The following is an editorial we published in Seafood.com News this week:
SEAFOOD.COM NEWS by John Sackton - -[Editorial Comment] The seafood business has just gotten tougher. With the collapse of global financial markets, it is natural to ask how this might impact our industry.
Here are a few thoughts:
Icelandic Banking: Glitnir and Landsbanki were the two most prominent international banks lending to the Seafood Industry. For the past few years, most deals involving expansion, acquisition, or consolidation of the industry in the U.S. and Canada have had some involvement from these banks - whether as the lead financier, or as part of a banking consortium. Their expertise in the industry helped other financial partners get on board.
Now in Iceland they are called arsonists by former Prime Minister Dav'd Oddsson. Although loans to the seafood industry played no part in the demise of these two banks, our industry will suffer because we are splashed with the mud from the collapse. Two of our major financial supporters have disappeared.
It will now be harder for seafood companies to make deals unless they have hard assets, like secure control of fishing rights. The Alaskan CDQ companies are a good example: they will be able to secure financing because they have a readily identifiable asset base in terms of their fish quotas. Others who also have quota rights will continue to be able to get financing. But if government actions threaten the stability of these quota rights, financing will dry up. So, one consequence is that financing is going to be more difficult in the seafood industry for investment, growth, and acquisitions.
Credit woes: Most companies don't do deals on a week in and week out basis. A far more down to earth problem is basic cash for operations. The economic model for a seafood producer is 1) borrow money, 2) pay fishermen for (or import) product, 3) process product, 4) hold inventory and sell product, 5)get paid, 6) repay loan. How much product a company can buy from fishermen (or import) is constrained by their credit line. If the credit line is reduced, they must buy or import less fish. This leads to less competition for raw material and lower prices to fishermen. It also can lead to product dumping if a company needs to raise money quickly due to a cut back in its credit line.
Unless things change fairly quickly, we are going to see a general contraction in the amount of credit available to the industry to purchase product, and the credit that is available will be at a higher cost.
Customer Credit Woes Even more immediate is the problem of customer credit. Restaurant chains also have to get approval for what they can buy- and some of them are finding all of a sudden that their approvals have dried up. Suddenly the seafood company is faced with a customer who cannot buy because of constrained credit. Alternatively, a seller can decide that they can no longer afford the risk of selling to a long time customer.
Shrimp Debacle: Many companies have millions of dollars of their credit lines tied up in irrevocable letters of credit to support their customs bonds to import shrimp. In some cases, Customs is refusing to liquidate shipments for negligible reasons. In this situation, having so much credit locked up is frankly dangerous -- if banks tighten lending rules or raise interest rates, it is a huge problem for those companies that cannot get their custom bonds canceled upon liquidation of an entry. This is especially acute for people importing from high duty countries, such as China. The U.S. government is falling over itself to give money to banks. One clear thing the government could do to protect the seafood industry is to order customs to release bonds when liquidations are substantially complete, and any remaining liability has no conceivable relationship to the amount of cash tied up.
Customers: Another way to secure credit is to have customer commitments in place for the seafood that will be produced. However, only the commitments from the strongest and most financially viable customers are worth anything. The competition among companies to sell to the strongest buyer leads to a big advantage to buyers: they can demand favorable terms; demand the seller hold the inventory and the risk, and use the fact that they have relatively good credit to force sales at the lowest price. So at a time when costs are going up, strong buyers have the ability to push seller margins down to the bone.
Also, there is the general problem of demand - already many seafood commodity prices are falling, particularly some of the higher priced items like lobster. It is widely known that so far, foodservice seafood demand has fallen off more quickly than retail demand. Yet foodservice sales are the bread and butter of the seafood industry. If there is a continued contraction, it will mean weaker demand and more pressure on pricing. The euphoria we all felt a few months ago as seafood demand seemed to skyrocket has evaporated. It is quite likely that seafood consumption in the U.S. will be down this year.
Economic Recession: In an interview with the New Brunswick Business Journal, Glen Cooke, of Cooke Aquaculture, the largest salmon producer in Atlantic Canada, said that the financial melt down was not his number one concern. Instead, 'The number one concern is: will consumption drop off in the U.S. markets and Canada if we slide into a recession?'
'Number two is our customers in the marketplace. Are they going to be stable enough to distribute for us?'
Falling consumption is likely to be the biggest and most immediate problem, because that will exacerbate all the other issues of cash flow, credit worthiness, and commitments that make the seafood industry viable, and marginally profitable.
Undoubtedly there are also opportunities in these times. The ones who will benefit are those who are financially strong enough to take advantage of lower prices for raw material, and maintain good customer relationships. But as the Glitnir debacle showed, what appears as strength may not be really strong, so transparency will be important also. Those companies that have deep pockets, that have strong partners, or that are open about their sources and strength of financing will prosper, while those companies whose sources of financing are opaque may seem to be higher business risks.
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