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Walking the Tightrope of Survival

First published on April 21 in Urner Barry’s Reprinted with permission.

There is a path through this, but it is like staying on a tightrope, with the slightest mistake causing a disastrous fall. The issue is not a decline in price. We have lived with volatility before. The issue is how to adjust to structural changes where some distributors estimate 20% to 40% of their foodservice customers will never reopen, and more and more companies try and put seafood through the retail channel. The second issue is to avoid outcomes that permanently devalue a product. The poster child for this is lobster. If the season becomes chaotic with prices dropping to the point where harvesters will no longer fish, the result is likely to be a devaluation of lobster that lasts for years. This is what falling off the tightrope would look like, for those who managed to survive. Of all the primary U.S. seafood items, the lobster industry probably has the most difficult path.

Uncertain times in the Lobster world. MLA image

The reason is that first, it is huge. Around 300 million pounds of lobster will be landed by U.S. and Canadian lobstermen in a normal season. With the changes wrought by the U.S. tariff war with China, Canada has become less dependent on the live market in the U.S., and more dependent on China. Meanwhile, lobster in Maine is more dependent on the U.S. The Chinese will take live lobster at the right price. The bottleneck is cargo capacity. Already there are a total of six to seven charter flights a week leaving from Halifax and Moncton, and freight costs are double that of a year ago. There is no way to ramp up cargo capacity to match the potential volume of live lobsters coming ashore once the seasons open up. In the past, it was passenger airline capacity that moved most lobsters to the U.S., Asia and Europe. That does not exist at the moment, and no analysts expect air travel to rebound quickly. Frozen lobster is in a more precarious position. Some frozen lobster, especially whole cooked, will go to China and elsewhere in Asia. But the bulk of the product goes to the foodservice, casino, and the cruise ship industry… all of which are largely shut down. As one producer said, even if I can sell small tails to retailers for promotion, what am I going to do with the claws… the meat industry is all foodservice. The only path for lobster is for production to be drastically scaled back to meet current demand, which means maybe 200 million lbs. instead of 300 million lbs. But the industry is so decentralized and fragmented with so many multiple players all focusing on a particular niche or market path that coordination is not likely, unless it is imposed by governments. A large group of maritime producers and harvesters has asked for either a government curtailment of the spring processing season through a significant delay, or a shutdown of the spring season altogether. At this time it is very unclear what will happen. However, there is no one I can find in the industry who thinks an unconstrained season won’t be a disaster. The problem is that if left to market forces, the value of lobster could be destroyed for years. The worst-case scenario is that harvesters keep fishing so long as anyone will buy, driving prices below $3.00 at the shore. Meanwhile, unsold processed lobster builds up as companies try to keep their relationships with their boats, until financially and operationally they can’t take it any more. Eventually everything shuts down. But how does it open up again? In the fall, packers will be sitting on a mountain of very low-cost tails and meat, and they will have to sell these into the market at low prices before they can even begin to start buying again. This trains the customers that the value of tails, instead of being $18.00 to $22.00, is back to $13.00, as is meat. Just like what happened in 2012-2013. It will take the industry years to work itself out of this hole. Avoiding falling into it could help the lobster industry with a quicker recovery. Falling off the tightrope here means a long and painful climb back up. The strength of the seafood industry is its diversity in products and in the range of companies that produce and distribute them. This crisis is also providing some companies opportunity. Frank Dulcich, CEO of Pacific Seafood and chairman of National Fisheries Institute this year, said Pacific has taken the opportunity to restructure its foodservice sales operations. Part of this involved working with a smaller and more focused staff, but another part meant developing Amazon-like technology so that their upper-tier customers could order directly from their inventory via their phones or tablets. Dulcich also talked about pivoting to more ready-to-eat meals and food to-go options as retailers cut back on traditional seafood counters. For seafood companies more broadly, Dulcich says it’s important to see what opportunities come from this crisis, and where the company might grow in the future, even while cutting back today. Finally, it does appear that foodservice sales may be bottoming out. NPD, a company which tracks supply, is reporting that sales remain off around 40% for all broadliners, while Dulcich says some of their sales have seen a 98% drop in that sector. The key is that some proportion of foodservice operations won’t reopen, and unless seafood distributors focus on new strategies, they will be expecting a traditional market to come back that likely is gone for the foreseeable future.

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