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Meeting Report: Gunnar Knapp, Professor of Economics, I nstitute for Social and Economic Research, University of Alaska., Anchorage, AK.

8/10/10

8:00 – 9:20 AM

Participants Gunnar Knapp University of Alaska Don Anderson U.E. EPA, Washington, DC Betsy Bicknell ERG

Kathleen Wu ERG, Chantilly, VA

Anne Jones ERG, Lexington, MA

Betsy Bicknell (ERG) met with Gunnar Knapp in person on Tuesd ay morning, August 10, 2010. Other participants listed above joined the meeting by phone. At t he start of the meeting, Dr. Knapp provided files for several presentations:

— Alaska Fisheries Harvest Trends Overview 01

— Alaska Fisheries Harvest Trends Overview

— Alaska Fisheries Prices & Value Overview 01

— Alaska Fisheries Prices & Value Overview

— Alaska Fisheries Short Management Overview

— Alaska_Major_Fisheries_Overview 02

— Knapp_IFFO08_Fishmeal_&_Fish_Oil_from_Food_Fishery_Byproducts

— Knapp Value Added 02

— Role of Seafood in Alaska Economy

D on Anderson (EPA/OW/EAD) began the meeting by providing a re trospective of the national regulations that apply to seafood processing facili ties in Alaska. In 1974-5, EPA established regulations for seafood processing in the U.S., including regulations that were specifically crafted for Alaska. For certain parts o f the Alaska seafood processing industry, EPA set two levels of limits. Less stringent limits requ ired that waste be ground to less than 0.5” prior to discharge. For seafood processing or population centers, c alled “non-remote” areas in the regulations, EPA set limits for TSS and oil and grease , based on screening solids from the wastewater and their off-shore disposal.

Mr. Anderson explained that Alaskan seafood processing industr y representatives challenged the regulations in court. The court upheld EPA. In 1980, exercisi ng its right to petition, industry petitioned EPA to change the regulations because they were t oo costly. EPA suspended the regulations in June 1980, while considering the petition, and has never lifted the suspension. In January 1981, EPA published a proposed a response to the petit ion. While evaluating the petition, EPA analyzed two alternatives for managing the seafood proc essing wastes: 1) screening and barging for ocean disposal and 2) byproduct recovery. EPA found that costs were higher for Juneau. For this reason, in the proposed response to the pet ition, EPA found that Juneau should be reclassified as “remote,” while Anchorage, Ketchikan, Petersburg, and Cordova should retain the classification of non-remote and the more stringent reg ulations. In the proposed response to the petition EPA also indicated its preference for byprod uct recovery as the method for management of screened solids. EPA also noted that it wa s considering adding Dutch Harbor and

the Kenai Peninsula to the list of “non-remote” locations.

EPA Region 10 developed a General Permit for seafood processi ng industry in 2001, noting that EPA would re-evaluate the suspended regulations. EPA has started the re-evaluation process,

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beginning with collecting information reflecting the current s tate of the industry. In April 2010, EPA sent a questionnaire to nine seafood processing companies with operations in Anchorage, Ketchikan, Petersburg, Cordova, Juneau, Dutch Harbor and the Kenai Peninsula. Mr. Anderson noted that at the industry’s request, the deadline for re sponding has been delayed from 45 after receipt until October 1, 2010. Early in 2011, EPA will publish a Notice of Data Availability, with an explanation of what it means with regard to the pe tition response.

Dr Knapp suggested the following agenda for the meeting:

- 10 minutes of an economists’ view of waste disposal and byproduct recovery;

- 30 minutes about the Alaska seafood industry, focusing on issue s related to waste disposal;

- Time for questions and discussion. After this introduction, he emailed several small files to Don Anderson, Kathleen Wu, and Anne Jones. Betsy Bicknell viewed the files on Dr. Knapp’s offic e PC.

Economist Introduction to Seafood Processing Wastes

Seafood processors buy fish and make multiple products which they sell into multiple markets. In the Alaska, unlike other areas, the seafood processing i ndustry is independent from the harvesters. That is, the fishermen are independent businesse s, free to sell their catch to whomever they choose. The exception is the pollock industry, which f eatures harvester/processers that operate in the Bering Sea. In the salmon industry, proce ssors buy fish from the fishermen. It is far from a simple industry. It is distinguished by consi derable variability and uncertainty in the harvest. From year to year, fishermen and processors do not know how many fish will be caught.

Dr. Knapp reviewed a slide from a presentation he gave at th is May’s seafood technology conference. It provided eight basic points about the Alaska seafood industry.

1) Not all value adding is profitable or optimal for a fish processor. 2) Where and how fish are produced in wild fisheries and aquacul ture has important implications for the economics of value-adding. 3) The choices which maximize the profitability of the processi ng industry are not necessarily optimal for byproduct utilization. 4) The most profitable locations for value-adding are not nec essarily where the fish are produced. 5) Different groups within a region may be affected in diff erent ways by value-adding. 6) A variety of policies may be used to promote value-adding within a region. 7) Opportunities and challenges associated with value-adding ma y change significantly over

time. 8) Marketing is critical to successful value-adding.

In particular, Dr. Knapp emphasized point #2: Where and how fish are produced is important. He explained that in some processing areas production volume s are small while in others they are very large. This is important because byproduct recovery i s capital intensive and may not be economical for small production volumes. Further, in some a reas the fishing season is almost year-round (e.g., the Alaska pollock fisheries) while in othe r areas the season is only 4 to 8 weeks. Dr. Knapp pointed out that the more seasonal the pr oduction is, the worse the economics. That is because the processing equipment must be sized for the lbs/day produced in the season, but it will sit idle for most months of the year. Other f eatures of the Alaska fishing industry that impact waste management alternatives are that the size o f the catch varies from year to year; the distance to markets (Seattle, Asia) and the distance fr om the fisheries. The most profitable places

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to do the processing are not necessarily where the fish ar e. Other important variables include the rapidly changing technologies and markets, fluctuating prices, an d fluctuating energy costs. What is economic one year might not be in another year.

File Alaska Major Fisheries 02

After this introduction, Dr. Knapp provided background of the A laska fishing industry, taken from materials he uses in an introductory-level college cla ss on the Alaskan economy.

There are five major fishing industries in Alaska

1. salmon

2. herring

3. halibut

4. shellfish

5. groundfish (including pollock)

Each of these fisheries has different seasons, locations , and types of gear used to harvest the fish. Larger processing plants will process all types of fish but at different times of the year. The economics vary depending on whether a plant processes one or a mix of species. Smaller operations focus on one fishery. The processors in the sout heast mainly harvest salmon. Halibut and shellfish are high value (fetch high $/lb in the marke t).

Alaska harvests five different species of salmon, each of which has at least two common names. The species vary in size and how they are used/processed. The salmon types, from the largest to

smallest are:

1. Chinook (king);

2. Chum (dog or keta).

3. Coho (silver);

4. Sockeye (red);

5. Pink (humpy);

Products vary in the price they will fetch in the marketp lace, from lower value canned salmon (mostly pink salmon), to higher value frozen salmon, to the highest value fresh salmon. Only a small volume of salmon is shipped as fresh product, due to shipping costs (it must be transported by air). Sockeye value is 3-4 times greater than pink. ( note on slide 12, Overview of Selected Alaska Salmon Fisheries, 2000 the earnings per permit fished are per year, while the average permit value reflects a one-time cost. With a few exc eptions, it appears that the fishermen are willing to pay a price for a permit reflecting about a 1. 5 to 4-year payback period).

The Alaska salmon industry went through an economic crisis in the 1990s with the emergence of the farmed salmon industry 1 . Salmon are farmed in Norway, Chile, Scotland, Cana da (both British Columbia and eastern Canada), and Maine. Rega rdless of the farm location, the species

farmed is Atlantic salmon. As a result of the increased supply from the salmon farms, the price paid to fishermen dropped from $2/lb to $0.4/lb.

1 Alaska laws prohibit Salmon farming. The closest farm i s a single solitary salmon farm in Washington State. Alaska has a large fish hatchery indus try to increase the number of wild

salmon available for harvest.

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As a result of this economic crisis, many processing plants closed. With the emergence of the

market for “wild Alaska salmon” there has been some recove ry of the industry.

Herring. The herring fishery is the least significant of the Alaska fisheries. It is centered in Sitka and has a very short season (early summer, May). Dr . Knapp reported that most herring were frozen in the round (as whole fish), so there is little w aste.

Halibut is headed and gutted at sea, so the processors generate l ittle waste (maybe frames, if they are producing filets).

Shellfish: this is a small fishery, relative to the others in Alask a. There was a shellfish boom between 1960 and 1980. During that time, Kodiak was the “crab ca pital.” After 1980, harvests fell. Shrimp and king crab harvests haven’t recovered. Dungenes s crab are harvested in SE. Most snow crabs and King Crab are harvested in the Bering Sea. V olumes of waste associated with shellfish are relatively small.

Groundfish, including pollock this is a very large volume fishery. Groundfish are typic ally harvested by trawlers. Kodiak and Dutch Harbor are the m ajor landing ports. Trawling is indiscriminant and can result in by-catch (non-target s pecies). According to law, the by-catch cannot be processed and sold and must be discarded at the pro cessor. The percentage of by-catch varies, depending on the fishery, and the location of the fis hery.

Prior to 1980, the groundfish industry was foreign. After the change in the economic exclusion zone, there was a tremendous growth in the pollock harvested a nd processed by U.S. interests.

By-catch is not so much of a problem with shellfish and ha libut because shellfish and halibut (along with the by-catch) are generally caught live and are sorted on the fishing boat. Small crabs can’t be delivered to the processor and must be released. Sometimes they are sorted by sex as well as size. Therefore by-catch is released and not brought back as waste.

File Harvest Trends Overview 01

Dr. Knapp presented several slides depicting the amount of fish landed by year. From year to year, harvest can vary by as much as 50%. There are also longer cycles in fish productivity, called “regimes.” Fisheries biologists aren’t sure of the cause of the ocean regime shifts, but do not believe they are a result of over-fishing. The regime s hifts are believed to be a nonanthropogenic phenomenon.

Alaska Hatchery Program

A large percentage of chum and pink salmon come from hatcher ies. Hatcheries have their own waste disposal problems. The mature fish which have reac hed their spawning stage are may be poor quality, inedible flesh (too dark, or old). Salmon c lose to spawning are generally considered inedible regardless of whether they are hatchery or wild fi sh. These mature fish must be disposed of: They are hatchery waste. Also, the fry from a ha tchery are placed in a stream. When they mature, they return to the stream all at once. If too ma ny of the hatchery fish survive, there may be more fish than the processor can use and these excess fish become waste. There are numerous hatcheries, including the Douglas Island Pink & Chum Hatchery in Juneau, and others in more

remote areas of southeast Alaska.

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Shell fish Dr. Knapp pointed out features of the shellfish production trend graph. He noted booms and busts in the crab industry. Kodiak had a huge crab boom in the late 1960’s, which vanished (not related to overfishing). This cycle also affects t he Bering Sea catch. The crab fishery there comes and goes.

Groundfish Populations of groundfish are more stable than salmon popu lations. Ground fish live 10 to 40 years. They can be reasonably well managed using e stimates of biomass. For example, permits might be set using a limit set at 10% of the biomass estimated. There are, however, some trends evident. The pollock population declined a little in the last 2-3 years.

File Alaska Fisheries Prices and Value Overview 01

Chinook (king) salmon represent only 1% of the salmon catch. Coho (silver) are also a small portion of the catch. Sockeye, pink, and chum make up the majority of the catch. Prices fell in the 1980s through 2000, they have rebounded some si nce then. Prices are up in

2010.

The major Pollock fisheries are in the Bering Sea and Kodiak. Processors make three products from the pollock: fillets, s urimi (fish paste, sold to Asia, and used in the U.S. to make imitation crab products), and roe (high value but represents a very small volume of the pollock processed).

Processors pay several taxes, including fisheries business tax; landing tax, property taxes. The fisheries taxes are turned over to the general fund, but are ty pically returned to the community,

File Knapp_IFFO08_Fishmeal_&_Fish_Oil_from_Food_Fishery_Byproducts

IFFO (international fish meal and fish oil organizatio n http://www.iffo.net/ ) This organization keeps statistics on fish meal and fish oil prices and production. World wide, most fish meal is produced from whole fish (anchovies in Chile and Peru; menhaden in the Gulf of Mexico and eastern U.S.) Some is produced from byproduc ts.

There are good data on the fishmeal and fish oil produced f rom pollock, less for other species.

Pollock harvests vary by month. There is wide seasonal va riation in Alaska pollock harvests, with distinct winter and summer seasons driven by roe content and market factors. Fish oil yields are much lower in the winter (1-2%) than in the summer (3-4%) because fish have a higher oil

content in summer than winter.

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Reprocessing in China A new trend in the last 6-7 years is to head and gut fish i n Alaska, freeze them, and then ship the frozen fish to China, where low-cost labor makes value-a dded products from the frozen whole

fish.

Questions and Discussion

Anne Jones asked if processors compete with each other to obtain fish. Dr. Knapp explained this varies year to year and in the various communities (# of pla nts) and depending on the state of the market and how valuable the fish. Fishermen depend on the proce ssors. Processors depend on fishermen (they can’t compel the fisherman to sell them f ish). This is a very sensitive price

formation issue.

Processors are middlemen. They are in a very risky busines s. When there are strong wholesale prices, processors will bid up the price they pay to fisherm en. When there is a big harvest, with more fish than processing capacity, the processors may put the fishermen on limits (limit the amount of fish that they will purchase). When there is a small harvest, the processors compete for the fish and bid the price up. Also, if the run is good floa ting processors can come in to an area and take the harvest. This can change the economics i n the area.

Some processors use tenders to pick up fish. For example, in Cordova, the fishermen bring the fish in, but tenders might also come out to the fishermen to pick up the fish to deliver elsewhere.

To reduce the uncertainties, fishermen typically line up wi th a processor, making agreements to supply only that processor and the processor agrees to buy t he fisherman’s catch, although they also break those agreements, and some never make agreement s. Dynamics have changed with the change in the number of processors. In the 1990s, when many pla nts closed, the industry became less competitive, in some cases there was only one buyer per town. In Ketchikan and Bristol Bay, however, there is a lot of competition.

The fishermen and processors have a long-standing debate about whether the price paid for fish is

fair.

In the past, processors were sued for collusion on prices. As a result, they are now supersensitive about communication with other processors in the same commu nity. Dr. Knapp wondered if this sensitivity has played a part in their hesitance to form cooperative facilities for managing seafood processing waste.

As the discussion wrapped up, Don Anderson asked if EPA could ask for further clarification of issues at a later date. Dr. Knapp was agreeable but poin ted out that he would be on sabbatical the coming year and would be traveling 2/5 of the year and woul d not necessarily be in his office

when he is in Alaska. He indicated that email would b e a good way to contact him.

Dr. Knapp opined that the seafood processing industry wants l ess regulation, or at the least no changes to existing regulations. In the communities, th e local environmentalists will be in the minority. He expects that Alaska’s congressional delegat ion will weigh in on behalf of the industry.

He also expected that the industry would ask if there is an environmental problem with current waste management practices. (if it ain’t broke, why fix i t?) He suggested that as we visit plants, we should keep their violations history in mind.