’ viability

The impact of higher costs can already be seen on industry. Mr Vetvool points to companies—so far only in non-food sectors—that have had to close their doors. All the companies in the food sector have made losses in 2022, he adds. And national measures to support industry do not extend to companies with an annual turnover of more than EUR10m, so M.V. Wool does not qualify. However, it would be eligible for relief under the EMFF measures currently being processed by the government. But companies would prefer stable energy prices rather than going cap in hand to the government. And, according to Mr Vetevool, this should be possible because Estonia is largely self sufficient in energy. As a processing company M.V. Wool has high energy consumption because it needs to cool and freeze its products. If energy prices are not reined in, I fear food production will shift to Poland, he states. We need therefore to have a discussion on the importance of Estonian food security and whether it is strategic to maintain food production here, otherwise I foresee a sector in deep trouble, says Mr Vetevool.

Salmon and trout products for international and domestic markets: Cold smoked (main product), fresh and frozen fillets, gravad,hot-smoked, fillets, portions, party boxes

Other products for domestic market: Cod, catfish, eel, mackerel, herring, whitefish, hake, and redfish, which are marinated, salted, hot and cold smoked, fresh.

Export markets: France, Belgium Italy, Finland, Sweden, Denmark, Czech Republic, Latvia, Lithuania