Above: Kathy Johnson photo
This month, economic impacts of the coronavirus pandemic will become more visible and the success or failure of economic decisions will have a big impact on our lives, as much as the success or failure of pandemic containment actions.
The big money fisheries in Atlantic Canada are lobster and snow crab and how these fisheries navigate the next few months will be critical to the survival of many shore communities and small businesses.
We need to prepare for depression-level economic disruption, something not seen in our lifetimes. The Federal reserve in St. Louis released a study from their economists that said as many as 47 million Americans could be laid off as of the end of June. This would correspond to an unemployment rate of 32 per cent, higher than the depths of the great depression in the 1930s.
However, the study also said that this was a worst-case estimate and did not include the number of white collar and salaried employees who may be kept on payroll. The study also did not account for income support from the U.S. stimulus bill. So, the authors suggested that a range was more likely, with the unemployment rate falling between 10.5 per cent and 40.6 per cent.
With this type of shock, we will see a collapse in demand for high priced items as people stretch their food budgets.
There was one positive sign for the seafood industry in this study — far less layoffs are expected in the second quarter from white collar and salaried occupations. It is within this group that higher dollar seafood sales are concentrated.
The second important point is that long-term layoffs are much more destructive to demand than short-term layoffs. If after 12 weeks there is an accelerating trend of rehiring, purchasing patterns may snap back somewhat towards their previous pattern. But if the recovery is slower or more piecemeal, the impact may be much worse due to long-term unemployment effects.
So, the first takeaway is that our markets in June will look nothing like our markets today. Just because a seafood item is still trading at its current level is not a sign that it will be at that level in June.
The Canadian lobster industry is providing government and the lobster industry with a running total of projected surplus lobsters. This is the total pounds that are stranded, with no markets this year compared to last year.
In 2019, Canada landed an estimated 190 to 200 million pounds of lobsters across all LFAs. Right now, the industry is projecting that 70 million to 100 million pounds cannot be sold into existing markets in 2020. This projection is updated and changes almost daily.
Canada has a decentralized system of lobster fishing areas (there are nearly 40 separate zones). Each zone has its own quota, season and fishing licenses for lobstermen in that area.
The Canadian strategy has been to open zones to take advantage of biological availability at the highest quality, and market demands. As a result, the primary landings are a spring fishery in the Gulf of St. Lawrence and a December to June fishery in Southwest Nova Scotia.
Right now, the first LFAs that will open have been making individual decisions about whether to postpone their opening or sit out the season entirely.
The harvesters in LFA 36 and 37 around the Bay of Fundy have received permission from DFO to delay their April season opening by a few weeks.
Many harvester groups are waiting to see what assistance package the government will offer and whether that will be enough to sit out the season.
Others appear to be determined to go fishing and let the chips fall where they may. There is not likely to be a uniform national response across such a decentralized fishery.
So if many harvesters go ahead and fish, what will happen to the 70 million pounds of excess lobster?
The likelihood is that much of it won’t be caught.
The reason is that processing capacity is a limiting factor right now in how much lobster is purchased, and shipping capacity is also a limiting factor on the live market.
Many Canadian processors rely on foreign workers for plant labour. Although Canada has allowed a foreign worker exemption for entry into the country, it requires a 14-day quarantine for anyone crossing the border. Secondly, commercial air flights are not available, so only by using air charters can these workers be brought to Montreal and then bussed to the plant sites. This is a huge expense and very risky.
As a result, many plants will opt to forgo foreign workers and rely on local labour. But here, there are constant phone calls going back and forth about whether these local workers will come to the plants. All are concerned about health and safety.
The packers that will open are doing whatever they can to meet social distancing requirements. Plexiglass has virtually disappeared from New Brunswick as some processors are trying to construct individual working booths. Others are cutting shifts in half.
Because of all of these moves, there is likely to be a significantly reduced processing capacity.
In a normal year, buyers like to keep relationships with harvesters and the surest way to do this is to take everything being landed at the market price. This will be impossible this year, unless there is a corresponding reduction in the amount of lobsters landed.
In a normal year, if a buyer angers a local harvester, that boat can go to someone else. This year there are not likely to be other buyers, as all of them will be in the same boat with limited funds, reduced workforce and uncertainty about markets. Processor limits on purchasing are likely to ripple back through the fleet and result in significantly lower landings.
On the live side, it is true that there is some renewal of interest in live lobster in China, but the European market remains dead, as does the North American live market.
Because of the lack of air traffic, normal cargo operations are not possible. Right now, the only way to get lobsters to China is by charter air freight. Although there have been some flights, nothing is on a regular schedule yet and even so, this is not the time of year for the Chinese to buy lobster.
One positive note is that inventories are mostly being cleaned up. Although there are some pockets of inventory, estimates are that totals are around one million to two million pounds, not a game changer at this time of year.
However, this is live inventory. It does not account for the frozen inventory that is stuck in food service distribution. Because there is no production, lobster tail prices have not changed that much. American tails are down about five per cent since January and are still near their highest level in 10 years. But with new production, that may change unless there are food service orders.
On live pricing, we just have to remember that April traditionally has the highest lobster price at the dock. This year that is currently $5 Canadian ($3.50 U.S.). This is $2 to $3/pound less than the price in February. The U.S. price is close to the lowest prices received during the lobster glut in 2013, when prices fell to $2.75/pound at the dock. If there is any hint of oversupply, prices will return right down to this level, which may lead some people to stop fishing.
Snow crab is different than lobster in that a larger portion of total sales goes direct to retail and also there is a traditional Japanese market.
So far, like lobster tail, prices for snow crab clusters have not declined precipitously. Russian 5-8 oz sections are still being quoted at $8.75/pound by Urner Barry.
However, the U.S. used about 90 million pounds of snow crab in 2019 and a significant portion goes to food service.
Sysco, US Foods and other broadline distributors have all been laying off staff. For the most part, they are not ordering, even though there is a trickle of orders for health care and a few other food service venues. But many have told their suppliers they are in effect closed for 30 days.
This has hit receivables, as now their suppliers are uncertain whether they will be paid in 30 days when things are open and there is concern that the credit insurance companies may not be able to cope with a wave of credit defaults.
Although the government assistance package is supposed to address some of this, no one knows how quickly the small business administration can write rules and get cheques out to cover these losses.
The net result is that there will be an extremely weak sales environment for food service sales of snow crab. To think that retail alone can carry the volumes normally sold is a fantasy.
Packers continue to report interest in snow crab from retailers and from Japanese purchasers. There is a clear desire to keep program business flowing.
There is also strong momentum to get the snow crab fishery open in both Newfoundland and the Gulf of St. Lawrence. In Newfoundland, a target date of April 20 had been set for the fishery to open.
In the Gulf, packers had hoped to be packing snow crab from around April 15 — or roughly two weeks prior to the lobster season opening.
In both provinces, the impact of social distancing on the workforce is still not fully known. In New Brunswick, plants are calling their regular workforce and are getting non-committal answers about coming to work or not.
In both the crab and lobster industry, many of the plant workers are older and may be more concerned about their health.
As with lobster harvesters, many plant workers are also waiting to see what provisions the Canadian federal government might make for lost income.
One idea would be to extend the unemployment insurance for seasonal workers, or to reduce the number of hours required for a seasonal worker to qualify for unemployment. In normal times, the need to get a sufficient number of weeks of work is a key issue for plant workers.
With the companies trying to ensure safety and having to convince their workforce, the throughput for crab is likely to be lower.
So, both the number of people working and the speed of plant operations will combine to lower plant capacity in both provinces.
Add to that the market risk of holding inventory of snow crab when the selling price remains unknown into the future and food service sales are uncertain.
With a sufficient reduction in volume, crab has proven very resilient in terms of pricing. However, no one knows what that level is for this year and whether the market will take crab produced without such drastic price reductions as to force huge losses.
As with lobster, in Newfoundland there is likely to be little ability for harvesters to switch buyers if they don’t like a trip limit or weekly limit on landings. The reason is that in normal times, a boat will always find another company willing to take them on, as there was heavy competition for the available crab. However, this year, as in New Brunswick, all companies will be facing the same risk factors and there will likely be little appetite for fighting for higher market share.
If the packers can enforce some type of trip limit or match the volume coming ashore to their capacity and sales interest, crab could have a successful reduced volume season.
Our best forecast is that there will be both crab and lobster seasons, but at reduced volumes. The cooperation and success of the parties in managing this reduced volume will determine whether this year the packers and the harvesters can survive.
On the West Coast of the U.S., packers are already consolidating operations and there have been reports of significant layoffs, although we could not get the individual companies involved to confirm. But it is obvious that the sudden loss of food service sales is rippling back through the industry and this will happen in areas where fisheries are not yet open, as well as in areas where they are.
In New Bedford, plants have also laid off workers, mostly those involved in the fresh side of the business, as food service sales have stopped.
There is still tremendous uncertainty about the depth and breadth of the economic hit that is coming and the key to the survival of the Canadian snow crab and lobster sectors this year is to be open-eyed and clear about the risks and capacities in the market.
This article was republished with permission of John Sackton and seafood.com.