Seafood

Seafood

Industry Insight

COVID-19 INDUSTRY BRIEF

EFFECTS OF THE CORONAVIRUS ON THE Seafood INDUSTRY Updated  October 28, 2020

  • COVID-19 Impacts: Portions of the seafood industry have been somewhat insulated from the impact of the COVID-19 pandemic, as food consumption has continued despite the pandemic’s effect on everyday life. While the retail and grocery side of the business has benefited, the food service segment, which currently accounts for 60 percent of seafood volumes, has been decimated. Gordon Brothers has seen pricing and demand volatility especially in the fresh market where most of the products sold ultimately go to restaurants. The food service sector has seen a significant decline in sales, which is consistent with all food service segments catering to restaurants. Additionally, the sector has seen production-related issues because of COVID-19-driven production facility closures and the impact of social distancing on businesses. Although retail sales to grocery stores and other retail outlets have been positively affected by a spike in grocery store demand, how the sector performs in the long term will depend on how many restaurants go out of business because of the pandemic and what level of sales demand will remain at the remaining establishments.
  • Pricing Impacts Shrimp and Lobster: The reduction in restaurant business has had a material impact on the seafood industry with some estimates predicting a 25 percent reduction in seafood sales to the food service sector as of the fall. Some of this demand loss has been offset by an increase in retail grocery sales, but there is little doubt overall demand is down with lower import volumes of several key species and landing volumes of certain ground fish and scallops that have been intentionally reduced by fishermen due to a lack of demand. Fresh inventory segments have been the most vulnerable to fallout from the pandemic. Pricing on products such as lobster, which relies heavily on restaurant sales as well as export demand, has seen the biggest impact. Lobster shipments to China ceased from late January through mid-April due to a lack of airfreight but had begun to resume as of the week of April 20. With the lack of an Asian export market and with reduced demand in the domestic restaurant sector, lobster prices had fallen about 30 percent from pre-pandemic levels through mid-April. The market recovered about 10 percent of this decline in May, before declining again in early June because of normal seasonal harvest patterns. Lobster prices remained about 20 percent to 30 percent below the prior three-year average through August but recovered in early fall as economic activity throughout the U.S. grew rapidly. As of October 23, prices for hard shell one-and-one-quarter pound New England lobster were only 5 percent below 2019 levels and were higher than 2017 and 2018 prices. Farmed white frozen shrimp prices in the U.S. declined steadily from January through May, at first due to weakness in China, then because of increasing levels of South American shrimp being re-directed to U.S. markets in the first quarter, then followed by demand erosion as shrimp consumption in the U.S. was affected by the COVID-19 pandemic beginning in late March and continuing through May. Prices recovered in the summer with the improvement in the food service sector but have retrenched in recent months and were back at pre-pandemic January levels as of October.
  • Production Impacts: Although there have been some reported processing issues related to seafood, the issues experienced in the seafood sector to date have not been as difficult as that seen in slaughterhouses. Certainly, social distancing has impacted the sector and is adding to costs, but so far material supply shortages due to the pandemic have not been seen.
  • Pricing Impacts Fish, Oysters, and Scallops: Salmon prices saw a somewhat similar trend with weakness in the first quarter and then bottoming in April and early May. Some varieties like Norwegian salmon recovered in the second half of May and continued into June and July reaching prior-year price levels. However, Chilean fillet and whole fish prices have remained weak, dropping over 40 percent from the beginning of the year and remaining at historically low levels through the end of May. Despite some recovery in June and July, prices dropped again in the late summer and remain well below prior-year average price ranges. Despite these trends, not all seafood prices have dropped over the pandemic period. Pricing for tilapia, which is typically sold frozen at grocery stores, has held firm. U.S. monthly scallop landings this year are down by 30 to 40 percent because of lower demand. Landings in September only reached 2.5 million pounds versus 4.6 million pounds in 2019. Demand for oysters, a very high proportion of which are sold in restaurants, has also been decimated as the majority are sold in restaurants or special event raw bars. As a result, scallop pricing has remained consistent to prior-year levels because supply is being voluntarily constrained by fishermen.
  • Market Outlook: Per capita seafood consumption in the U.S. is anticipated to grow relatively slowly, increasing at an annualized rate of 0.7 percent through 2025. This modest growth is expected to occur because of growing health consciousness and the perceived benefits of consuming finfish and shellfish. Per capita seafood consumption increased at an annualized rate of 0.4 percent per year from 2015 to 2019. This trend combined with an expectation that seafood pricing will increase at a 1.0-percent annual rate through 2025, are the two key growth drivers for the industry. Additionally, aquaculture is expected to grow over the period, stabilizing supplies of fish and seafood, moderately mitigating the volatility of seafood prices. Overall, industry revenue is forecast to increase at an annualized rate of 2 percent to $2.8 billion by 2025.
  • Valuation Outlook: From a valuation perspective, Gordon Brothers has seen some weakness in shrimp and lobster prices, but overall demand, especially on the grocery side, has been strong, somewhat balancing weakness in food service. Gordon Brothers expects a decline in recovery in the food service segment and an improvement or stability in retail going forward.
COVID-19: Industry Brief Meter - Seafood

Content Divider

 

TARIFF ALERT

Date October 2020

 Projected Values – Seafood

 

Current Trends

  • The COVID-19 pandemic continues to affect the foodservice industry and drive lower demand, lower prices and lower per capita seafood consumption while disrupting production capacity and raising costs. This will continue to weigh negatively on the industry for the next 12 months.
  • The U.S. seafood market continues to be negatively affected by tariffs.
  • Ongoing environmental factors including global warming, right whale regulations and Marine Stewardship Council challenges continue to affect the industry.
  • Ongoing positive market trends related to delivery, convenience and healthy eating continue.

aPPROXIMATE nET reCOVERY ON cOST

Synopsis

COVID-19 Impacts to the Industry: Portions of the seafood industry have been somewhat insulated from the impact of the COVID-19 pandemic, as food consumption has continued despite the pandemic’s effect on everyday life. While the retail and grocery side of the business has benefited, the food service segment, which currently accounts for 60 percent of seafood volumes, has been decimated. Gordon Brothers has seen pricing and demand volatility especially in the fresh market where most of the products sold ultimately go to restaurants. The food service sector has seen a significant decline in sales, which is consistent with all food service segments catering to restaurants. Additionally, the sector has seen production-related issues because of COVID-19-driven production facility closures and the impact of social distancing on businesses. Although retail sales to grocery stores and other retail outlets have been positively affected by a spike in grocery store demand, how the sector performs in the long term will depend on how many restaurants go out of business because of the pandemic and what level of sales demand will remain at the remaining establishments.
 

As of October, food service and drinking establishment sales as reported by the U.S. Census Bureau were off 14.9 percent from February levels and remain materially affected by the COVID-19 pandemic. According to estimates published by the Independent Restaurant Coalition, restaurants have lost 2.3 million jobs during the pandemic. As of July 10 there were 26,160 total restaurant closures, and of those 15,770 were expected to close permanently according to a study by review and reservation service Yelp. While restaurant traffic in the United States has been heavily affected by COVID-19, a partial rebound occurred in the summer, as outdoor dining expanded and state mandated closures relaxed. This trend is expected to reverse itself in the winter and into early 2021 since it’s expected that additional restaurants will close as outdoor dining volumes decline because of colder weather. Without further stimulus spending, the Independent Restaurant Coalition reported 85 percent of independent restaurants could be forced to close permanently.
 

The reduction in restaurant business has had a material impact on the seafood industry with some estimates predicting a 25 percent reduction in seafood sales to the food service sector as of the fall. Some of this demand loss has been offset by an increase in retail grocery sales, but there is little doubt overall demand is down with lower import volumes of several key species and landing volumes of certain ground fish and scallops that have been intentionally reduced by fishermen due to a lack of demand. U.S. monthly scallop landings this year are down by 30 to 40 percent because of lower demand. Landings in September only reached 2.5 million pounds versus 4.6 million pounds in 2019. Demand for oysters, a very high proportion of which are sold in restaurants, has also been decimated as the majority are sold in restaurants or special event raw bars.
 

Fresh inventory segments have been the most vulnerable to fallout from the pandemic. Pricing on products such as lobster, which relies heavily on restaurant sales as well as export demand, has seen the biggest impact. Lobster shipments to China ceased from late January through mid-April due to a lack of airfreight but had begun to resume as of the week of April 20. With the lack of an Asian export market and with reduced demand in the domestic restaurant sector, lobster prices had fallen about 30 percent from pre-pandemic levels through mid-April. The market recovered about 10 percent of this decline in May, before declining again in early June because of normal seasonal harvest patterns. Lobster prices remained about 20 percent to 30 percent below the prior three-year average through August but recovered in early fall as economic activity throughout the U.S. grew rapidly. As of October 23, prices for hard shell one-and-one-quarter pound New England lobster were only 5 percent below 2019 levels and were higher than 2017 and 2018 prices.
 

Farmed white frozen shrimp prices in the U.S. declined steadily from January through May, at first due to weakness in China, then because of increasing levels of South American shrimp being re-directed to U.S. markets in the first quarter, then followed by demand erosion as shrimp consumption in the U.S. was affected by the COVID-19 pandemic beginning in late March and continuing through May. Prices recovered in the summer with the improvement in the food service sector but have retrenched in recent months and were back at pre-pandemic January levels as of October. Salmon prices saw a somewhat similar trend with weakness in the first quarter and then bottoming in April and early May. Some varieties like Norwegian salmon recovered in the second half of May and continued into June and July reaching prior-year price levels. However, Chilean fillet and whole fish prices have remained weak, dropping over 40 percent from the beginning of the year and remaining at historically low levels through the end of May. Despite some recovery in June and July, prices dropped again in the late summer and remain well below prior-year average price ranges. Despite these trends, not all seafood prices have dropped over the pandemic period. Pricing for tilapia, which is typically sold frozen at grocery stores, has held firm. Scallop pricing has remained consistent to prior-year levels because supply is being voluntarily constrained by fishermen as noted previously.
 

Ongoing Trade War: In 2019, the Chinese government implemented retaliatory tariffs on U.S goods affecting $110 billion in estimated annual imports at varying tariff rates of 10, 15 and 25 percent. Affected goods range widely, but U.S. seafood has been directly affected. The Trump administration announced a phase one trade deal with China on October 11, 2019 that was implemented on February 15. While tariff rates were adjusted for some products, the seafood industry was left out of the settlement.
 

The most affected industry remains the lobster industry, which is essentially shut out of the Chinese export market due to a 25-percent tariff rate on lobster exports to China. Due to the pandemic, demand in China was negligible in the first half of this year, and at one point there was no airfreight going to China, shutting down all lobster exports to China for a period. While these shipments resumed in the spring, almost all North American lobster shipping to China has been coming out of Canada for the last few years because of the Chinese tariff on U.S. lobster. A key EU tariff on U.S. lobster imports was rescinded in August, but the trade issue with China will likely be an ongoing issue in 2021.
 

Seafood Market Outlook: Per capita seafood consumption in the U.S. is anticipated to grow relatively slowly, increasing at an annualized rate of 0.7 percent through 2025, per research firm IBISWorld. This modest growth is expected to occur because of growing health consciousness and the perceived benefits of consuming finfish and shellfish. Per capita seafood consumption increased at an annualized rate of 0.4 percent per year from 2015 to 2019. This trend combined with an expectation that seafood pricing will increase at a 1.0-percent annual rate through 2025, are the two key growth drivers for the industry. Additionally, aquaculture is expected to grow over the period, stabilizing supplies of fish and seafood, moderately mitigating the volatility of seafood prices. Overall, industry revenue is forecast to increase at an annualized rate of 2 percent to $2.8 billion by 2025.
 

Global Warming Affecting Harvests: Based on the best available science, the world’s aggregate climate temperature has warmed by about one degree since the nineteenth century and is poised to continue warming in the near term. While acceptance of this throughout the world as proven fact and the cause of this warming far from settled, it is not hard to see the impact warming waters and related environmental factors are having on fisheries on a regional and local basis. From low oxygen levels in Cape Cod to unusually warm water on Newfoundland’s south coast, to various species migrating north, record catches and improving stock assessments of select species, the North American fishing world is being heavily affected by warming waters.
 

Generally, but not always, warming has a negative impact on harvest rates. This year, the Gulf of Maine is averaging higher temperatures than in 2019 and is currently above the average range as recorded for over 100 years. Year to date through August, there were 102 “heatwave days,” record temperatures in June and close to or above record levels as the annual peak temperatures were reached in late August. Ocean heatwaves occur when temperatures are in the 90th percentile of available data for at least five days. To the extent that warming continues unabated, North American fishing levels could be significantly affected.
 

Pollution and Overfishing an Ongoing Concern: Consumer perception around the nutritional content of fish and seafood is a key demand driver for industry products. However, there are additional concerns that have become prevalent. Among seafood consumers, pollution is the top industry concern followed by overfishing, which is the second biggest threat to oceans according to a recent study commissioned by the Marine Stewardship Council (MSC). This concern may prompt seafood processors to emphasize sustainability efforts in both the production and marketing of their products. Nearly three quarters of global seafood consumers want to see independent verification of seafood sustainability claims in supermarkets, although price is still the biggest motivator of purchasing decisions. The volume of MSC-certified catch has been increasing year over year and was up to 11.8 million tons in 2019 from 10 million tons in 2018. MSC-labeled seafood now represents approximately 15 percent of the total worldwide global catch.
 

Constrained Supply Worldwide: Over 50 percent of fisheries worldwide are estimated to be overfished indicating that, in the future, harvest levels will decline because of continued overfishing or regulatory constraints imposed to rebuild stocks. Only 32 percent are estimated to be in a healthy biological condition as of 2018. In the Northeast Atlantic, many fisheries are producing less than the estimated maximum sustainable yield; however, 56 percent of these fisheries are on a management path leading towards this maximum. The shift in inspection responsibility for imported seafood products from the U.S. Food and Drug Administration (FDA) to the Food Safety and Inspection Service agency of the U.S Department of Agriculture inhibited imports of seafood products in 2018.I Imports of pangasius, a farm-raised catfish from Vietnam also referred to as swai, were especially negatively affected. Regulatory and health constraints related to aquaculture products and concerns over excessive antibiotic use and environmental impacts of fish farms on wild stocks have also constrained supply. Near-term harvest and fish farming supply levels worldwide will likely continue to be constrained by regulatory and environmental impacts although aquaculture is expected to increase through 2025.
 

Industry Is Highly Regulated: The fish and seafood processing industry is highly regulated at both the state and federal level. Harvesting catch levels, requirements and permits are regulated in the United States by the National Marine Fisheries Service (NMFS) and in Canada by the Fisheries and Oceans Canada. Federal food safety regulations are administered by the FDA and the Department of Agriculture that inspect plants and apply Hazard Analysis and Critical Control Point (HACCP) regulations. Operating companies must develop and implement an FDA-approved HACCP plan to process seafood. NMFS also sets standards for grades of fish and issues permits for processing facilities. Processors that participate in NMFS’s voluntary seafood inspection program can market seafood as Processed Under Federal Inspection and obtain Grade A certification.
 

Eligibility and Perishability Are Important: Due to the perishability rate of seafood, product age and integrity is critical to recovery value. When lending on these assets it is important to understand the implications of eligibility and expiration dates for different varieties of fish and seafood. As an example, live lobster and farmed fish can often be deemed ineligible on a company’s borrowing base. Similarly, fresh fish is often deemed ineligible due to its short shelf life of three to 14 days under typical circumstances. Frozen fish and seafood can have up to 18 months of shelf life; however, quality and desirability starts to diminish at nine months. The short shelf life of fresh seafood necessitates rapid turnover in inventory levels. Products that are not sold fresh are also typically frozen or rendered quickly. This short fulfillment cycle has a positive impact on recovery values in an orderly liquidation sale.
 

Proper storage is critical for maintaining freshness and value, which is why many seafood processors contract with third-party cold storage facilities to manage inventory. However, lenders should beware of liens these third parties may have on inventory stored at their facilities and should consider whether inventory held at these locations should be excluded from the borrowing base to minimize risk.