A lot of people in the seafood industry are thinking about the coronavirus, now called COVID-19.
The major impact has been on shipping, tourism and travel, all of which are vital to the North American seafood industry.
The question is whether this is a short-term event like a hurricane or political strike that impacts one area of our supply chain, or if this is a year-long global pandemic, leading to big changes in behavior in our markets.
Clearly we don’t know yet, despite people like the CEO of Mowi saying it is a short-term event.
However, we can already see some supply and demand disruptions and we can prepare for others.
Most seafood products have not suddenly changed in price, with the majority of items showing rising or steady prices.
But there are a few exceptions. One big one is shrimp.
The huge runup in global supplies has been supported by purchasing from China. That’s why prices have risen even with record U.S. imports for the last two years. Demand from China has been even stronger. This is now at risk as much of the Chinese restaurant industry is shut down due to restrictions on movement. Retail sales of shrimp, plus online sales, are not going to be enough to make up for these losses. Furthermore, the uncertainty is going to cut into the ability of Chinese importers to even place orders.
This has already impacted shrimp prices, as a large harvest expected from India will likely come into a market that is oversupplied this spring. So, sellers are trying to move inventory as much as possible.
There has also been an immediate impact in lobster pricing.
Here Canadians are especially vulnerable. After the U.S. China trade war resulted in tariffs on American lobster going into China, this business (50 per cent of Chinese imports), moved to Canada without skipping a beat. In the third quarter of 2019, China surpassed the U.S. as the largest importer of lobster from Canada.
For lobster, the crisis could not have come at a worse time. Chinese buyers had loaded up on lobster for the New Year holiday and those sales were disrupted. This means that there are huge inventories of high-priced lobster still unsold in China. This is going to be a bitter pill to swallow and has immediately tanked the normal winter price rise for hard-shell live lobster.
It will undoubtedly have an impact on shore prices this spring.
Finally, the snow crab market is quite vulnerable.
This fall, snow crab posted record prices. And so far, there has not been much change, as sales of Canadian snow crab are still coming from last year’s inventories.
But this is likely to change.
Snow crab pricing has traditionally depended on demand from both the U.S. and Japan. It is Japanese demand that is at risk from the coronavirus.
First, a large portion of Japan’s cluster purchases are shipped to China for reprocessing. It is unclear whether those supply lines will be operating normally this spring. Live dungeness crab shipments to China have already stopped.
Secondly, Japan is becoming another centre for the spread of the virus, leading to a sharp fall in Japanese foodservice and of course a shutdown of tourism from China. Much of the expansion of the raw crab market—which likely took 30 to 40 per cent of the Japanese purchases from Canada in the last couple of years, is supported by the expansion of the tourist trade in Japan. This entire segment is now at risk.
So, without the Japanese to bid on crab, the pricing is likely to come down.
The changes in behavior due to the virus in China and the potential global spread, also offer some opportunity. Primarily, retail sales and home delivery options for seafood are likely to get a boost, as foodservice sales fall.
The biggest overall threat of this disruption is uncontrolled growth of inventories. This can happen when producers set too high a price for market demand. It causes backups in the supply chain, as buyers who relied on historical data for their projections suddenly find the rug pulled out from under them and they have too much product on hand.
This spring and early summer is the traditional start of many fisheries. They include Canadian snow crab, lobster, the first shrimp harvest in India, the coldwater shrimp season in Oregon and Canada and of course, Alaskan salmon.
Most markets don’t have a major correction until there is some type of shock. This year, the shock is likely to be seen in harvester and producer prices.
Each of these fisheries is at major risk of a sharp reduction in dockside pricing.
What happens next depends on whether compensatory demand can make up for lost sales in Asia and possibly in the U.S. as well if an economic downturn is triggered.
What kills companies is being forced to carry inventory that either was purchased at too high a price and can’t be sold, or that is being carried at too high a financial cost. In these cases, the company can suddenly find itself upside down with little ability to control the situation.
Low prices alone don’t kill any business, so long as it can cover short-term operating costs. This is true for harvesters, as well as processors.
There are possibly two scenarios for the industry growing out of the crisis.
One is a short, sharp reduction in pricing that spurs make-up demand for products like shrimp, lobster, crab and salmon, so that within a few months it is obvious that demand is again on pace of outstripping seafood landings and harvests, and we will see an upturn in pricing.
The second scenario is a slow grinding gridlock of inventories, where the lack of sales and financing cost on one product spill over into the ability to finance and buy something else and the entire purchasing environment becomes toxic.
This second scenario is a recipe for financial disaster for weaker companies and a surge in consolidation by stronger companies.
What outcome actually transpires will depend a lot on how prices in the distressed commodities (those with a strong Asian sales demand) adjust and whether the entire U.S. economy ends up heading into a recession that leads to a drop in foodservice demand, or not.
The most important actions for seafood companies to prepare is to first, be very careful about taking on inventory and debt and secondly, trying to expand into new market areas (like retail delivery), including buying your way in, wherever possible.
This means that seafood buyers further down the supply chain from producers, like category managers at retail or major foodservice buyers may see some great buying opportunities in the spring.
This article was republished with permission of John Sackton and seafood.com.
