Improving Industry Performance

Last month’s column discussed the fact that our industry’s performance is weak and seemingly getting worse, when measured against four key performance indicators — competitiveness in international markets, industry profitability, resource sustainability, and providing jobs and incomes.

In this column, I will talk about what we need to do to improve the industry’s performance.

So what can we do to improve? To answer that question, it helps to learn some lessons from our history.

For a long time — centuries, in fact — we were strong competitors in the markets to which we provided fish products. Our competitiveness was based on a few significant advantages: the abundance of our resources; favourable access to markets where prices were good; use of advanced technologies and relatively low production costs.

petit-de-grat-63-18The highly abundant fish resources in Atlantic Canada — most notably, cod — were the main reason Europeans were attracted to come here, initially to fish seasonally, later to settle and more recently to come for months at a time in factory vessels.

Those resources provided high catch rates and enabled production of large volumes of commodity products at relatively low costs. By commodity products, I mean the products of one producer were less different from those of another, so they attracted pretty much the same prices from buyers, regardless of who produced them. Nevertheless, there were different prices for different product forms and quality grades, reflecting the fact that they would end up being sold to different users for different uses, based on their quality and form factors.

Development of our industry depended on being able to preserve fish catches, to allow them to be distributed geographically and stored until they could be consumed.

When we produced saltfish, our products provided substantial quantities of food for the poor and middle classes — depending on the quality grade — in Europe and the Caribbean. After the transition to mainly frozen products, our principal market became the United States.

All of these markets were reasonably close, geographically and readily accessible by ocean transport. U.S. markets were also accessible by truck. Europe and the U.S. were relatively affluent in global terms and trade patterns among the different regions were well established. Practically all the trade was in commodity products of one kind or another, because the challenge until after the Second World War was mainly to obtain a sufficient supply of products that were needed and in demand.

We were fortunate that the countries that were our main customers were also active in making new scientific discoveries and developing new technologies, contributing to rapid industrialization and increasing affluence, with a growing middle class able to pay good prices for the products they bought.

Even though the products were commodities, the expanding middle class wanted the better quality grades and were able to pay higher prices for them.

img_7389Some of the new technologies developed eventually came to be used in the fishery — new, larger vessels with steel hulls and powerful engines, navigation and fish-finding instruments, new fishing gear and gear handling equipment, refrigeration, mechanical dryers and other mechanized production equipment. These technologies helped increase fish catches to better meet the growing markets, improved on-board storage to maintain quality better, enabled production of more ‘fresh-like’ frozen products that people preferred to canned or salted and dried and lowered production costs.

But, even though our fishery changed over time, practically all our output continued to be commodities.

Because we couldn’t attract higher prices than our competitors, there was a lot of pressure to operate at low costs. The lowest-cost producer has a significant competitive advantage, allowing it to be profitable at prices where others lose money. And historically, we operated at low cost, sort of.

Our resource abundance provided high catches per unit of effort. Before the era of globalization and free trade, prices paid for fish catches and wage rates for plant workers here were typically lower than those in the countries we sold to. As well, our investments in individual fishing vessels and processing facilities were lower than those in some of the countries we competed with, and licence fees for resource access were typically lower here than they were in many other jurisdictions. But we gave up some of that advantage by having a seasonal fishery and too much capacity that was underutilized.

On the other hand, we benefited in recent decades because a weak Canadian dollar offset some of the effects of our low productivity. Nevertheless, incomes and returns on investment were lower than they would have been otherwise, because the costs of carrying excess capacity had to be covered.

Although our advantages were strong for a long time, they eventually began to erode and our competitiveness began to decline. Today, we no longer have the same advantages.

The new technologies that initially helped us also enabled other countries to travel long distances to catch fish in the waters off Atlantic Canada, process them onboard and take them home. Those countries did not need to buy our fish products — they simply came here to fish and turn the catches into products for their home markets.

Uncontrolled fishing efforts led to extensive overfishing and a dramatic reduction in the abundance of our resources. Eventually, it led to moratoriums on fishing various groundfish resources throughout Atlantic Canada, from which we have yet to recover.

Fortunately for us, our abundance of other resources — lobster, crab, shrimp, scallops — along with better control of the foreign fishing effort after the 200-mile limit came into effect in 1977, enabled us to re-define the fishery and carry on at a somewhat reduced scale. Our lobster, snow crab and Northern shrimp catches made us the largest producers of those species in the world. And, although we still produced commodity products, they were high-value species, because shellfish is generally much less abundant than groundfish or pelagic species and there were only a few suppliers other than ourselves.

For a while, things seemed relatively good, despite our disaster with groundfish and diminishing resources of lower-valued pelagic species.

But recently, they have taken a turn for the worse. Although lobster catches remain high, the abundance of shrimp and crab is now decreasing, due to climate change caused by global warming.  Because of our diminished shrimp resources, others are taking over our markets for that species. Norway is now developing a new snow crab fishery that will soon harvest as much crab as we did a few years ago.

p1012184Although cod and other groundfish seem to be returning in some abundance, it will be a long time before our catches can get back to historical levels. Consequently, resource abundance is no longer the advantage for us that it once was and is unlikely to be anytime soon.

Similarly, favourable access to good markets is no longer what it once was.

We continue to have good access to the U.S. market, but our access to markets in Europe became limited after the European Common Market — later the European Union — was established. CETA will improve our access, if it comes into effect, something that now seems to be in doubt.

On the other hand, free-trade agreements, such as NAFTA, CETA, or TPP, do not put any more fish in the water for us to harvest or give us exclusive access to markets.

Other countries have access to the same markets as well, usually on terms similar to those that apply to us. That means we still have to compete for the opportunities the agreements make available and the competition has been increasing in intensity. Unfortunately for us, there are strong indications our competitiveness has been decreasing over time, with ripple effects on industry profitability, jobs, and incomes, as I discussed in last month’s column.

About two-thirds of global fish exports currently originate in low-wage developing countries and most of them are sold to more affluent markets where we also sell, including the United States, Europe, Japan, and China.

Our competitors have access to the same technologies we have, but they also have much lower labour costs and weak currencies. That gives them a significant advantage in selling large quantities of commodity products at low prices — the same advantage we once had, but don’t anymore.

When you produce commodity products, the only time you have any bargaining power with customers is when market demand is much stronger than supply. If supply is stronger than demand, prices inevitably fall.

Here in Atlantic Canada, we start with a weak bargaining position because we produce commodity products but we weaken it even further by catching and selling large quantities of lobster, crab, shrimp, or other species during a short operating season.

High seasonal peaks in landings require a lot of money to buy the catches, prepare them for market and hold them until a buyer takes them off our hands. Buyers know we desperately need to sell our products, because the financing we have to hold unsold inventories is very limited, so they are able to drive even harder bargains than would be available to them otherwise.

Because we have little or no control over the prices we get for our products, every year, before the seasons for different species start, there is much speculation about what prices will be, based on what seems to be happening with market demand and supply of similar products from competing suppliers.

Recent prices for crab and shrimp products have been at historically high levels, because market demand has been stronger than supply from here and elsewhere, as resources have been diminishing due to climate change. But history has shown that high prices attract new suppliers, increasing competition, similar to what has happened recently with oil. And prices for fish products are notoriously cyclical as economic conditions change, as they are for other commodities, including oil, so the balance between supply and demand can readily change again, as it has many times in the past.

What all this means is that we can’t control the prices for our products, so we can’t increase prices when our costs increase. And our costs are already higher than those of our main competitors, even if industry wages and incomes are lower than other Canadian industries are able to pay.

In other commodity-producing industries, a common way to lower costs is to steadily consolidate production in fewer and fewer hands, increasing bargaining power with customers and suppliers, allowing an increase in the scale of production, improving productivity, and getting greater utilization of the investment in physical assets. That leads to what economists call economies of scale — as the scale of production increases, costs per unit of output decrease.

However, the fishery is a highly fragmented industry, globally and locally, making it difficult to consolidate.

Despite the difficulty, the increasingly intense competition in global seafood markets is now forcing gradual consolidation of the industry globally and the pace seems likely to increase in the future.

Consolidation has been happening within species groups, product categories and markets, fuelled by investors seeking to take advantage of expanding markets for seafood and economies of scale. Currently, aquaculture companies, which have a superior business model and higher profitability, are taking over companies engaged in capture fishing, expecting to increase their profitability through better marketing and distribution.

In the Atlantic Canadian fishing industry, resource management and licensing policies make it very difficult to consolidate production, so few have been able to do it successfully. That means our inability to reduce costs through industry consolidation and economies of scale is gradually making us even less competitive over time relative to competing industries elsewhere where consolidation is taking place.

So how can we apply these lessons from history to improve our industry’s performance?

First, we have to recognize that our industry is now a relatively small part of a much larger global industry and because we depend on export markets, we cannot isolate ourselves from what is going on elsewhere. What is happening globally is important and will affect our industry, whether we like it or not.

Second, we cannot depend on either resource abundance or low costs as competitive advantages. In today’s world, trying to compete on resource abundance or costs are battles we cannot win. Others have greater resource abundance, access to the same technologies that are available to us, and/or lower costs than we do. Consequently, we must look for advantages in other areas.

Third, it isn’t good when we depend too heavily on one or just a few species to sustain the industry. The abundance and distribution of different fish species will continue to change as global warming and climate change continue to influence fish habitat. That means we need a more diverse fishery, based on a variety of species, to minimize the risks of being too dependent on any one. And we need to do our best to ensure our harvests are sustainable.

Fourth, because our principal commercially important fish resources are limited, with some diminishing and others rebuilding, we need to focus on maximizing the value we obtain from the resources we do have.

To help us do that, we should adopt the same industry-wide goal as the industry in Iceland — maximize output value per kilogram of catch.

Fifth, we need to adopt the newest and best technology we can. It may not give us a sustainable competitive advantage but we will certainly be at a substantial disadvantage if we don’t, because our competitors will surely try to use that technology to gain a further advantage over us. We will need the newest and best technology to maximize output value, improve productivity, have competitive operating costs, and provide the incomes and returns on investment we need to attract workers and investors.

Sixth, access to good markets is necessary, but not sufficient to provide us with the prices we need, if we want to earn good incomes and have a profitable industry. Although some sales are made locally and within Canada, the vast majority of the seafood produced in Atlantic Canada is exported to other countries. When those countries provide us with easier access to their markets — such as through NAFTA, CETA, or TPP — that is generally good for us.

Nevertheless, such free-trade agreements do not give us preferred access to markets, so we still have to compete for them against many other countries that have advantages of one kind or another we do not have.

Seventh, selling commodity products exposes us to intense competition in which we are at a significant disadvantage, because we cannot be the lowest-cost producer. We have to focus on high-value niche markets and do everything we can to distinguish our products from those of our competitors. For example, selling fresh, high-quality fish products into the U.S. market — which the aquaculture industry in Atlantic Canada does every day — will give us an advantage, because low-wage developing countries farther away from that market cannot do so.

Eighth, we need to get away from short, seasonal fisheries with high peaks in landings. If we don’t, we will only be able to supply markets with high-value products for a limited time, making us an unreliable supplier and forcing us to produce frozen commodities with the remainder, we will continue to diminish our ability to bargain for better prices, we won’t be able to afford the investment in state-of-the-art technologies, and the limited supply of labour available will be attracted to other opportunities that provide better incomes for longer periods of the year.

As the discussion above illustrates, the fishery in Atlantic Canada has felt the full effects of globalizing markets and supply chains, like many other sectors of the economy. Some of these effects have been good but others have taken away the competitive advantages that sustained us for a long time. On the whole, we haven’t stood up to the forces of globalization very well. Because of that, we very much need to re-define our industry for the future and create some new competitive advantages.

As George Santayana once said, “those who don’t learn the lessons of history are doomed to repeat them.” In re-defining our industry, we need to bear that in mind.

Robert Verge

Managing Director of the Canadian Centre for Fisheries Innovation — Newfoundland

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