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Reduced returns

Seafood supply chain survives while U.S. dollar tumbles

By James Wright
November 01, 2007

Five years ago, when East Coast Seafood in Lynn, Mass., built what 
it calls the world's largest lobster-holding pen on Deer Island, 
New Brunswick, it seemed like a shrewd investment. At the time, 
the Canadian dollar was worth only about 62 cents in U.S. currency, 
so the lobster exporter paid its Canadian employees the equivalent 
of $7 an hour.

But on Sept. 20, the Canadian dollar had rallied to a 30-year high and, well ahead of forecasts, reached 1:1 parity with its U.S. counterpart (it moved slightly ahead of the U.S. dollar soon after). 
As a result, the average wage paid to those employees is now about $11 an hour.

"When you see the difference, you can imagine what the cost 
of operating has done," says President and CEO Michael Tourkistas, who founded the company in 1981. "If we had known [the currencies would shift], maybe we wouldn't have been so eager to open on the Canadian side."

Lobster buyers are among those keeping as close an eye on the Canadian dollar, nicknamed the "loonie," as they are on supplies from both Canada and the United States. Because the two countries' cultures and economies are so closely tied - Canada is the United States' largest trading partner - the recent shift in currency values is significant.

While global currencies undergo cyclical changes, seafood companies are finding that the U.S. dollar no longer provides the advantages that it did in years past. And for some, their bottom line is suffering.

Conversely, Canadian exporters are finding themselves better positioned to lure in European buyers as the euro also continues to distance itself from the dollar ($1.41 at press time in mid-October). But the overriding opinion of many U.S. importers and Canadian seafood suppliers whose primary market is the United States is that the diminishing dollar is simply bad for business.

"The guys in Canada are taking a beating right now," says industry analyst Howard Johnson of H.M. Johnson & Associates in Jacksonville, Ore. "If you're a [U.S.] pollock exporter, you're doing pretty good; those selling into Europe have a competitive advantage because they can even cut their price and still [make a profit]. But overall, [seafood] prices are rising and the soft dollar is a big contributor."

Johnson, who annually compiles U.S. per-capita consumption figures for the National Fisheries Institute of McLean, Va., worries that higher seafood prices will slow U.S. consumption, which in 2006 reached 16.5 pounds, the second highest total on record. That's because more than 80 percent of the U.S. seafood supply is imported, he says. Other industry experts share Johnson's concerns.

"In general, the weakening dollar is bad news for U.S. seafood consumers since the U.S. market is heavily dependent on imports," adds Ásmunder Gíslason, a seafood industry analyst with the Icelandic banking conglomerate Glitnir. He adds that currency values can dictate where some of the world's most popular seafood products end up.

"An example of change one can expect to see is exports of salmon products from Chile. It is likely that increased effort will be put into seeking alternative markets for these products to compensate for the weaker prices obtained in [the United States]," adds Gíslason. "These efforts will be affecting the supply from Chile to markets in Europe and other places. The weakening of the U.S. dollar thus not only affects the U.S. market."

The U.S. dollar has slipped against many global currencies, most notably the loonie and the euro, which is used in 13 European nations. But even traditionally weaker currencies like the Thai baht and the New Zealand dollar have posted gains against the U.S. dollar in recent years (see chart, p. 25).

Jim Anderson, Ph.D., professor at the University of Rhode Island and editor of Seafood Market Analyst in Wakefield, R.I., says that a sinking dollar and high dependence on imports could force seafood prices up even higher.

"It's hard to say whether 
depreciation in U.S. currency will cause [foreign] suppliers to lower their prices, or if [U.S.] prices have to rise. It all depends on who has the market power," says Anderson.

"The countries with diversified portfolios, so to speak, are in a stronger position to say, 'Too bad, United States,' and sell it elsewhere. The countries where [the United States is] the only buyer are the ones that may cut their prices."

'Don't get caught blind'

To offset losses in currency exchange, many U.S. seafood buyers focus their purchasing efforts on regions like South America and Southeast Asia, where the U.S. dollar remains strong. Still, Canadian seafood retains a strong presence in the U.S. market, but the financial climate is forcing Canadian seafood processors, already wrestling with rising costs of labor, fuel and raw materials (see International Sourcing, p. 30), to implement strategies to remain competitive.

Colin MacDonald, CEO of Clearwater Seafoods, a scallop and lobster supplier in Bedford, Nova Scotia, says 90 percent of the company's sales are in foreign currencies, with 40 percent destined for the U.S. market. Rising fuel and labor costs packaged with inflation and the weakened U.S. dollar have prompted Clearwater to get "more productive with its assets," says MacDonald. In short: To make money, you must spend money.

"There's four levers you can pull: Increase your volume, lower your costs, increase your yields and [provide] greater value to the consumer so they'll pay you more for your product," says MacDonald. "We've done them all and all of them required significant investment."

To fetch higher prices for lobster products, Tourkistas says East Coast's 60-40-percentage sales split to Europe and the United States, respectively, may have to widen even further.

"With Europe, we haven't seen any drastic change because the euro has also strengthened, offsetting the gains in the Canadian dollar," says Tourkistas. "The [Canadian] dollar itself has not hurt us. In terms of [U.S. sales], it's disastrous. So you just button down, try to reduce your costs and make adjustments to survive."

A worst-case scenario for a seafood supplier during economic swings is being locked in at a selling price that was negotiated months before. Lucrative contracts with large retail or foodservice buyers can turn from boon to bust before the pact expires.

"You can suffer in existing long-term agreements," says Dana Staples, North American sales rep for the Barry Group in Corner Brook, Newfoundland. "If you agreed to sell to Red Lobster at, let's say, $20 [a pound] for lobster tails back in May, now that lobster tail is now costing you at least 5 percent more to process."

The loonie's rise didn't happen overnight, Staples adds, but parity with the U.S. dollar was reached about three months before projections. One way the Barry Group avoids the pitfalls of shifting currencies is holding less product in inventory, which allows the company the flexibility to make price adjustments over the course of the year.

"It's part of doing business in the world now," says Staples. "It's no different than the price of oil going up by 50 cents a barrel. The big thing is that you don't get caught blind."

One safeguard many suppliers find valuable when currency shifts occur is having diversi-
fied markets.

"The U.S. dollar is going into the tubes, but if you have a diversity of sales to other countries you can offset the difference," says Staples. "Seafood is becoming more and more difficult to make a profit. We're not creating new business, we're just stealing it from each other. [As an industry] we're not going out and finding new customer bases and developing new profitable items. We're still 20 years behind the poultry industry."

While the weak U.S. dollar weighs heavily on the minds of some North American seafood buyers and suppliers, one lobster distributor downplays the importance of currency strength and its impact on day-to-
day business.

"Everybody's talking about the exchange rate right now, but you don't know who to believe. Some [U.S. dealers] used to make all their money on Canadian lobsters on the exchange rate - sort of playing with the bank," says Pete McAleney, owner of New Meadows Lobster in Portland, Maine.

"We need each other. We need [Canadian lobsters] in the wintertime and when they hit like hell in May and June. When their season closes, they can hold the lobsters for their own use but when September rolls around they have to start buying Maine stuff. It's a wash. I really don't understand the problem right now. We're businessmen; we all make money."

Better opportunities

When Johnson of H.M. Johnson & Associates recently consulted with a shellfish-marketing group in Prince Edward Island, Canada, his advice was simple.

"I told them, 'Go buy a ticket to Europe,'" Johnson says.

Apparently, pollock suppliers have already taken that trip. Pollock exports through August totaled 238.7 million pounds (including roe), up 23.4 percent from the same period last year. Germany and the Netherlands imported 71.5 million pounds and 42.5 million pounds of frozen pollock fillets, respectively, through the first eight months of this year, according to the National Marine Fisheries Service.

However, because the 3-billion-pound U.S. pollock harvest is fully utilized, suppliers say there's a ceiling on market growth. So to maximize profits, pollock suppliers need to make key decisions before processing, says Merle Knapp, VP of sales and marketing for Glacier Fish Co. in Seattle. Glacier is a major exporter of surimi to Japan, where the yen has remained on relatively equal footing with the U.S. dollar.

"You have to go back to round fish and ask, 'Do we make surimi for Japan or cello blocks for Europe where we might get a higher price?' The two markets feed off each other; as one market rises, the other rises and vice versa," says Knapp. "It's a just a question of which one does first."

The currency in which seafood commodities are traded internationally is mostly based on tradition, Knapp says, although that can be negotiated. So investing in a foreign currency has become standard practice for importers and exporters.

"Somebody's gotta hedge, you know," Knapp says. "We always hedge on the yen. Any good business has a plan in place for foreign currency."

In theory, the depreciating U.S. dollar will increase opportunities for exports and reduce the ballooning seafood trade deficit, says Anderson of the University of Rhode Island.

"But seafood is a special case," he adds. "If the price of imported seafood goes up, then maybe the domestic market improves; it doesn't necessarily create an incentive to export. Maybe the Japanese can pay more, but so can the U.S. consumer. There might be better opportunities in the domestic market because the cheap [imported] stuff isn't as cheap."

Where U.S. seafood consumers will see the greatest impact of currency depreciation will be in retail cases, says Anderson, adding that an economic recession is possible as early as 2008. But if retail prices continue to rise, consumers may choose to forego seafood altogether.

"It's reasonable for [retailers] to absorb some increase in cost and not pass it on to the consumer. But too much volatility is not good for shaping consumer habits, like buying salmon once a week," Anderson says. "Habit and stability are important characteristics of building a market; you want the stuff on the shelves every day."

Assistant Editor James Wright can be 
e-mailed at jwright@divcom.com

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