Seafood trading is hard when a couple of bad decisions on pricing or timing can wreck a business.
As a result, we are trained to focus on short-term problems.
Most of our time is spent managing supply, shipping and customer needs within a six-to-12-week time frame. This can obscure long-term issues that will transform our business.
The last year is a great illustration of this and we are not out of the woods yet.
When the pandemic first hit the U.S. in March of 2020, seafood prices not on contract dropped immediately, with widespread fear that markets would just disappear. Even if harvesters could supply fresh markets, their customers would not be there.
As a result, those items with seasonal openings in the spring all saw coordinated price collapses. This was true for crab, Alaska salmon and lobster, but also for less seasonal items like crabmeat and Atlantic salmon fillets. The only exception among major items was the whitefish sector. The whitefish sector escaped due to longer-term contracts and the fact that the period after Lent is the low point in seasonal global landings.
A year later, this May all the items that saw a collapse in prices are now at record or near-record levels.
No one has a problem selling seafood at high price levels as long as customers accept them. But we can’t let our short-term focus lull us into thinking the market today is just going to continue as it is.
In the seafood industry and in the broader economy as a whole, we are experiencing something economists call the bullwhip effect. The basic idea is that a relatively small change in customer behavior amplifies back through the supply chain to huge changes at the manufacturer/distributor level.
This happens because there is no reliable real-time exchange of information up and down the supply chain.
At each point in the distribution chain, suppliers try to balance out-of-stock situations and long inventory situations. Historically they rely on previous experience to do so.
When end customer behavior changes even in a small way, it can lead to huge changes at the manufacturer/producer end of the supply chain. Instead of having a manageable inventory to meet customer needs, the supplier suddenly has too little or too much product, causing big swings in pricing as they try and rebalance. This effort is replicated at each level of the supply chain, so the signal becomes increasingly stronger.
The story of the pandemic is that the change in customer behaviour proved far different than expected, and as a result, inventories that had been adequate were suddenly too low and prices surged. This has been the experience in seafood over the past year.
First, the potential lack of markets and production issues caused packers to drop their prices. They thought that with the closure of foodservice, a lot of demand would just evaporate.
Second, consumers shifted into retail food purchasing and the money they saved from not travelling or eating out allowed them to purchase more expensive foods, including seafood. No one anticipated that the shutdowns (and government support) would lead consumers to have more money, not less.
The frozen seafood sector boomed, outperforming most other retail categories.
Packers and importers were caught flat-footed by this shift in demand. Suddenly their products were in short supply and prices shot up.
Why didn’t things normalize more this spring?
Afterall, retailers are not going to buy as much $13/pound crab or $6/pound salmon as they would when these products were $8/pound and $4/pound respectively.
I think things have not normalized because we are in a global reset that is still very much going on.
New patterns of consumer behaviour, where people live, business travel, office work, education and wage expectations are all going to be different than they were before the pandemic.
As a result, there are multiple pressures from many different directions, all obscuring the extent and duration of our product shortages and price increases.
One factor is that restaurant and foodservice demand bounced back faster than expected. Suddenly foodservice need for seafood was additive to retail needs. So, the pressure of shortages and higher prices continued, as once again demand was stronger than expected.
Seafood is unique in that there are certain commodities where the supply simply can’t be increased and as U.S. and Chinse consumers have more money to spend, prices on these items will rise over the long term to reflect the higher value. This is currently the case with crab and lobster.
But other seafood commodities do respond to increased demand with increased production. Salmon and shrimp are examples.
We can expect an increase in salmon production overall as the land-based facilities come online, despite the fact that some have had biological problems and setbacks. The overall trend is that there is a big advantage to producing closer to the market and once these facilities have proved operational, there will be significant competitive price pressure on salmon.
Shrimp is another commodity where superior genetics and improved broodstock have led to huge production increases. These may be tempered for a year or two due to the continued severity of the pandemic in India and parts of Southeast Asia, but overall, the trend shown by Ecuador will prevail. It is possible to massively continue to increase shrimp farm output.
But it may not be possible to transport all this product.
Our ability to forecast our future has been hampered by the larger production and shipping problems across all commodities caused by the pandemic.
Freight rates from Asia have gone from $3,000 to $4,000 per container to $8,000 to $12,000. In some cases, shippers are saying they will switch to freight on board (FOB) only. This has happened with H&G whitefish sold into China.
Producers frustrated by unpredictable shipping and customs delays have given up on logistics, saying to their Chinese customer your haddock is in Amsterdam if you want it. The transport is on you. Could China do the same to their export customers, shifting to FOB sales?
It was not just seafood that experienced a stop and start. So did electronics, computer chips, cars, rental cars, airlines, furniture and global shipping and freight forwarding.
Each of these sectors cut back rapidly due to fear of loss and found they could not catch up when consumers changed their behavior.
In terms of inflation and price increases, we need to know what will stick and what will change, so we don’t end up making one of the wrong purchase calls that can be catastrophic.
In one example of the bullwhip effect, producers in Canada are still trying to raise crab prices weekly, but at the market end more and more customers are already backing away. So, loads that would have sold in two days three weeks ago are now taking 14 days or more to sell.
Trucking costs, lack of containers and other freight disruptions are likely to continue for the rest of this year and probably into 2022.
There is already evidence of consumers reacting to retail price increases by changing their behavior.
Supermarket News reports that consumers have begun to shift shopping patterns in response to high grocery prices.
Inmar, a North Carolina-based retailer intelligence company, reports that in their May survey, two-thirds of respondents have shopped at a different store in response to price hikes.
Retail analysts say there is a shift to lower price club stores and value chains. This is bound to influence buyers for the chains losing customers to make them more resistant to price increases. A retailer seeing customer outflow is going to think twice about replenishing a crab stock that cost him $7 with one costing $13. For a casino operator in Las Vegas, a whole cooked lobster is now half the price of a large snow crab section. Undoubtedly market changes are afoot.
Outside the U.S., food prices have begun coming down.
Financial analysts who bet on commodities say that food inflation is now declining in “virtually all countries.” The reason is that the macro factors that pushed up food inflation, especially the culling of Chinese pig farms and the spread of the swine disease to other parts of Asia, have now reversed. Long-term commodity contracts (such as corn) are 20 per cent lower one year out than the short-term delivery contracts.
It is reasonable to think we will see a retreat in pricing on those seafood commodities. The key takeaway is that the current experience of rising prices across the board will come to an end and we should not get lulled into thinking this is the new permanent state of affairs. Instead, we are seeing prices rise due to the fact we are in the middle of a huge shift in behaviours and we don’t yet know the end point.
Seeing a short-term price increase that then settles down to a new stability is not a long-term inflationary threat. And that is why I don’t think we should be adjusting our expectations to a multi-year period of rapidly rising prices.
This article was republished with permission of John Sackton and seafood.com.
