1

The Canadian Lobster Industry: Market Value, Trends and Issues

John SacktonSeafood Datasearch

Moncton, Shediac, and ShippaganMarch 27-28, 2019

2

Background• 40 Years in Seafood Industry

• Crab, shrimp, lobster and cod

market analyst since 1997

• Preseason price and market

outlooks on shrimp, crab, lobster

and cod – Maritimes,

Newfoundland, Alaska, US West

Coast

• Price arbitrator for Alaska crab

Fisheries 2005-2017

• Co-Founder of NFI’s Global

Seafood Market Conference

• Shrimp, Crab, Lobster Analyst for

US National Fisheries Institute

• Publisher of Seafood.com News

• Owner of Seafood Datasearch

3

Outline for Today

• EconomicvalueofCanadianLobster• Wheredoesthisvaluecomefrom?• StrengthsandChallengesoftheLobsterIndustry

• CurrentMarketIssues• Pricing• FactorsPushingIndustryChange• Outlookfor2019

4

Lobster is by far the most valuable Canadian Seafood Export

0%

10%

20%

30%

40%

50%

60%

70%

80%

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

$000’sCanadianDollars

Lobster FarmedSalmon Other LobsterPercent

All Other

Lobsterpercentageoftotalseafoodexportvalue

Lobster

Farmed Salmon

5

Lobster supply remains near record levels

54,092 48,04658,137 57,706

66,265 66,09074,055 77,018

84,807 86,198 92601 92,762 97849 95000

34,17629,019

31,710 36,820

43,640 47,593

57,748 57,97356,257 55,521

59,85350,311

54,316 54000

8,620

7,013

7,4038,176

8,9889,183

9,795 9,66610,174 10,747

11,789

7,520

79417000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019(est)

MetricTons

After9YearsofGrowthTotalLobsterLandingsDeclinedin2017andCameupSlightlyin2018

Canada Maine OtherUS

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Lobster Value has Grown as Landings Have Increased

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

$000US

ExportValueforLiveLobster($US)

7

For the Maritimes, Lobster represents 52% of export value;crab and shrimp are important also

Lobster,$2,129,391.00,

52%Crab,$1,491,598.00,

37%

Shrimp,$468,349.00,

11%

2017

Lobster Crab Shrimp

meat11%

tails21%

wholecooks11%

Live57%

meat tails wholecooks Live

By Product volume, Live represents about 57% (2017)

Value

8

Despite Increasing Sales to China, the US is the dominant buyer of Canadian lobster

0

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60000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MetricTons

LiveLobsterUnitedStatesofAmerica China EU OtherAsia Others

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MetricTons

FrozenLobsterUnitedStatesofAmerica China EU OtherAsia Other

US

ChinaEU EU

China

US

9

Live lobster price China vs. US by qtr

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

$7.00

$7.50

$8.00

2014-Q2

2014-Q3

2014-Q4

2015-Q1

2015-Q2

2015-Q3

2015-Q4

2016-Q1

2016-Q2

2016-Q3

2016-Q4

2017-Q1

2017-Q2

2017-Q3

2017-Q4

2018-Q1

2018-Q2

2018-Q3

2018-Q4

Livelobsterexportpriceperlb forUSandChina

USdollarperlb Chinadollarperlb Linear(USdollarperlb) Linear(Chinadollarperlb)

ChinaUStariff

10

US and Canada Have a Deeply Integrated $US 4 Billion Reciprocal Seafood Trading System

• Sofar,thishasnotbeen disruptedbytradetensions

• CanadaisgainingadvantageoverUSbyopeningnewtrademarkets– CETA– TPP– ExpandingTradewithChina

• USexportstoCanadaincreasedin2018yearover2017.

• ButwithUSshutoutofsomeexportmarkets,excessUSproductcoulddepressprices

CA to US 2017 $US 3.3 billionCanada top exports to US

VALUE PERCENTsnow crab $ 594,413,989 18%LOBSTER 1,066,662,765 32%

SALMON 651,560,477 20%

US to Canada: $US .95 billion

US TOP EXPORTS TO CANADA

Lobster 233,117,642 25%

salmon incl wild 84,354,788 9%

The US and Canadian Markets are Deeply Tied Together

11

Tail - 20-24%

Claw knuckle leg meat:9% to 13%

Live - 100%

Whole Cooked - 86%(average cook loss, can be reduced about 5% with treatments)

Yield is key to understanding Lobster pricing and why live lobster

demand sets shore prices

Calculations based on averageof 22% for tails and 11% for meat

12

Breakdown of 500 lbs lobster by raw material pounds and cost at various shore

pricesCostatShorePrice

Livelbs WholeCookcost

Tailscost Meatcost

Processed(tails/meat)rawmat$

100% 86% 22% 11%Pounds 500 430 110 55 1655.00 $5.00 5.81 22.73 45.45 15.156.00 $6.00 6.98 27.27 54.55 18.187.00 $7.00 8.14 31.82 63.64 21.219.00 $9.00 10.47 40.91 81.82 27.27

With $9.00 shore price, processors $CA for tails and meat is $CA 27.27 (20.31 $US). Current US pricing is $20.00 for 4 oz tails, and $17.75 for lobster meat.

13

Lobster Landings by LFA

2,973

7,626

7,1408,099

7,000 6,092

1,9254,5017445418211,2031,166

8,017

22,679

3,072

3,372

4,915

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Tons

LFALandings2017

38363534333231B31A3028&292726B26A25242315-221-14c

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US Live Exports to Canada support New Brunswick’s processing sector

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2012 2013 2014 2015 2016 2017 2018ytdOct

LOBSTER(HOMARUSSPP.)LIVE/FRESH

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

NB PEI NS QB NL

EstimateduseofUSImports,plusmeatandtailexportdata

Meatexports TailExports USImports-liveweight Landings-liveweight

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New Brunswick and PEI produce frozen lobster; Nova Scotia produces Live

NB61%

PEI23%

NL4%

QB6%

NS6%

PercentofLandingsGoingtoFznLobsterNB PEI NL QB NS

NB18%

PEI8%NL1%

QB8%NS

65%

PercentofLandingsGoingtoLiveNB PEI NL QB NS

16

Result is different industry structure in different provinces

• NovaScotia:livelandingsinLFA33and34inDecember

• NewBrunswick:landingsforprocessinginspringand

fall;livelandingsinbayofFundy

• PEI:mostlyprocessingfrozenlobsterMay-June,Aug-Sept.

• Quebec:Bothprocessingandlivemarkets

• NL:mostlyfrozenprocessing

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Structural problem

• Liveproductssetmarketprice

• Whenlivemarketisstrongprocessorsarepricedoutofmarketbyrawmaterialcosts

• ResultisthatprocessormarginsinbothNBandPEIareoftenunderwater.

• Industryprofitsheavilyfavorharvestsector.

• Harvestsectorhaspoliticalclout

18Raw Frozen Tails Frozen raw split lobster body and tail

Yield issues make it important to “sell the shell”

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Unique Strengths and Challenges for Lobster

• Employs25,000harvesters;71%ofallmaritimefishers

• Widespreadgeographicdistributionmaintainseconomicviabilityofcoastaltowns

• Providesprocessingemployment

• Strongexportdemand• Sustainablyfished

• Landingsglutsreducevalue• Highpricevolatilityduetodemandforlivelobster

• Highlyvariablequality• Highlyfragmentedbuyingstructurewithmiddlemen

• CrossborderindustryforbothUSandCanada

• Cashbusinessheavilydependentonfinancing

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Problems Encapsulated in Price volatility which kills markets

Lobster meat 70%

Tails 21%

Live: 80% April; July – Dec 7-8%

Cod Loin 7%

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Could lobster products be mis-matched with

markets

• TrendinUSmarketistousemorefrozenlobster;thisisgrowingareainfoodserviceandretail.

• Liveshellonlobsterishardtoeat;only1%ofUShouseholdsbuylobster.

• Frozenandprocessedlobstermoreaccessible.50%UShouseholdsbyshrimp.

• Volatilityoffrozenpricespreventsmarketexpansion.

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Current market conditions

• Lobsterisademanddrivenmarket• MoreinshellCanadianfrozenproductgoingtoUS

• MorelivelobstergoingtoChinafromCanada

• Thisisdrivinguprawmaterialprice

• Aftercontractingin2017,lobstersupplyincreasedin2018

• USlobstermarketremainedstrongduetoeconomy

• UShadlimitedliveexportstoChinaduetotariffs

• For2019awintertospringshortfallexpectedonfrozenlobster

• IndustryiscountingonChinatoconsumelobsteratcurrentpricelevels

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US domestic lobster supply slightly

increased in 2018

-150,000

-100,000

-50,000

0

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100,000

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2011 2012 2013 2014 2015 2016 2017 2018Pounds(000’s)

USlandings CanadaImports(live) USImportsMeatUSImportsTails(homarus) USimportsTails(rock/Spiny) USexportsLive(NotCa)UsExportsSpiny Exportstocanada(live)

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More frozen tails and whole cooks going to US

• Expansionoflivemarketshasmeantlivedemandsetswharfprice

• Moreprocessedlobster(tails,meat,scoredclaw)goingtoUS

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US

China0

500000

1000000

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2000000

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3000000

3500000

Apr-17

May-17

Jun-17

Jul-17

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Sep-17

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Feb-18

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Jul-18

Aug-18

Sep-18

Oct-18

Nov-18

Dec-18

CAFrozenLobsterExportHasDecreasedtoChina,IncreasedtoUS

UnitedStatesofAmerica GreaterChina

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Expansion of demand for frozen lobster in US in 2018

• Frozentailsandotherin-shelllobsterincreasedin2018

25

8,484,1479,906,417

8,215,163 7,449,056

16,165,178 15,707,032 14,533,505 15,456,492

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

2015 2016 2017 2018

CanadaExportstoUSbyProductForm

LobsterMeat Live Tails

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When converted to live weight,

meat and tails are the largest volume to the

US

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

2015 2016 2017 2018

POUN

DS

LiveweightequivalentExportstoUS

LobsterMeat Live Tails

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Frozen lobster showed 8% growth at Foodservice

• NFINPDData

SouthAtlantic+7.5%

Mountain/Pacific

+15.1%

NewEngland+5.0%

MiddleAtlantic+14.5%

EastNorthCentral

+5.3%

WestSouthCentral

-13.0%

WestNorthCentral

+8.8%

EastSouthCentral

+8.4%

Canada26%

Maine/US14%

Spiny/Rock11%

NorthAtlanticNotSpecified

49%

ORIGINOFFZNLOBSTER

MARKET SHARE PLUS GROWTH RATE IN 2018

27

28

Lobster Pricing for live, meat, tails

meat

tails

live

Peak live prices with very low volume

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Canadian Live Exports Increased to Chinabut were down to US

Seafood Datasearch: Intracen customs data

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

2015 2016 2017 2018

Livelobsterexports

US Europe China OtherAsia Other

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CA Frozen lobster excluding meat

Seafood Datasearch: customs data

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

2015 2016 2017 2018

FrozenlobsterExcludingMeatUS China Europe OtherAsia

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Meat exports

Seafood Datasearch: customs data

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

2013 2014 2015 2016 2017 2018

LobsterMeat Lobster meat isshipped almostentirely to the US

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Comparison of lobster meat vs. tail and frozen exports to US

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

2015 2016 2017 2018

LobsterMeat FrozenLobstertoUS

Look at Longerhistory

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Tail prices are higher than meat prices for first time in 10 years

0

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25

30

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

ChartTitle

Lobstermeat lobstertails Lobsterwholecooks(est) MeatPrice TailPrice(4oz)

Exports of Canadian meat and tails to US

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3.5

4

4.5

5

5.5

6

6.5

7

7.5

8

8.5

04/05/16

05/05/16

06/05/16

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06/05/18

07/05/18

08/05/18

ShorePrices2016and2017and2018PEICNR NBN.ShoreCNR PEI NBN.Shore NSN.Shore Newfoundland

Shore Prices

Seafood Datasearch

PEI Aug ‘18 Price up $.25 over 2017

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LFA 34 Season

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

LFA34Landings In 2018, high demand forlive lobster for China and the US pushed prices upto $9.00 at times.By end of year prices retreated somewhat to the$8.00 range.Result was that almost nolobster for processing wasbought at $7.00Landings should be comparableto past two years.

36

Canadian Export Price to China & US

Seafood Datasearch

$-

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

0

2000000

4000000

6000000

8000000

10000000

12000000

14000000

1/1/16

2/1/16

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12/1/18

LiveVolumeandPricetoUSandChina($CA)

Chinaqty usqty ChinaVal$CA USVal$CAChina US

PercenttoChina

2016 15,030,226 60,643,004 19.9%2017 19,193,492 61,524,624 23.8%2018 31,056,815 58,299,251 34.8%

37

China lobster demand is not slowing

• Data:Intracen

Total live Homarus from US and Canada

US shipments exceeded prioryear until July, when tariffs were imposed

37

0

5000

10000

15000

20000

25000

2014 2015 2016 2017 2018

MetricTons

ChinaLiveLobsterDemandCanada UnitedStatesofAmerica

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US Trade War with China Risks

RisksforUS• Shutoutofmajorexportmarket• Acceptlowerpriceinalternativemarkets

• DisruptUSseafoodimports• Cutsalesofsomeitemsduetohighercosts

• LowervaluestoUSHarvesters

RisksforCanada• Overheateddemandforlobsteratwharf

• MismatchbetweenChinesepricesandothermajormarkets,especiallyUS.

• Growthof‘GrayMarkets’inCanada• CAIndustryoverlydependsonChinesemarket

38

In worst case scenario, US Harvesters agitate to limit Canadian Seafood Imports to boost their incomes

39

How China trade impacted lobster from Canada• Chinademandnowdominantfactoringloballivelobsterprices• Canadiantradeshiftedto:

– Morelivelobster,lessfrozentails,meat,wholecooks– MoreliveshipmentstoChinathantheUS

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

9000000

Jan-17

Feb-17

Mar-17

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CANADAEXPORTSMOSTLYTOCHINASINCEJULY

US GreaterChina OtheAsia N.Europe S.Europe Others

Live exports from US and Canada grew 7.6% over 2017

Frozen exports fell -6.7%

*Biggest drop was in fzn lobster to China. US fzn imports actually increased.

39

Tariff imposed

40

Canada becoming live supplier to China

-

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Jan Feb

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rilMay

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Juky Au

gSept Oc

tNov

Dec

FlowofLiveLobster2018

CAtoChina UStoChina CAtoUS UStoCA

0

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4000000

6000000

8000000

10000000

12000000

14000000

16000000

18000000

0

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

ChartTitle

uschina cachina usca caus

2017 2018Differenceuschina 16,482,522 19,214,196 2,731,674usca 52,914,148 62,334,869 9,420,721cachina 18,973,764 30,535,006 11,561,242caus 61,800,425 58,299,251 (3,501,174)

41

Ecuador Experience vs Canada: Both become more dependent on Chinese Market

0

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2013 2014 2015 2016 2017

EcuadorMovestoChinaMarketforShrimpUS Europe China

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2013 2014 2015 2016 2017

CanadaLiveLobsterExportsUS China&Asia Europe Japan

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Overview of Live season

• USremainslargestmarketbutsinceJuly,Chinahasbeenbiggerimporter

• Positivefactorsinclude:– Stableexchangerates– StrongUSeconomysupportslobstersales

– Retailmarketscanabsorblivelobster

• Negativefactors:– Unlikelobstermeat,demandforliveishardtoexpandatfoodservice.

– Expandingatretailmeanslowerprices

– LivelobsterisanicheseafoodproductforconsumersoutsideofafewareasoftheUS.

– ExpansionwilldependonNon-USmarkets

43

Canada has advantages as global supplier• USTradePolicyDisasterhasbeen

gifttoCanadianshippers:

– PreferredsuppliertoChina

– PrimarysuppliertoEurope

• LackofAmericancompetitionin

Chinawillhelpmaintainprices

• Insecondarymarkets(Korea,

Singapore)USwilldiscountprice,

undercuttingCanadianSellers

• StrongTailmarketisonlyplace

processorscanmakemoney.

• Meatinventoriesfinallyappearto

becleanedup.

• Processorsgotburnedwith

overproducingwholecooks,and

tailsin2016.

• Sincethentheyhaveremained

cautious.Unlikelytospeculate

despitehigherprices.

44

Tail Prices by Size

45

Warm water tails

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2014 2015 2016 2017 2018

Total

46

Lobster tail sales go with stronger economy and lower unemployment

47

Summary• MeatandTailmarketisveryunstable• Run-upinpriceinmeatmarketclassicexampleofdestroyingdemand.• Inversionofmeatandtailpricingseemsunlikelytolast• FrozenlobsterrawmaterialcostisbeingsqueezedbyexpansionoflivetradetoChina• Yetbyliveweight,frozenlobsterrepresentsatleast40%ofvolume• Issuesforprocessors:

– Riskinholdingtailsandmeatifmarketpricedeclines• Frozenlobstercouldhaveanopportunitytoexpandmarketduetohighpriceandlackof

supplyofsnowcrab.• Harvesterdilemmaisthatvaluesmaydifferforliveproductandcannersbyagreater

amountthanusual.• Alsoshippablevs.non-shippablelobsterscouldhavevariationinprice

48

There have been many studies on whether the lobster industry

is undervalued

• Buyingstructureleadstopoorquality,noincentivetoimprove

• Pricevolatilityreducesmarketabilityofprocessedproducts

• Cashflowproblemsduetoglutsforcepackerstotakelowerprices;industryispoorlyfinanced

• SeasonalityofLFAlandingsonlypartiallyaddressesproblemofsoftshell(molting)lobsters

49

Why are major companies and Private Equity Investing in Lobster

• MajorseafoodcompanieslikeThaiUnion/ChickenoftheSea,Mazzetta,andChamplainFinancialallinvestinginlobsterindustry.

• Theyseelongtermvalueinaluxuryresourcewithgrowingglobaldemandandsteadysupply

• Thisvaluecan’tberealizedbywhathappenedtothemeatmarket– boomandbust.Insteadithastodevelopoverthelongertermwithamoregradualincreaseinvalue.

50

Thai Union also bought Red Lobster• RedLobsterisakeybuyerintheindustryformanyyears.• Largestuseroflobstermeatandtails.• ButRedLobstercustomerismiddleclass,andverysensitivetoprice.

• Howwillcompanykeepsellinglobsterifpricecontinuestobeabovewhatcustomerscanpay.

• Justbecauseamarketisheretodaydoesnotmeanitcannotbegonetomorrow

• Newfoundlandusedtoproducemillionsofpoundsofcrabmeat,primarilyforRedLobster.Nowthatproductistotallygone.

51

DFO Mandated changes to carapace size

• ChangestominimumsizehaveincreasedvalueinLFA’sbychangingmixofmarketsvs.cannerlobsterThiswasDFOmandate.

• Effortstochangebuyingpracticeshavenotbeenwelcomed

• Otherfisherieshavetotallychangedtheirvalueequationthroughindividualquotas.

• Lobsterindustryhatesquotas;significantsocialfearsoflosingcontrol

Can the Status Quo Ever Change

52

Numerous industry studies and reports mostly focus on same issues

• Glutsinlandings• Poorqualityandhandling• Inefficientbuyingnetwork• Lackofmarginsforlobsterprocessors• HighFinancingcostsleadstocompanies

tobepricetakers• Vulnerabletoracetobottominvalue• Pricevolatilitydiscouragesconsumption

53

Lobster industry participates in seafood value chain roundtable

Goals for 2023:

54

Lobster industry is in transition• Currentmarketisverystrong;butitiserodingdemandformeatandtails.

• Whencrabsectionsgotpricedtoohighforpackerstoproducemeat,theygaveuptheproducttodosectionsonly.

• LobsterqualityistovariableforCanadatogiveupprocessingfrozenlobster:itisnecessaryforlowerqualityandsmallerlobster.

• IncreasedlobsterprocessinginUSwillalsobeachallenge

55

Time for Questions