ANNUAL LOBSTER MARKET REVIEW

John SacktonSeafoodNews.com MARCH 24-25, 2014

New Brunswick

Background

• Crab, shrimp and lobster market analyst since 1997

• Preseason price and market outlooks on shrimp and crab for 17 years – Atlantic Canada, Alaska, and US West Coast

• Price arbitrator for Alaska king crab, snow crab annually since 2005

• Publisher of Seafood.com News

INTRODUCTION

LOBSTER 2014

• Low prices and ample supplies expanded the market. • Lobster tail prices have fallen steadily from 2011 until this

summer.• For first time in five years, landings slowed this fall, and the

smaller volumes led to a run up in prices• Chinese demand continues to be a major factor- sales of Nov-Dec lobster now continue right to the

Chinese new year• Live market prices are volatile, having already peaked for

this year.• In 2014 high prices will impact customer demand

4

Are We Seeing the End of Low Priced Lobster

• Overall demand has increased• Supply has stabilized, not increasing • More processing in Maine; competition for raw

material• New markets for tails- New England retailers and restaurants- EU will get more Canadian tails and meat with no

tariff- More substitution for shrimp, scallops

5

Topics covered today

• Review of supply situation• US Market• Other export Markets, including China• Recent price history and price issues• Outlook: What are some issues on the Horizon- Market expansion- Promotion- Lobster Aquaculture

SUPPLY

8

US Supply Continues at a High Level

NA Lobster Tail & Whole

Warm Wtr Lobster Tail

Lobster Meat Live coldwater Other CA0

10000000

20000000

30000000

40000000

50000000

60000000

US Lobster Imports from Canada and others

201120122013

Imports from CanadaIncreased 3.5%;Mostly from Live

9

Total US Imports Increased in 2013

1 2 30

20000000

40000000

60000000

80000000

100000000

120000000

140000000

Total US Lobster Imports Increased in 2013

OtherCanada

poun

ds

10

US IMPORTS OF LOBSTER BY SPECIES

Source: Urner Barry and US customs data

11

US LOBSTER SUPPLY WITH EXPORTS

Source: US Census Data, Canadian Export Data, NMFS

12

Global Supply of Homarus is Increasing

FAO Fishstat database; 2011-2012 data are industry estimates

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

20000

40000

60000

80000

100000

120000

140000

Global Supply Of Homarus Sp vs Spiny/Rock Lobsters

Homarus spp Spiny Lobster

MT

13

HOMARUS LOBSTER LANDINGS DECLINED SLIGHTLY IN 2013

Source: FAO data plus estimates for 2012 and 2013 based on Canadian and Maine lobster councils

14

LFA 34 had lower reported landings in 2013-14

Gulf PEI Maritimes NL0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Canadian Lobster Landings 2011-2012

20112012

Met

ric T

ons

REASONS FOR DECLINE• Some LFA’s in Canada had

strong or record landings, but bad weather this fall / winter and slow catches have meant lower landings in Nova Scotia, the largest single landings area.

• Maine did not experience the glut of lobsters in 2013 as in 2012 but ended up at 126 million lbs vs 127.2 in 2012

15

MAJOR TRENDS IN 2013

• More Maine processing capacity meant expansion of market for tails and meat – especially at retail in New England

• Global landings of spiny lobster trending upward again; US Imports increased

• China increased its imports of lobster over 2012 despite luxury crackdown

• Volatility in pricing this spring may impact customers as costs for raw materials are up

• We may have seen the end of low priced lobster

16

US MARKETS

18

US REMAINS THE LARGEST MARKET FOR CANADIAN LOBSTER

NEW BRUNSWICK

PEINOVA SCOTIA

DEMAND IN US MARKET STILL MOST IMPORTANT FACTOR FORCANADIAN EXPORTERS

19

US DEMAND HAS BEEN INCREASING BECAUSE OF LOW PRICES FOR PAST TWO YEARS

• RETAIL- Expanded use of Frozen

lobster- Walmart added 3

lobster items this year- Whole Foods increased

promotion

• Foodservice- Took Advantage of low

priced tails- Used in competitive

market position- Red Lobster helped by

‘lobsterfest’ in February

US LOBSTER CONSUMPTION IS HIGHLY REGIONALIZED:

63% in Northeast

• With change in laws regarding processing in Maine, more lobster tails, meat consumed in Northeast

• Retailers offering tails as well as live lobster

20

21

Retailers Doubled the number of lobster promotions in the US in Jan-Feb 2014

2013 20140

1000

2000

3000

4000

5000

6000

7000

8000

9000

US Retailed Lobster Promotions doubled in Jan-Feb

Stor

es w

ith Lo

bste

r Spe

cial

Retail promotions up100% in Jan / Feb

22

Lobster was seen as a value compared to shrimp and crab

Source: Urner Barry Retail Database

lobster shrimp snow crab0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

Retail Promotions for Jan/Feb

20132014

Num

ber o

f sto

res w

ith p

rom

otion

23

Lobster tails on sale at Whole Foods

24

Changes in Massachusetts laws helped market

• Massachusetts is one of the highest per capita consumption areas for lobster

• Until two years ago, lobster could only be sold whole in many circumstances

• Change in processing laws meant opening market to tails

• Has had a big impact on volume of frozen tails sold in New England - especially from Maine processors

25

Foodservice expanding as well

• Lobster appeared on 35% more menus in 2013 than in 2012 according to data essentials, a menu tracking service

• 2013Restaurants with lobster specials include- Golden Corral, Darden, Quiznos, dozens more

• Based on 2013 tail prices: Golden corral bought 200,000 lbs at $13 per lb., a 20 year low price according to their buyer

• Even Long John Silver’s featuring ‘lobster’ – although actually a Nephrops which the FDA allows to be called lobster

26

Monthly Supply of live, meat and tails to US market

Domestic produced tails and meat is still a very small amount

Source: Urner Barry Lobster Insider report

27

Price and Volume for Canadian frozen lobsterimports

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11Jan

-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12Jan

-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13Jan

-14

Mar-14

12

13

14

15

16

17

18

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

CA Tail Import4 Oz Tail price

EXPORTS

29

30

31

32

33

EXCHANGE RATE WILL BE HUGE FACTOR IN 2014: CANADIAN DOLLAR HAS WEAKENED

34

BUT CA DOLLAR HAS WEAKENED EVEN MORE AGAINST EURO

35

36

CHINA’S CURRENCY HAS WEAKENED AGAINST CANADA

37

CURRENCY WILL MAKE US A VERY ATTRACTIVE MARKET THIS YEAR

• The US is a better market for lobster exporters

- In the past, being tied to US when the CA dollar was at parity was the kiss of death, now the movement is the other way

• A weaker Canadian currency will also help exporters to Europe

• It will not help sales to China, but with only an 8% swing in value, currency is not the major factor in whether Chinese buy more Canadian lobster or not

38

39

GROWTH OF CHINA’S IMPORTS OF LIVE N. AMERICAN LOBSTER

Source: Global Trade Atlas, GTIS, China Customs

2013 YTD OCTPROJECTED FULL YEAR

40

CETA agreement will be major boost to Lobster Exporters

41

New Brunswick Fzn Exports

US Japan Europe China / HK Other Asia0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

NB Fzn Exports decline

201120122013

42

PEI Exports

US Japan Europe China / HK Other Asia0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

PEI Frozen Exports

201120122013

43

Nova Scotia Exports

US Japan Europe China / HK Other Asia0

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

20,000,000

Live Lobster Exports – Nova Scotia

201120122013

44

Export Summary

• New Brunswick is seeing less exports to both US and Europe, China, although US shipments increased in 2013

• PEI has seen big gains In US exports – likely due to larger companies like Mazzetta and Red Chamber/Aquastar buying plants to serve US customers

• Nova Scotia is seeing jump in live sales to both US and China

PRICING

46

Lobster tail prices began rising this summer

Source: Urner Barry Comtell

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

12

13

14

15

16

17

18

4 oz tail

Prices haveReturned to2011 levels

47

Long term picture of 4 oz tail price is mixed:Below PPI index; but at same level that caused

market reaction in 2011

48

US volumes have increased and prices are increasing also

Source: Urner Barry

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

12

13

14

15

16

17

18

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

CA Tail Import4 Oz Tail price

49

Live Prices have come down from their seasonal peak

50

What happened to tails and meat?

CK 2 lb vac pack

4 oz tail

51

LOBSTER MEAT SHOWS LESS VOLATILE PRICING BECAUSE IT IS A FOODSERVICE PRODUCT

52

Pricing Outlook

• Shore prices heavily impacted by two factors:- Overall market demand- Pace and quantity of landings

• We had a very strong year for demand, and it will not continue the same in 2014 in all areas:- Users of tails will back off due to higher prices- Live buyers will gain due to currency- Currency factors allow cushion for sellers to better

compete- Chinese buying shows no signs of slowing for North

American Lobster• Cannot predict pace and quantity of landings for opening

May 1st.

OUTLOOK AND DISCUSSION

54

LOBSTER MARKET IS CHANGING: Processing

• Bigger and Financially strong companies have entered market: Red Chamber/Aquastar and Mazzetta in PEI.

• On the US side: Harbor Seafoods, Mazzetta’s Gloucester Plant; East Coast / Paturel new Plant in Maine; Linda Bean’s in Maine, and general growth of Maine Processing

• These companies have better financial ability to hold inventory and develop programs for value-added lobster products.

• Positive development for market expansion

55

FINANCING MAY BECOME ISSUE IN 2014

• Lobster Processors have historically depended on advances to pay for purchases

• Some major purchasers facing problems with debt repayment – leading to uncertainty about loans.- Some outstanding loans may not be paid by start of

season- May be harder to get loans to pay harvesters; that

would lessen competition on the wharf- EDC could make adjustments in companies it

supports this year; could have impact• However, some stronger financial players could see

opportunity to expand market share

56

Changing Live Market• Historically live market has responded to supply change

with big swings in price.• The reason is that the US live market can only absorb

limited product; when there is a glut no one wants lobster.

• Chinese demand is changing this equation- Sales of live now continue to Chinese New Year (Feb

1st)- Other Asian demand increasing also- N. American lobster is well positioned in China as a

‘value’ product• Live Prices to China declined this year, according to

Clearwater, which saw increased volume but lower price.

57

AQUACULTURE LOBSTER COMING

• In the 1980’s, Alaska salmon producers had great markets and a strong industry. Then came farmed salmon and by the mid-1990’s salmon values had plummeted and many companies/fishermen went bankrupt.

• In Malaysia, a massive Darden lobster Aquaculture Project has developed the first closed cycle aquaculture for warm water lobster.

• They grow to stage 4; then supply local farmers with seed to grow out in local cages. First lobsters are now being shipped to China.

58

POTENTIAL CHANGES

• In ten years, wild lobster will see competition from aquaculture, and it will have a price impact.

• Costs for aquaculture product generally decrease.• Canadian lobster prices won’t be set by local supply alone.

59

IMPORTANCE OF PROMOTION

• These changes make lobster promotion very important• Lobster currently is in a very favorable climate with

expansion of demand- Good time for promotion; not a time to relax- Promotion has higher benefit in expanding market

• Important to help establish a positive image for wild lobster- MSC is a big step forward in this context- Need to position lobster in terms of animal welfare - Need to prepare for competition from Aquaculture

60

LOBSTER HAS RANGE OF PRODUCT FORMS

• LIVE• WHOLE COOKS• TAILS• MEAT• VALUE ADDED PRODUCTS• SOUPS, BISQUES, DIPS

Important that pricing in one area – such as live – not cripple markets in other areas. With a large supply, all product forms needed.

China can be a destabilizing factor when live supplies may be short.

Whole cooks

• Untreated: 86% of live weight• Treated with retention agents – 91% of net weight• Live weight of .8 lbs (350 gms) = whole cooked weight

of .72 lbs, or 315 gram• Still get 12-14 whole cooks in 10 lb. box at 76 mm.

Buffet and Cruise lines

• Major users of whole cooks are Casinos and cruise lines, which put them on buffets.

• Buyers care about piece count• Change in lobster size will not make much difference,

piece count for 10 lbs will still be around 12-14, which is widely accepted.

Tails

• Small tails (2.5 oz) are not economical for processors to produce because of high labor cost for throughput.

• Some buyers have in the past used small tails when prices were much higher.

• No economic advantage to produce small tails in current pricing environment

• Higher profitability in larger sizes for entire industry.

LOBSTER SUMMARY• Shortfall in production in US and Canada in fall 2013 • Going into 2014 raw material costs are higher• China’s buying of North American lobster now major factor in

pricing at shore • China’s long term appetite for lobster is changing the market• US consumption is highly regionalized by geography and

product form; more use of tails and meat in New England is a new phenomenon

• After big expansion of market based on relatively low prices, lobster prices are returning to more average levels. We have seen the end of low priced lobster.

• Market will react to current price levels, favorable currency will help Canadian exporters manage sales

64

65

Thank youTime for Questions