Creating Value from Fish

Except for lobster, catches of other important commercial fish species have been decreasing in recent years.

And even though cod and other groundfish have been increasing in abundance around Newfoundland and Labrador, it seems like it will be a long time before catches come anywhere close to being able to replace the revenues and incomes lost from decreasing catches of shrimp and crab. That means we will need to maximize value from the catches we are able to take.

So, what is involved in creating value from fish?

There are many aspects to creating value and this column doesn’t provide enough space to cover the subject fully. But I will discuss some of the key elements.

First, it is important to understand that the value of any product is determined in the market, by the people who choose, pay for and ultimately consume the product. As I have said before, we don’t intentionally catch fish for which there is no market. We need the revenue from product sales to cover our costs and provide incomes and returns on the investment needed to make the products available.

Everyone involved in providing the product to the consumer simply gets a share of the price the consumer pays. Although it is not obvious at first glance, that means value flows from the consumer back through the supply chain. Product flows from the source of supply to the market; money flows in the reverse direction, from the market to the source of supply. And higher prices provide more money that can be distributed to the participants in the chain.

Some consumers and some markets are able and willing to pay more than others. Because of that, the most critical part of creating value is finding the right customer willing to pay the right price for the right product. Some products — e.g. fresh, high-quality, portion-controlled — sell for higher prices than others. And getting the right price also usually means delivering the product at the right time, because prices are different at different times.

In other words, value is created by more than the product itself. The service that goes with the product is also very important. Part of that service is distributing products to the locations where they will be consumed. And another part is the reliability of the supply. Customers’ lives are easier when they can count on a supply of products being available when needed and they are willing to pay more to a supplier who can provide that assurance.

Second, the laws of economics tell us that the market price for any product depends on the balance between demand and supply. If demand is stronger than supply, the price goes up. If supply is higher than demand, the price goes down.

We have been fortunate in recent years that prices have been going up, because demand has been stronger than supply. But that is not always the case. We have certainly seen periods when supply was greater than demand and prices went down. We will undoubtedly go through similar periods in the future.

It’s no accident that practically all the products we turn out are sold in export markets. Demand is stronger in those markets than local supply. However, supply is higher than demand in the areas where fish are harvested and processed. An important part of finding the right customer and obtaining the right prices is simply moving the product from its point of origin to a market where supply is short.

And it’s not enough to just send products from Canada to the United States, Europe, or China. Upon arrival, those products then have to be distributed to the retail stores and restaurants where they will be made available to consumers for purchase. Exports and trade may be between nations, but markets are ultimately very local and very specific in how products are sold and used.

Many fisheries are seasonal. But fish product consumption also has seasonal patterns. And the two patterns don’t necessarily coincide.

In the United States, for example, the period of peak seafood consumption is Lent, so retailers and restaurants increase the range and quantity of seafood items they offer at that time of year. When we had a large groundfish fishery, we fished during the winter and a big part of the effort was focused on supplying products for the Lenten season.

In a seasonal fishery, supply is substantially higher than demand during the fishing season. If all the supply flows directly to the market, it will attract low prices, because the supply is higher than the amount the market can consume. On the other hand, if the supply can be kept below or in balance with demand, it will attract better prices.

Doing that requires holding product off the market until demand catches up with supply. In turn, that means the product must be preserved and held in inventory, requiring working capital financing. But fresh products consistently sell for higher prices than products that are frozen or preserved in other ways, so holding preserved products in inventory both reduces revenue and increases costs, providing less money to be distributed to participants in the supply chain.

Third, recognizing the important role markets play in creating value, another significant factor in value creation is how well products are suited to their intended use. Commodity products — mostly what we produce — are general-purpose products that can be adapted to a variety of uses. They are widely produced and the output from one supplier is not much different from that of another. Unfortunately, that also means the supplier doesn’t create much value.

The ultimate value of the product is determined by whoever prepares it for its final use. That can be done by professionals in a restaurant or other food service facility, by workers in a secondary processing plant, or by someone who buys fish at a retail store and turns it into a meal at home.

Products are prepared for market in fish plants. The plants buy fish from harvesters and transform them into market-ready products. The closer they can get to matching product attributes to what buyers and consumers want, the higher the price they are likely to get and the more value they create.

But, as the saying goes, you can’t make a silk purse out of a sow’s ear. The product options available to a fish plant depend partly on markets but they also on the size and quality of raw materials they have to work with. How much value can be created depends on the products the raw materials are suited for.

The plant’s job is to optimize utilization of those raw materials to meet market requirements and get the best value from them. That means taking fish apart and using different portions to produce different products. Output value depends on the overall mix of output, not on the value of any one piece.

Because raw material characteristics determine product options, the potential for value creation is determined in the harvesting sector. When and how fish are caught, how they are handled on board, and how they are transported to a plant for processing are all critical to achieving high value.

When you add it all up, value is created at each step in the overall supply chain. It is a team effort. As is the case in any team effort, performance is better when every member of the team is focused on the same goal and collaborates with other members to achieve it. Many coaches have reminded their players that there is no “I” in “team.” One selfish player can bring down the performance of the whole group.

In the same way, no one participant in the seafood value chain can claim to have created most or all the value. But the potential for value creation comes from two sources — the market and the raw materials used to make products for the market. How much of that potential is captured depends on the other participants in the chain, the ones who convert the raw material into products, find the people who want to consume the products, and make the products available to those people at a price they are able and willing to pay.

A significant issue we have is that many harvesters don’t really understand how their work either enables value creation or prevents it, because they don’t understand what happens after fish leave their hands. They don’t see all the work that goes into creating value from the fish they catch.

In 2013, McDowell Group, Inc. issued a report titled, Economic Value of the Alaska Seafood Industry. The report provided estimates of the output value of Alaska’s industry and the employment and labour income it provided.

One of the key findings was that, “The Alaska seafood industry directly employed 63,100 workers in Alaska in 2011. An additional 78,400 jobs were created elsewhere in the U.S. related to Alaska seafood resources. Put another way, for every Alaska fisherman, processor, or direct support worker, an additional 1.24 U.S. jobs were created by the Alaska seafood industry.” Those additional jobs were in wholesale/distribution, grocers, and restaurants. Only about one-third of total employment came from fishing.

As I have said in this space before, this industry is not just about catching fish. A lot more must happen to create value from the fish and many people play a role in that. How well they are rewarded for their work ultimately depends on the characteristics of the fish and what the final consumer is willing to pay for the product. We should never forget that.