Globalization in the Seafood Industry and the Implications for Alaska

1. Globalization in the Seafood Industry and the Implications for Alaska John Sackton Seafood.com

2. Background • 30 Years in Seafood Industry; market research and consulting for past 13 years. Founded Seafood.com news in 1998. • Seafood.com is largest daily seafood industry news service in North America • Non-binding price formula arbitrator and market analyst for Alaskan king crab, snow crab, tanner crab and brown crab (since 2005). • Consulting on markets and pricing for shrimp, crab, salmon, lobster, whitefish, catfish, and other shellfish.

3. Seafood has always been a global commodity • Cod brought English and Portuguese to North America • Trade In Salt Cod Founded New England • Alaska was also developed for its seafood resources: halibut and salmon Text The ‘Sacred Cod’ has hung in the Mass. Legislature for 310 years

4. Trade has always been part of the Seafood Industry • What’s new is change in balance of power between producing and consuming regions • No longer can Alaska expect to set price for its own seafood commodities

5. Globalization issues • Current period of high prices for seafood may not last • Growth of aquaculture is single most important factor changing the seafood industry. • Consolidation among buyers and processors having major impact: global sourcing reduces importance of producing regions • Currency issues very important for local economies; but have no control • Alaska has some positive strategies to deal with these problems

6. Many seafood items are selling at highest prices in many years. • Most dramatic examples of higher prices are • Crab • Salmon • Cod • Halibut • All based on increasing consumer demand for seafood

7. Snow crab 5-8 oz 2001-2007 • Last year processors capitulated and sold 2005 crab at a loss. • Low inventories and strong sales led to higher prices • Crab consumption increasing in U.S.

8. Head off King salmon 11-18 lbs 2002-2006 • Low salmon prices expanded demand • Strong interest in wild seafood helped Alaska • Cutbacks in Chilean production helped firm market

9. Single fzn pollock block 1998-2006 • Bird Flu scare in Europe prompted big switch to fish; especially whitefish • Cutbacks in supply firming price • Huge influx of substitute species: catfish, tilapia

10. Halibut, dressed, 20-40 lbs • Switch to fresh halibut helped increase demand • Long season helps maintain demand • Growth of farmed fish will drive down price 1998 - 2006

11. What’s behind the expansion of demand • Europe: bird flu, expansion of value added products (ready meals). • Consumers favorable to wild caught fish • Retail has new interest in seafood • Health benefits stronger, more publicized • New purchasing regions

12. Seafood Demand is Growing in the U.S. NOAA

13. Demand growing in Europe also (slide from Youngs Bluecrest)

14. Aquaculture production is source of new growth Floating Fish Farms Vietnam

15. Exponential growth trend for Aquaculture Source: FAO state of world aquaculture 2006

16. World aquaculture supplyby category 55 51 Million MT 48 46 43 39 36 34 31 28 25 20 18 15 17 17 13 11 12 10 Source: FAO Fishery Statistics

17. World aquaculture supplymajor farmed finfish excl. carp Million MT Source: FAO Source: FAO Fishery Statistics

18. Farmed tilapia ’000 MT Source: FAO

19. Sea-ranched and farmed Atlantic cod MT Estimates Source: NSEC, Norsk sjømatsenter, The Icelandic cod project

20. Emma Cardy-Brown of Rabobank gave this farmed cod prediction at the Aquavision conference:

21. Aquaculture products lower costs over time • More efficiency of production • Consolidation of markets • Genetic Improvements • Counter Trend: increasing price of feed. Catfish Farms in Mississippi

22. Alaska has felt impact of Aquaculture • Salmon prices will likely never again reach the levels they were at in the 1980’s • Japan buys Chilean coho salmon • Wild salmon appeals to a large, but still niche market • Salmon products must continue to get differentiated

23. Aquaculture will impact future prices of cod and halibut • Huge expansion in growth of farmed cod (rabobank) • Growth in farmed halibut as well

24. Consolidation among buyers driving processors to merge • Bigger buyers (Wal-Mart, Costco, Ahold, Carrefour) force sellers to consolidate • 2006 saw: • Trident / Ocean Beauty (called off) • Maruha / Nichiro (Westward / Peter Pan) • Pan Sfd/Marine Harvest / Fjord: One company now controls 25% of world farmed salmon 24

25. Sellers get bigger to protect margins All sellers give the same reason for their acquisitions: They need to be bigger to protect their margins by meeting major customers demand for greater efficiency, lower prices

26. Larger companies have: • Global sourcing • Ability to target different markets • Manufacture in different locations • Some Alaskan Salmon Processing moving to China • Crab processing moving to China also • Divorced from local product • Example of Iceland Seafoods vs. Trident 26

27. Consolidation among buyers is pushing prices down • Retail buyers have become stronger in Japan; U.S. and Europe • For some items, they set the price: king crab in U.S. is good example • Their benchmark is not seafood -- its everything • They heavily depend on promotions. • Retail demand is a big factor in increasing sales of seafood • Seafood sellers need to consolidate to be able to effectively sell to retailers

28. Retailers and Seafood • Depend on promotions for some items like crab, shrimp • Need consistent supply • Always comparing seafood to other products they can sell for more profit • Consumer interest in seafood driving some retail behavior; expansion of retail seafood sales.

29. Example of retail pricing power • Retailers abandon crab when price was over $4.00 (in U.S. and Japan) • Result- huge amounts of unsold crab from 2005 in Dec 2006- panic on part of Ak sellers, crashed the price. • Lower prices brought back retail buyers; in Japan began selling much more crab at retail. Used up inventory; helped firm prices.

30. 15 year history of crab prices

31. Larger buyers also driving certification and traceability • Certification driven by retailers, who see it as a market advantage that they don’t have to pay for • Traceability helps them control liability and quality • Certification: not just an ecolabel • Full Net Weight • Legal catch • Imported properly • No contaminants 31

32. Eco-labeling and certification • What is Eco-labeling • Major Players • MSC • Global Aquaculture Alliance • How has it gained traction • Gained prominence with commitment by Wal-Mart to MSC labeling for many products • Used as important marketing tool by Alaska • Major consumer issue in Northern Europe

33. Eco-Labeling masks different interests among market participants • Retailers: want marketing benefit without any responsibility for costs • Producers: investment may result in new market opportunities; but costs must be realistic, without onerous controls • Environmentalists: Influence over appropriate labels increases the power of NGO’s • Consumers: Like the concept • Upscale consumers will pay premium: Whole Foods

34. Can Eco-labeling help local fisheries? • May become competitive requirement: • Alaska and Russian crab producers (Barents Sea) both seeking MSC eco-label; may force Newfoundland to do so • Helps with regional identification of products • Big Advantage for Alaska on salmon, pollock, cod, halibut and black cod. • Cost burden for custody and traceability can be shared • Eco-labeling now has to be considered as an important feature for marketing a new fishery • When all products are eco-labeled, marketing benefit will diminish; will become entry requirement

35. All seafood is subject to commodity cycles • Retailers have major impact on seafood price cycles because they can turn to substitutes • Long term growth of aquaculture means that real price value of seafood is eroding • New sources of supply mean that new demand has to be created, usually by dropping price.

36. Salmon cycle Source: Panfish

37. Commodity Cycles: snow crab

38. Japan’s role is changing • Japanese buyers priced out of market for some species • 30% decline in Japanese sockeye • Declining household seafood consumption • Retailers have growing influence on prices • Japanese respond to lower prices with higher volume purchases (crab)

39. Currency can also have a major impact on pricing

40. Current currency trends • Strong Euro gives huge price advantage to Europe for whitefish • Yen is fluctuating within a relatively narrow range • Strengthening Canadian dollar makes Canada a more attractive market; harder for Canadian exporters. 40

41. Market strategies to maintain Alaska Seafood Value • Support Consolidation among major players: • Trident / Ocean Beauty • Maruha / Nichiro (Westward/Alyeska and Peter Pan) • Market wild Alaskan products (consumer preference for wild) • Ecolabeling and MSC Certification • Expand Marketing in new areas (Eastern Europe) • All of these being done by ASMI

42. Alaska strategies that can maintain value -Product differentiation (wild) -Continue with ecolabeling (MSC) program -Product integrity issues -Regulatory approaches

43. Embrace Aquaculture • Very Controversial, I Know • Among major world producing regions, only Alaska and Russia not seeing huge growth in Aquaculture • Norway, Iceland, New Zealand, China, Thailand, Vietnam, Chile, Canada: all have significant aquaculture production as well as wild fish production

44. Aquaculture will come to dominate seafood supplies • Must have a pro-active, as well as defensive strategy to maintain Alaska’s market position • Key Problem: would more Alaskan aquaculture undermine market for Alaskan wild fish. I don’t think so.

45. Thank you • Time for questions