Risk – Winners and Losers

Risk has two parts — one that offers potential for gain, another than could lead to loss.

Either outcome is possible, presenting a dilemma. If we don’t take a risk, we lose the opportunity for gain. If we do, we must accept the potential for loss.

A lottery ticket is a good example.

The potential for a big win is the seductive part, enticing us to take the chance. As the saying goes, you can’t win it, if you’re not in it. But when you buy the ticket, you also accept that you may not win. You take the chance, because the cost is small and affordable, to have the small possibility of a big gain.

Unfortunately, however, not all risks are like lottery tickets. Sometimes, the cost of entry is high and sometimes, the potential payoff is not.

Anyone who takes risks for a living quickly learns to assess the odds — the cost versus the chances of success and the potential reward for being successful. And they pay a lot of attention to minimizing risk. Making wild bets is certain to lead to ruin but calculated gambles can increase the likelihood of positive outcomes.

I recently read two very interesting books about risk versus reward — Fortune’s Formula and A Man for All Markets. Edward Thorp was a central character in the first and the author of the second. He had a PhD in mathematics and spent his life developing systems to win at games of chance and in the stock market. He was very successful at both and accumulated a lot of wealth along the way.

Most of us don’t have Ed Thorp’s brain power or his discipline in sticking to mathematical systems in placing our bets, so we are not likely to enjoy the same degree of success. However, we can improve our chances if we think about the risks we are enticed to take and use what we know to assess the likelihood of success.

What makes a proposition risky is uncertainty about the outcome — i.e. the future.

If we knew the outcome, there would be no risk. Because we do not know what the future will bring, we have to assess risk based on what we know about the probabilities and desirability of different outcomes. Different possibilities are not likely to be either equally probable or equally desirable.

Right now, there is a lot of uncertainty about the future of the fishery in Atlantic Canada. And the uncertainty comes from many sources. It is something we need to think seriously about, because tickets to a better future are now on sale. Should we buy them? Or maybe a better question is, when should we buy them?

At a conference CCFI held on the rebuilding the Northern cod stock in November 2017, Dr. Mariano Koen-Alonso from the Department of Fisheries and Oceans gave a very interesting presentation on climate change. He said it is more than just warming; it is a long-term change in environmental conditions that will have different effects in space and time. Because of the change, there will be ecological winners and losers.

Dr. Koen-Alonso based his observations on many years of environmental data he had collected and analyzed. But we can see the truth in what he said, because it is all around us.

Extreme weather patterns that at one time were unusual have become common. Shrimp and crab have become ecological losers, while cod seems to be winning, at least around Newfoundland. And lobsters have been a big ecological winner around Nova Scotia, but a loser further south.

On the other hand, these are the effects we can see so far.

As he said, this is a long-term change in environmental conditions. Because this is a very complex problem, we don’t know all the effects climate change will have in different places or over time. That means we also don’t know how weather or the abundance and distribution of different fish species may continue to change in different places and over time, so that leads to uncertainty about the future — and substantial risk.

However, the industry is facing other significant uncertainties and risks, as well.

We know that overall market demand for fish and seafood has been strong in recent years. Indications are demand will continue to be strong for the foreseeable future. Nevertheless, markets for individual fish species or in specific geographical areas or at different times of year can have very different characteristics from the overall average.

There can be issues with market access or the terms of trade and there can be large imbalances between demand and supply that affect prices.

For Canadian fish products, markets are an area where there is now significant uncertainty.

President Trump has been threatening to cancel the North American Free Trade Agreement (NAFTA), which has enabled a free flow of Canadian fish products into the U.S. market for nearly 25 years.

Negotiations are underway to “update” the Agreement but how they will turn out is hard to say. Because the U.S. market accounts for over 60 per cent of Canadian fish product exports, that is potentially a very significant problem.

But even if NAFTA continues, we also have to compete for a share of the U.S. market against an increasing flow of products from aquaculture and low-cost developing countries.

An aging and shrinking labour force presents more uncertainty.

There isn’t yet much indication that we are not harvesting available quotas, due to lack of people. But some plants are turning out less labour-intensive products, because they are having trouble getting enough people to do the work. If we can’t find a solution to that problem, we will increasingly ship out raw materials for processing elsewhere, getting less value for the fish we catch.

That will have ripple effects throughout the entire seafood value chain and the economy of the Atlantic region.

As the ecosystem changes, industry will have to change focus, decreasing effort for declining species and increasing effort for species on the rise. But that means fishing gear and processing equipment currently in use will have less value and new investments will have to be made. Similarly, investments in technology will likely be needed to supplement the people who continue to work in the industry. But it will be difficult to justify those investments, if supply is uncertain.

Who will be willing to make those investments?

People in the industry are faced with a dilemma. If they don’t invest in new capabilities, they won’t be able to take advantage of new opportunities, so they will lose out. But they may be losers even if they invest — especially if they invest too soon.

In the fishery, as in any business, winners are the organizations that can secure an adequate supply of good quality fish, have access to markets that pay good prices, can attract the supply of labour they need to operate, can obtain the capital they need to invest, are able to deploy that capital to earn good returns on investment and manage risk.

Because of the uncertainties the industry is currently facing in all these areas, we can reasonably expect to see a very different industry evolve over the next five to 10 years. There will be winners and losers.

 

Robert Verge

Managing Director of the Canadian Centre for Fisheries Innovation — Newfoundland

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