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Challenges to the Global Seafood Market

3215 words (13 pages) Essay in Environmental Studies

08/02/20 Environmental Studies Reference this

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1. Introduction to Global Seafood Market

Being the major protein source besides meat in our diet, seafood are amongst the most traded commodities worldwide. In 2018, global fish production have reached a level high of

178.8 million tonnes and each person is expected to consume on average 20.7 kg of fish a year (FAO, 2018). The market of fish and seafood is mainly supported either by aquaculture or commercial fishing. Aquaculture is the farming of freshwater and saltwater producing while commercial fishing refers to the harvesting of wild fish. Seafood processing is another major market in the industry.

Similar to other natural resources on earth, the biodiversity in the ocean is under serious threat of depletion. Overexploitation and commercial fishing coupled with the growing demand for seafood in human consumption have aggravated the situation. To keep up with the demand of seafood in our food production, aquaculture has outpaced commercial fishing in supplying our fish and seafood production since 2000. In fact, according to the world fish market data by FAO, aquaculture contributes to 48.8 percent of our seafood consumption in 2018 and is forecasted to grow year over year as commercial fishing sector becomes stagnant. It has become one of the fastest growing food production sector in the world.

In 2016, about 35 percent of global fish production entered international trade in various forms for human consumption and non-edible purposes. The major importers and exporters of the global seafood market include USA, China, Japan, India, Norway and Vietnam. Most aquaculture producers are small-scale and usually originate from developing countries in Southeast Asia while wild-caught industry is most active in the North Pacific region of the States and countries such as Norway and Iceland.

2. Risk in Aquaculture

Just like any other sectors in the market, aquaculture is not without its risk in production and management. This industry is specially vulnerable to disease risks, risks pertaining to farm equipments and environmental risks.

Disease risk is a major farm-level risk caused by exposure to bacteria and parasites. According to Food and Agriculture Organization (FAO), disease outbreak has cost the global aquaculture industry around US$6 billion per year. In fact, as most aquaculture activities are small-scale business taking place in developing countries, there might be more diseases loss that go undocumented. A major disease outbreak might affect the production and has high economical costs. For example, the infectious salmon anemia (ISA) outbreak in the Chilean salmon farming industry cost US$2 billion dollars and 20,000 jobs. This is part of the reason the loss ratio in aquaculture insurance are high. Investments in biosecurity in the aqua farms such as surveillance programs are in dire needs as aquaculture continues to grow.

Climate change risk is another risk that aquaculture is facing. Highly regulated temperature and precise chemical conditions are required to cultivate the farmed species successfully. Global warming resulted from climate change will affect water temperature and dissolved oxygen content in the water that will influence the farmed species adversely. One of the strategy to combat to risk in this area might be development of adaptation model so that the farmed species could be more resilient to changes.

3. Risk Management Practices in the Aquaculture

(i) Aquaculture Insurance

Similar to crop insurance in agricultural products, aquaculture insurance seeks to pool and spread the risk of aquaculture producers while cushioning the loss in the event of unfavorable situations. Insurance has been regarded as one of the most effective mechanism in mitigating financial and business risks. The aquaculture insurance has gained its importance over years as the sector grows. New farming projects are being introduced around the world to meet the rising demand of our food production and combat the depletion of natural resources from the ocean. Most of the aquaculture insurance are being written on salmon and shrimp to date and many of them are being closed in the western countries. With Asia comprised of the 80 percent of the global aquaculture production, the market for aquaculture insurance is clearly premature.

Global Aquaculture Insurance, Aquaculture Insurance Exchange, Swiss Re and Willis Towers Watson are some of the major insurance companies that offer and specialized in insuring aqua farming (Mk). Each insurance policies are tailored as there isn’t a standard template for the aquaculture insurance just yet. However, most insured will seek to protect themselves against damages on building, equipment and transportations. Some will insure on the production of biomass such as fish stocks, shrimps, mussels or algae. As the aquaculture industry is still developing, it is crucial that good risk management practices exist in the industry to ensure  sustainability. To date, aquaculture insurance is only available through international market. However, more small scale aqua farmers should be educated on the benefits of aquaculture insurance and be given access to the insurance market. We also need to get more insurance companies on board in the agriculture insurance market as according to Geir Myre, global head of agriculture insurance at XL Caitlin, some insurers refuse to get into business with aqua farmers due to the high loss ratio. The industry is of high risk as “fish can be more easily completely wiped out in recirculated aquaculture systems, often linked to the release of hydrogen sulphide or H2S (Evans, 2018).” Unpredictable weather, temperature and algae boom are other factors that might be of concern.

China, being one of the major aquaculture producers, has been emphasizing the effort to increase the market share of its aquaculture insurance. China started its aquaculture insurance market in 1995. They are being provided by People’s Insurance Company of China (PICC). New insurance model has emerged and revolved over years to solve the issue of high loss ratios. The government strongly advocates the partnership between commercial insurers, mutual insurance associations and producers’ cooperatives. In my opinion, the role of producers’ cooperatives play an important role in this insurance market. Cooperative acts as intermediaries between the insurers and the insured. The insurers only enter the contracts with the cooperatives, while the cooperatives under the scheme will contract with its members. With the presence of cooperatives, the administration of the insurance policy will be smoothed as cooperatives possess domain knowledge that can aid the insurers in assessing, identifying and characterizing the aquaculture risks. In this case, the possibilities of moral hazard diminishes and the insurance market will appeal to the insurers as cost decreases. Furthermore, China takes advantage of the weather-indexed insurance to guard the aquaculture industries against climate change risk. The China government has been wise in implementing the risk management policies in aquaculture. They provide clear policy guidelines and incentives for farmers while make sure that the market is sustainable by developing the commercial insurance firms and mutual insurance associations.

Being one of the most exposed countries to natural catastrophe in aquaculture, Vietnam is another country that can be examined for its aquaculture insurance practices as well. In Vietnam, the Ministry of Finance and Ministry of Agriculture and Rural Development launched a national pilot program that includes aquaculture insurance back in 2011. This program is among the efforts to promote better risk management practices amongst small and medium enterprises. The result presented was unsatisfactory and showed that the program is not well managed. The aquaculture insurance in the pilot program has seen a loss ratio of 306% and the epidemic causes damage rates of 80-100% in the production. Besides, a lot of challenges were presented during the claim process. Many claims were denied as many lack evidences to support the claim processes. Hence, there is also a need to bridge the gap of knowledge in insurance and risk management practices amongst farmers and insurance staff as farmers are ignorant about the insurance coverage, benefits and operational standards while insurance staff indicate limited understanding of aqua farming and aquaculture insurance. Technical guidelines for the insured and insurers such as the monitoring procedures for farm production, farm management practices and farm improvements and the relationship between those to losses caused by diseases or other risks were deemed very crucial to the success of aquaculture insurance (FAO, 2016).

Well-crafted aquaculture insurance policies will benefit all parties. For example, if natural disasters hit, the insurance coverage will lighten the burden of producers and governments on  rehabilitation efforts. They will also allow aqua farmers to better organize their aqua farming practice and take advantage of the risk management market that is available such as The Llyod’s London. If planned properly, the insurers and other value chain players can benefit from the market from a financial perspectives as the new aquaculture insurance markets expand.

(ii) Aquaculture Futures Market

As aquaculture becomes an important alternative to supply the global seafood market, aquaculture futures market will eventually evolve and become developed just like other commodities. Shawn Hackett, president and CEO of Hackett Financial Advisors, a money- management firm with a focus on agricultural commodities, once said, “All you need for a futures market is an active market. An active aquaculture industry will lead to this, and there would have to be some sort of pricing mechanism to manage risk, very much like the petroleum market.” The main objective of the futures market is to allow producers and processors to manage the spot price risks. Besides increase profitability for farmers, futures contracts may enhance market efficiency, limit price volatility and increase the seafood consumption. While not prevalent, different type of seafood futures contracts actually exist or existed.

Fish Pool is an international exchange based in Bergen, Norway that trades financial salmon futures contracts since 2006. The volumes traded at the exchange represented about

10-15 percent of the annual production of farmed Atlantic salmon in Norway. Salmon price is highly volatile and hence the futures is an optimal tool in hedging the risk. The exchange only deal with financial contracts and offers no physical deliveries, which might be the reason that the futures still exist to date. High transportation costs and the storability of fresh salmon has made physical contracts unappealing to the market. In fact, Fish Pool is one of the success case of the seafood futures on the market.

Shrimp futures is another type of futures that is notable in the industry after the salmon futures. Shrimp futures contracts was seen on Minneapolis Grain Exchange a few years back but had been taken down due to the poor trade volumes. The lack of transparent cash markets make it hard for shrimp futures prices to actually converge with those of the spot market. Besides, the lack of liquidity have led to ineffective hedging and poor price discovery mechanism. The lack of participants might indicate that majority of the market either have no interest or are unaware of the benefits that might be offered by the futures contracts. Japan’s Osaka Kansai Commodities Exchange is another exchange that lists frozen shrimp future contracts. Contrary to those on MGE, the shrimp futures contracts are still being traded to date.

One of the key factors that determine the success of the futures contract are liquidity. High open interest and large trade volume allow the futures contracts being introduced to stay on the exchange. Hence, the more the numbers of market participants, the more likely the future contracts will be staying on the exchange. To attract market players be it hedgers or speculators, the future contracts must serve to hedge the risk against price volatility and lead to price discovery. For speculators, the futures markets are the provider of information for them to predict spot prices. However, seafood contracts have usually failed to attract necessary liquidity to serve as price formation mechanism in the past. There are studies shown that the correlation between salmon futures contracts and spot prices is at minimal. Also, when we refer to the futures contracts on agriculture commodities, we can find that they have standardized properties. For instances, U.S. No. 1 Yellow Soybeans (maximum 13% moisture). However, it is challenging to standardize seafood products as they vary in sizes and shapes in every production.

In a nutshell, efforts to provide futures contracts with seafood as underlying assets have faced hurdles due to the insufficient trading volume, lack of product homogeneity and limited price transparency. We have seen attempts to create seafood contracts by different countries in the past years; some succeeded, some did not. However, I believe that the seafood futures contracts have the potential to emerge as one of the risk management tool in the market for both the producers and consumers as the market develops but required further studies on the contract design.

4. Effects of Trade Policies on the Global Seafood Market

(i) US-China Trade War 2019

US-China trade war has become one of the biggest headlines on the news recently. Not only will the wheat farmers and apple growers be impacted by the disputes between the leaders of both countries, the seafood market will also be significantly affected since US and China are both the major importers and exporters of the global seafood market. For example, 25 percent of tariff is being imposed on Tilapia from China and soybeans from the United States that is used to feed farmed fish (Mallison, 2019). Alaska, the largest seafood exporter to China for seven years since 2000, has been seeing declining market share in the exports by a fifth in year 2018 (Welch,

2019). The lost in sales and unanticipated costs from the trade war expose the seafood companies and even restaurants to business risks as they face hurdles in the international trade.

In fact, many of the end products entering the US market are seafood caught in the

American water that are being processed in the China. Often times, with trade war escalating, it is the parties who are at both ends of the supply chain that suffer. Part of the costs will be absorbed by the producers while most of them will be passed down to the consumers. Hence, the looming price increase might eventually depress the global traffic of the commodities. In fact, the seafood end-product consumers in the States will be more at risk as other foreign fishing competitors such as Russia can still ship their fresh caught to China for low cost processing and reexport them to the States tariff free (Wilsterman, 2019). In the long term, the new policy might only reduce China’s reliance on US in its seafood market as exports decrease.

In the United States, major seafood importers and distributors such as Pacific American Fish Company and Great Fish Company has begun to stock their inventory before the new tariff goes into effect. The plan is to maximize the savings without paying for the new costs. Other risk management strategy that companies has come up with include making additional stops at Southeast Asian countries such as Vietnam and Malaysia before shipping the commodities to the

States to avoid the high import duties and (Harkell, 2018) .

(ii) Brexit Negotiations with the European Union

The negotiations about Brexit and European Union have been around for a while. Agriculture and fisheries are amongst the industries being impacted by the uncertainties of the deal in the UK. Britain exports 75 percent of the fish it catches, and 75 percent of that goes to the EU. Leaving European Union means departing from European Economic Community. Some of the perks of being the member of European Economic Community includes zero tariff on goods moving between member states and zero common tariffs for goods entering the European Union. With most of the trade partners being in the European Union, British risk losing its competitive edge in the seafood market if trade protectionism arise.

One of the major risks that will inflict on the fishing parties is the storability of fresh seafood products. Brexit signals additional paperworks when it comes to export and import across borders. Hence, any border delays could adversely affect the quality of the live and fresh products. For now, Scottish fishermen are planning to reduce their catch to avoid potential losses, according to industry officials. The aquaculture market will be affected by Brexit as well due to trade barrier as they export most of their products.

Moreover, a European Commission investment package was granted to Britain before to assist the seafood industries. The funding is targeted at innovation, onshore and offshore infrastructure and the efficient use of natural resources for all the seafood sectors including aquaculture and fisheries (Holland, 2016). It also provides capital to small businesses in the sectors to stimulate growth. The industries risk losing the funding and might have to reconsider the number of future projects approved if Britain is no longer in the European Union.

With Brexit remain uncertain to date, many in the fisheries industry have speculates about the trend and expect that the cost of trade protectionism and rising cost will outweigh the increase access of UK fishermen to UK water. The effort in the past by UK and EU to make fisheries more sustainable might go to waste.

References

  • DiNapoli, Jessica. “U.S.-China Trade War Triggers Seafood Supply Chain Shake-Up.” Reuters, Thomson Reuters, 28 Sept. 2018, www.reuters.com/article/us-usa-trade-seafood/us- china-trade-war-triggers-seafood-supply-chain-shake-up-idUSKCN1M81DP.
  • Evans, Owen. “Head of Aquaculture Insurance Firm on RAS: ‘Some Insurers Don’t Want to Insure Those Kind of Farms.’” SalmonBusiness, 11 Sept. 2018, salmonbusiness.com/ head-of-aquaculture-insurance-firm-on-ras-some-insurers-dont-want-to-insure-those- kind-of-farms/.
  • “FAO.org.” Insuring Small-Scale Farms Adds Resilience to the Aquaculture Value Chain | GLOBEFISH | Food and Agriculture Organization of the United Nations, www.fao.org/ in-action/globefish/fishery-information/resource-detail/en/c/892527/.
  • “FAO.org.” Slowing Growth in International Seafood Trade as Uncertainty Dominates | GLOBEFISH | Food and Agriculture Organization of the United Nations, www.fao.org/ in-action/globefish/fishery-information/resource-detail/en/c/1189978/ .
  • Harkell, Louis. “In Charts: US-China Trade War Hits Seafood, Part Two.” Undercurrent News, Undercurrent News, 24 Dec. 2018, www.undercurrentnews.com/2018/12/24/in-charts- us-china-trade-war-hits-seafood-part-two/.
  • Holland, Jason. “Brexit: Pressing Questions for U.K. Seafood Industry.” SeafoodSource Official Media, 6 July 2016, www.seafoodsource.com/features/brexit-pressing-questions-for-u-k- seafood-industry.
  • Leary, Elisabeth. “Less Scottish Fish for EU Diners without Brexit Deal – Fishermen.” Reuter

Thomson Reuters, 31 Jan. 2019, www.reuters.com/article/uk-britain-eu-fishing/less- scottish-fish-for-eu-diners-without-brexit-deal-fishermen-idUSKCN1PP2AF.

  • Mallison, Andrew. “Opinion: Sustainable Seafood Is among the Casualties Of.” IntraFish, IntraFish, 30 May 2019, www.intrafish.com/commentary/1795010/opinion- sustainable-seafood-is-among-the-casualties-of-trade-war.
  • Mk. “Aquaculture Insurance – Is It Worth It? – Coverage of Operational Risks Linked to Strict Conditions.” Eurofish Magazine, www.eurofishmagazine.com/sections/aquaculture/item/479-aquaculture-insurance-is-it-worth-it-coverage-of-operational-risks-linked-to-strict- conditions.
  • Rohrlich, Justin. “A Futures Market in Fish Is Inevitable. The Question Is When?” Minyanville, 29 June 2010, www.minyanville.com/businessmarkets/articles/aquaculture-fish-farming- recirculating-aquaculture-aquaculture/6/29/2010/id/28970?page=full#ixzz5pRTt32P3.
  • Welch, Laine. “Ongoing US/China Trade War Sinks AK Seafood Sales.” Alaska Fish Radio, 4 Mar. 2019, www.alaskafishradio.com/ongoing-us-china-trade-war-sinks-ak- seafood-sales/.
  • Wilsterman, Margot. “How The Trade War With China Is Threatening America’s Largest Fishery.” Forbes, Forbes Magazine, 12 Feb. 2019, www.forbes.com/sites/ margotwilsterman/2019/02/12/how-the-trade-war-with-china-is-threatening-americas- largest-fishery/#45586b163e0c.
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