With the spread of the coronavirus to new countries, I now believe the seafood industry is going to face its worst crisis since the economic collapse of 2008.
That was difficult and frightening enough.
From October to December of 2008, fresh whole salmon prices dropped 20 per cent. From August 2008 to January 2009, shrimp prices in the Urner Barry farmed shrimp index fell 16 per cent. Cod loins, which were at record prices in November of 2008, fell 34 per cent over the next 11 months, in a continuous price decline.
What happened?
The economic shock of layoffs and the banking crisis meant American consumers had less money to spend on dining out and demand at the foodservice level evaporated as companies cut back on travel, and people cut vacation spending at places like Disney or on cruises.
Large numbers of people found their mortgages to be underwater, as house values collapsed and were desperate not to spend money.
The coronavirus, now called COVID-19, has the potential, in my opinion, to replicate this type of global shock.
Some major companies are definitely questioning whether they should cut back on travel. The issue is employees who do not wish to travel by air.
Coming back from Kochi to Dubai, I was sitting next to someone with a cough and I must have got up and washed my hands six times during the four-hour flight. And this was during the first weeks of the crisis.
The Russian pollock season is in full swing, yet vessels that normally pick up this product from super trawlers and deliver it to China are stuck at anchor, full of product and not able to enter Chinese ports. Prices for H&G Russian pollock have come down from $1,600 to $1,325 per tonne, in one month.
At the same time, the Chinese factories that would ordinarily take this product are two weeks late in opening and those that are able to open often have just skeletal staffs, i.e. those employees who are local.
Local governments are chartering planes and trains to bring workers back to major production facilities, like Foxconn. And these companies are paying workers bonuses of $750 to $1,000 to come back. But the smaller to mid-sized companies are mostly left out of these arrangements. More than one third of China’s entire workforce is migratory.
In Qingdao, for example, families have been required to stay in their apartments. They could send one person out every three days for shopping and errands. Families made extensive use of delivery services which would deliver to the apartment building, but not to the apartment.
Some shippers in China are afraid of sending vessels to the U.S. for fear that there they will be quarantined.
The result is that major users of whitefish, like cod and pollock, are seeing production plans disrupted. And although most supplies for Lent are already delivered, if shipments do not resume in the next few weeks, some shortfalls may develop.
This type of crisis that shuts down travel, production, tourism and congregating in public places, changes people’s behavior in unpredictable ways. It is likely to have a months or years long impact on how people eat out.
World health officials have praised the way quarantines and confinement zones in China, South Korea and Italy have helped slow the spread of the virus. Imagine how American consumers might react should a local cluster in the U.S. require a quarantine.
The casual dining sector is not prepared for a downturn. After suffering from years of falling traffic, many are financially weak.
In Thai Union’s annual report for 2019, it indicated that Red Lobster sales revenue fell 6.9 per cent from 2018 to 2019. Thai Union is a 49 per cent owner of Red Lobster.
Obviously Thai Union has the financial strength to weather a downturn, but how many casual dining chains (the backbone of U.S. Foodservice seafood consumption), can survive a 10 or 20 per cent further hit to traffic?
This spring, as this crisis has the potential to build, a number of major fisheries will engage in price negotiations and set dock prices. This includes Canadian snow crab and lobster, west coast shrimp, Alaska salmon (in June) — all fisheries with year-round selling seasons, but shorter harvest seasons.
The price setting at the dock is based on packers’ and distributors’ expectations of price for the entire year, the supply and availability of what is landed, and the costs and business expectations of the harvesters.
Regardless of what price is paid in May or June, packers are looking at what price they expect to get four, five or six months into the future. They are projecting both price and customer volume.
In normal years, this is fraught with risk. However, the last several years have been good for the seafood industry in that demand for wild seafood has overall been much greater than the supply.
That is why we can see record high, or near record high prices in many very different fisheries, including snow crab, coldwater shrimp and wild salmon. This experience has led to packers bidding for product, high prices for harvesters and complacency that what is bought at the dock can be sold.
It has been several years since any sector (like lobster tail for example) has experienced a big inventory overhang and had to sell at a loss.
This year, the risk is off the charts, because we simply don’t know how severe, economically or socially, the disruption from this disease may get.
In Alaska, where demand is good for Alaskan-caught crab for the next couple of months, harvesters are working on a fishing price of $3.15/pound and they will get an additional payment under their pricing formula based on final sales. This fishing price is effectively $1 or $1.50 below last year’s crab harvester price in Canada, both in the Gulf of St. Lawrence and Newfoundland.
Although the initial price was set lower due to the presence of small crab (it is a growing resource) and some dark-shell crab, Alaskan crabbers have decided not to try and push for higher delivery prices prior to their final settlements due to uncertainties about the virus. Their formula gives processors room to maximize price without assuming the same risk that a buyer who paid the full dock price for crab would assume.
In this scenario, sharing the risk between harvester and processor is the only way to survive the upcoming season. It will not work to try to shift all the risk onto just one party. Anything harvesters can do to lower the uncertainty caused by the virus and still remain in business is critical.
In agriculture, a system of price supports and crop insurance backs up farmers. This is necessary because otherwise the risk of planting might be too great. The crop insurance program basically guarantees farmers that if they plant a crop and there is a market disaster caused by over supply or weather-related losses, insurance kicks in and they live to plant another year.
Nothing like that exists in the seafood industry.
The lobster and crab industry already have informal bonus mechanisms, in which fuel or bait or ice is supplied in return for delivery of product and there have always been talk of extra payments.
This year, these arrangements should be open and transparent as a way to mitigate risk. That means harvesters accepting a lower price than they might otherwise demand so long as they can remain in business and cover their costs and it requires processors who take advantage of this risk sharing price to be transparent about their sales and the ultimate value of the product.
Without this type of trust, no sharing of risk is possible and processors will push for the lowest price to mitigate risk, while harvesters will push for as much of the risk to be pushed past the dock as possible.
This is a recipe for gridlock and strikes, at a time when the industry will most need flexibility to deal with uncertainty and potential opportunities. Anything that can give both sides advantages to meet this uncertain future will pay off in more income and prosperity for both.
In wartime, you have to trust your friends, or you die.
The prospect of a global pandemic with radical changes to food buying behavior is a wartime emergency for the seafood industry. This year harvesters and processors will have to put aside some of their mistrust, or they will both go down together.
Finally, there are also opportunities in any upheaval.
The logistics issues and possible cost issues on the harvest side in the U.S. both open the door to lower volumes and potential shortages, which should serve to keep prices higher than they would be otherwise.
This could indeed happen on particular items that end up being in short supply.
For the industry as a whole, it is very hard to calibrate a drop in demand. We have been used to a world where everyone wants more seafood than we can supply. We won’t necessarily settle at that spot where what we produce just meets what is needed.
Once prices start dropping there is little to stop them and the history of these types of upheavals is that we overshoot.
No one wants to take the risk of buying expensive items until they have some feel that they will succeed and with the potential sales situation so uncertain, it may take some time before we find the right balance, and once again are selling our products into a dry market.
This article was republished with permission of John Sackton and seafood.com.
