The Financial Crisis and the Seafood Industry

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The Financial Crisis and the Seafood Industry
Outlook for in 2009
John Sackton January 30, 2009
Scotian Pride Conference Halifax
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Background

• 30 Years in Seafood Industry market research and
  consulting for past 14 years. Founded
  Seafood.com news in 1998.
• Provider of 3rd party independent in season
  price reports and market analysis for
  Newfoundland crab and shrmp industry for past ten
  years.
• For past five years produced non-binding price
  formula for Alaskan king crab, snow crab, tanner
  crab and brown crab.
• Also have worked on lobster market issues with
  PEI, Nova Scotia, NB, Arctic Char with Nunavut,
  and other species.

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Major points for today

• The Seafood Industry is weathering the Financial
  Crisis
• Industry has seen uneven performance, with some
  areas in crisis, like lobsters, and others not,
  like salmon.
• Food service sales weakening for 12 months
• Retailers backed away from some species
• Financial crisis pulled rug out from weakening
  market
• Credit issues have become less of a problem for
  businesses
• Consumer fears leading to lower consumption are a
  problem
• Different species have different outlooks in this
  environment
• Brief Review of US Trade Issues for 2009

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2009 is different

• Financial risk is very real our industry runs
  on credit
• As crisis grinds on potential for business
  failures rise
• Poseidon Seafoods, Charleston, South Carolina
• Seafood Layoffs occurring Slade Gortons in
  Boston
• Canadian exporters pulling some containers back
  from Russia due to inability of customer to pay
• Exchange rate volatility is extreme
• Seafood consumption will be impacted by larger
  economic forces beyond our control
• Drop off in foodservice consumption
• General retail sales collapse
• Supply issues will dominate pricing
• Where supply does not contract sufficiently to
  match reduced demand, severe downward price
  pressures will emerge

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Industry retains valuable attributes

• Resource based industry will retain value
• Food products are consumed during recessions
• Fuel price pressures are decreasing
• Industry record on sustainability improving
• Canadian exchange rate improving for exporters,
  but is volatile
• Aquaculture producers have some control over
  future production
• Feed costs declining as commodity prices fall

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First half of 2008 was healthy for the Seafood
Industry

• Positive trends for seafood coming into 2008
• Better consumer knowledge of health benefits
• Continued growth in consumption for key species,
  with some consumption limited by supply issues
• Strong Japanese market for crab
• Strong UK, Russia, Eastern Europe market for
  shrimp
• Progress on sustainability More MSC fisheries,
  broad retail messaging on certification, more ACC
  certifications for aquaculture
• Good retail sales boosted by rising food prices

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Positive trend in U.S. in 2008 limited by supply
issues Aquaculture species dominate growth
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Other 2008 problems

• Production problems in aquaculture species like
  shrimp, salmon, tilapia
• Fuel prices led to major spike in costs, freight
  charges
• Weak U.S. dollar returned less money to Canadian
  suppliers selling into the U.S. effecting
  lobster and snow crab prices in April June in
  Canada

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By second half of 2008 Industry was in weakened
state

• Economic worries increased
• Lack of foodservice demand led to lower prices
  on
• Shrimp (warm water)
• Crab
• Lobster tails
• Salmon and tilapia maintained prices due to
  reductions in supply

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Retail and foodservice purchase of seafood
Packers, wholesalers, importers and traders sell
equal amounts to foodservice and retail
billion
Foodservice adds more value in meal preparation,
leading to a larger share of total consumer
seafood dollar 67 Foodservice
Data from U.S. NMFS 2007
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Impact of economic collapse has been most severe
in Foodservice
For past two years real growth has been negative
- (-1.2 in 2007, -1.0 in 2008). Worst
performance in 40 years -Hudson Riehle, National
Rest. Assoc.
Through Nov 08
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What makes foodservice so important for seafood
sales

• Foodservice sales tend to be more consistent from
  year to year
• Foodservice is the main user of higher value
  seafood items like lobster tail, snow crab,
  farmed cod, halibut, oysters etc.
• Casual dining is also big user of items like
  tilapia, mussels, salmon,
• Seafood is a big menu draw for restaurants

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Decline in foodservice sales means trading down
for seafood
Species that are hurt by restaurants trading
down Lobster Snow Crab Halibut Cod Species
that benefit Pollock Tilapia Salmon

• Restaurants will sell fewer expensive meals
• White tablecloth and casual dining restaurants
  report declines in traffic
• Quick service restaurants are benefitting

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Foodservice is supplied by broadline and seafood
distributors

• Sysco is cutting back from truckload to pallet
  purchases, and then from pallet to case
  purchases.
• Some drivers finishing their routes by 10 or 11
  in the morning.
• McCormick and Schmick removed dungeness crab
  from their menu focus on tilapia, and on letting
  customer know they have low priced items
• Darden will stick to traditional products - crab,
  lobster, but will see decline in traffic, and
  focus on cost control.
• Many wholesalers report sales have stopped,
  business is very quiet, but this is normal for
  this time of year.

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Retail stronger than foodservice going into 2008
Data from Perishables Group 52 weeks ending
March 2008
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Retail seafood growth continued at least through
August up 6
Data from Perishables Group 52 weeks ending
August 2008
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Retail advantage in recession

• They have more opportunity to make sales - as
  customers trade down they can present different
  products
• Foodservice simply loses a customer who wont
  come to the restaurant.
• There is a trend towards more cooking at home
  retailers can meet that need
• There is growth in private label and store brands
  - also due to retail marketing of lower priced
  items

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Seafood Private Label shows growth
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How consumers buy seafood at retail slowly
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Seafood Items have long cycles and fewer repeat
customers
Crab, Scallops, Shrimp, Salmon
Days
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Promotion becomes very important at retail
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Retailers cut back on promotional dollars
Source retail sales data for fresh seafood, 13
weeks ending Sept. 30th, 2008
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Retailers saw crab sales fall more than any other
major seafood item
Source retail sales data for fresh seafood, 13
weeks ending Sept. 30th, 2008
Note these figures include all crab, not just
snow crab
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Lobsters only seafood item with more promotion
than 2007, and lower price
means more promotion, is same as 2007, - is
less
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Retail conclusions

• Despite strength going into 2008, retailers are
  struggling to sell higher priced items.
• Retail opportunities exist for seafood in 2009,
  but price points have to match retail
  expectations
• Also positioning products for retail promotion is
  key

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What are the Risks of the Economic Crisis

• Crisis is hitting banks, auto companies, retail
  sales and commercial property directly, seafood
  industry indirectly
• Not a threat to structure of seafood industry
  although lobster could be an exception
• Major problems are manageable for the industry
• lack of access for financing
• Decline in demand
• Result Seafood industry is having to react to
  recession. It is not facing a crisis in the same
  manner as banks and auto companies.
• Major risk is that new unexpected problems occur,
  further stifling consumption.

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Economic downturn frightened consumers who lost
confidence and cut spending

• Consumers cutting spending on foodservice and
  retail trading down
• But they have not stopped spending.
• Depth of the recession is not known yet. Many
  say it is worse than any since the 1930s.

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Consumer Spending and Confidence is falling
Courtesy Darden Restaurants
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Greater Weakness of Current RecessionVertical
axis index of 100 at beginning (month zero) of
recession.Horizontal axis - months into the
recession.
Courtesy Darden Restaurants
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Result is that consumers have gotten scared

• Exacerbated foodservice weakness that already
  existednot good for crab, shrimp or salmon
• Cutbacks at foodservice mean cutbacks for
  seafood.
• Retailers have backed away from expensive seafood
  promotions, will promote lower cost items.
• Buyers with good credit have achieved tremendous
  leverage to beat down suppliers prices.
• Result more pressure on seller margins in 2009

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Seafood industry has had a cautious approach to
banking
Source NFI and Glitnir survey of U.S. seafood
industry
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Working capital is single biggest need, and most
seafood companies have established long term
banking relationships
Source NFI and Glitnir survey of U.S. seafood
industry
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Credit crisis makes it harder for companies to
purchase raw material (example)
New season market prices open 30 lower, sales
drop
Available credit goes from 20m to -1
m(50-35 15 owed 14 m available)
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Most seafood companies not experiencing a credit
crisis

• Canada has cut back on export finance guarantees
  to the U.S. due to increased risk
• Most banking relationships not impacted by
  finance industry problems
• Major seafood commodity price weakness has come
  primarily in situations of oversupply. Not
  likely to be a problem for Canadian aquaculture
  this year.

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Opportunity exists in this environment

• Because seafood is perceived as having value,
  customers respond to lower prices by increasing
  purchasing. A period of lower prices widens the
  universe of buyers.
• Lower raw material prices allow for value added
  production at more attractive prices. It is an
  ideal time to introduce new value added items.
• Promotion in a lower price environment can win
  more customers

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Transformation in the crab industry
Period of heavy Supply and low prices in 1997-98
set stage for 10 years expansion of market at
higher value
Same pattern could be observed in the salmon
industry
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Seafood industry as a whole has some similarities
to crab market

• Long term demand for seafood is growing
• Supply is constrained
• When a short term price weakness occurs, new
  customers readily buy seafood.
• Result periods of price weakness can build in
  long term higher value for the industry by
  expanding the market.
• Tilapia 18 price rise, no fall off in
  Supermarket sales

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Other important issues this year include
sustainability, food safety, exchange rates

• Weak U.S. dollar has led to huge problems in
  lobster, and crab for harvesters, as dock prices
  fell.
• Strong European buying of shrimp has been a
  bright spot.
• MSC certification of shrimp industry in both the
  Gulf and Newfoundland will cement position in UK
  market.
• Sustainability is becoming more routine. This is
  helping the image of the seafood industry.
• Food Safety is the biggest single non-financial
  issue we face.

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When sustainability is no longer an issue, marine
environmental groups push food safety fears

• Recent Ipsos/McClatchy non-scientific poll
• Seafood is scariest Item in your kitchen,
  followed by beef, with vegetables and chicken
  lower down the list.
• This is despite the fact that the major food
  safety issue in the U.S. involved vegetables this
  year.
• 88 gave the FDA a grade of C or better, with 54
  at A or B.
• 79 felt imported food was the primary source of
  food safety problems.
• Because around 80 of seafood is imported, it is
  the focus of these fears.

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Food safety issues will be the most important
non-economic issue facing industry in 2009

• Pew campaign began this fall to force FDA to
  tighten inspections on Chilean farmed salmon,
  charging that salmon contains antibiotics that
  are not permitted in U.S.
• Consumer unease with China will continue, despite
  efforts of FDA to set up pre-approved Chinese
  plants
• Additional Chinese shrimp and catfish plants were
  removed from the automatic detention list.
• In current economic climate, reasonably priced
  aquaculture products will overcome consumer fears
  of aquaculture.
• Canada has value as brand for country of
  origin, especially in China and Japan, but also
  U.S.

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Species review

• Will review lobster, crab, cod, shrimp and salmon
  and mussels
• illustrate which species have declined in price
  which have maintained their prices
• Decline lobster, cod, shrimp
• maintain crab, salmon (forecast)
• Supply is the primary driver, even in recession.

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Lobster
Fall off in demand for luxury goods left popsicle
lobsters priced at same level as live lobsters
in Europe.
Nov 2008 Popsicles 11 Euro / kg
Live lobster has been sold at as low as EUR
11-12/kg last December. This means even lower
prices for frozen lobster.
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Live lobster prices
Live lobster has recovered 80, from 3.75 to
6.75
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Issues for lobster in 2009

• Lobster prices declined 33 to 50 at wholesale
  level not a forecast for other species - the
  result of a perfect storm of negative factors
• Low prices, inventories for popsicle and whole
  cooks will hamper new season purchases
• Lobster shows price elasticity - more product is
  sold when price is low price recovers when
  supplies shrink.
• Part of current recovery is because landings in
  Nova Scotia were less than expected some dealers
  were overly cautious and retail promotions and
  sales to Europe were very successful
• Most important thing is to avoid overpacking the
  wrong product and gluts, even if it means slowing
  landings.

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Cod prices now falling for first time in 5 years
Salt Fish Market collapsed this fall in
Portugal price per ton fell from 5400 to about
4400 or less Alaska HG price fell from 0.55
to about 0.35 cents
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Cod loin and value added products resetting to
new lower level
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Shrimp (warm water)
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Coldwater Prawn imports to UK are falling
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US prices weakening as well
Coldwater shrimp is not declining to the same
extent as warm water shrimp
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Shrimp demand may be more fragile than crab demand

• Inventories building in UK
• More competition from Norway / Iceland
• Potential for problems in Russia with shell on
  shrimp, if economy worsens.
• Result greater amounts of shrimp put into
  cooked and peeled market at a time when retail
  and foodservice sales are weakening in the UK.
• Denmark also seeing aggressive competition on
  price.
• Overall cold water shrimp may be positioned
  better than warm water shrimp in Europe, with a
  smaller decline in volume but market is
  weakening, and alternative markets (Russia,
  China) also weakening.

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What do declining species have in common

• Most have recently been at or near their highest
  prices in many years.
• In each case, new supply has led to downward
  price pressure, as buyers back away from previous
  levels of support for product.
• Lobster was the most dramatic due to a
  combination of unique circumstances heavy
  production of popsicles a very high priced
  product at a time when buyers were reluctant to
  purchase, and processors were reluctant to
  speculate on building inventory.

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Exchange rate issues

• Canada US exchange rate is more favorable to
  exporters than last year. Will be a significant
  help to the crab industry.
• Canada UK exchange rate is much worse will hurt
  exports to the UK.
• US / Yen rate much more favorable to the Japanese
• Changes since last May will be major market
  factor for both crab and shrimp

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Currency changes since Jan 2008
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Species that have maintained their value in
economic crisis

• Crab has maintained relatively strong prices, so
  far, during the economic crisis, as have other
  species like scallops.
• In each case, they have avoided an oversupply
  situation, or have taken advantage of supply
  difficulties in some producing areas or have had
  external factors affect the market.
• External factors for Crab Strong Japanese
  currency Weak U.S. / CA exchange both
  favorable to crab exporters

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King crab, snow crab, and dungeness crab have all
maintained their trading ranges this fall

• Major factor for king crab was Japanese demand
• Japanese currency swings meant they could
  purchase crab at the same level as last year,
  despite the fact that shortages had driven up the
  price.
• Without Japan, market would be like lobster

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Dungeness crab avoided a glut due to poor fishing

• Buyers were very nervous at start of season.
• Poor fishing quickly meant fall in price halted.
• Dungeness crab at low point in biological cycle.

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Canadian snow crab benefited from low inventory,
increase in retail demand

• Favorable currency allowed sellers to discount
  price below 4.00 in December.
• Some big U.S. holders also liquidated their
  inventories at a loss.
• Result prices in the 3.60 - 3.70 level
  spurred buying interest enough to halt inventory
  liquidations.

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Salmon whole fish prices declined, but expected
to rebound this year due to supply issues in Chile
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Pattern is similar, but less pronounced, for
fillets, which meet price resistance at 4.00
level
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Canadian industry taking advantage of Chile
problems

• Canadian whole fish exports to US Up 7.0
• Fresh Fillet imports up 54.1
• Cooke purchased company in Chile
• In 2009, Chilean Atlantic production may decline
  by 30 or more.
• Competition from Europe (Faroe Islands) more of a
  factor

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Tilapia disrupted by supply issues, still well
above historic pricing levels
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Cultured Mussels have a stable price, at
relatively higher level
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Strategies for 2009

• Oversupply is the single greatest threat to price
  stability. In lobster, it is magnified due to
  the high value of the product (tails, meat) and
  the weak situation for foodservice, and the
  trading down at retail.
• Foodservice sales will be weak there will be a
  lot of competitive pressure on prices
• Retail sector provides a good opportunity,
  especially for volume species like salmon,
  tilapia
• All strategies start with efforts to avoid a
  glut, which is a problem in lobsters, but not in
  aquaculture species this year.

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Thank You