The Economics of Value Adding for Fish Produc

Gunnar Knapp

Institute of Social and Economics Research

University of Alaska Anchorage

Second International Congress on Seafood Technolo

Anchorage, Alaska

May 12, 2010
“Value Adding”

Not a well-defined term in economics or marketing

My definition:

Changes to fish processing intended to increase the total 

seafood products produced from fish

Examples:

Secondary processing to produce higher unit-value pro

Utilization of by-products
Frozen headed and gutted 

sockeye salmon A “value-added” pr

sockeye salmon 
Value adding represents an opportunity for companies and 

derive greater economic benefits from the fish that they pro

process.

But significantly less value-adding occurs in many

fish-producing regions than would be possible

given existing production technologies.
Typically Alaska processors receive much higher prices for f

fresh salmon fillets than for frozen headed & gutted sal

Average Monthly First Wholesale Prices,

Bristol Bay Sockeye Salmon Products

$0.00$1.00$2.00$3.00$4.00$5.00$6.00

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Source: Alaska Department of Revenue Salmon Price Reports

$/l b
But fresh and frozen salmon fillets account for a much smaller sha

salmon production than frozen headed and gutted (H&G) prod
Why does significantly less value-adding occurs in m

fish-producing regions than would be possible

given existing production technologies?

Many of the reasons are economic.
The Economics of Value Adding: Eight Basic Poi

1. Not all value adding is not necessarily profitable or optima

for a fish processor.

2. Where and how fish are produced in wild fisheries and aq

has important implications for the economics of value-add

3. The choices which maximize the profitability of the proces

industry are not necessarily optimal for byproduct utilizatio

4. The most profitable locations for value-adding are not nec

where the fish are produced. 

5. Different groups within a region may be affected in differe

value-adding. 

6. A variety of policies may be used to promote value-addin

region. 

7. Opportunities and challenges associated with value-addin

change significantly over time. 

8. Marketing is critical to successful value-adding. 
1. Not all value adding is necessarily profitable or op

for a fish processor.

• Whether producing a higher-valued product is profitable o

depends on numerous factors:

– yield rates– relative product prices– input requirements– Input costs– transportation costs for inputs and products.
Under what conditions does secondary processing to produ

unit-value products total value?

Secondary processing increases value if:

Price of the

secondary

product

Price of the 

primary 

product

>

Vo

Volume of the

secondary

product

Yield

Price of the

secondary

product

Price of the 

primary 

product

>

Volume of the

primaryproduct

V

Yield

Price of the

secondary

product

Price of the 

primary 

product

>
“Secondary processing” increases value if:

Price of the

secondary

product 1

Price of the 

primary 

product

Yield

>

“Secondary processing” increases value only if the p

increases sufficiently to make up for the loss in volum
Under what conditions does “secondary processing” increa

“Secondary processing” increases profit only if the price inc

sufficiently to make up for the additional labor costs and oth

and any loss in volume.

Labor use 

per unit of 

secondary 

product

wage

rate

Price of the

secondary

product

Other 

inputs use 

per unit o

secondar

product

Other 

inputs 

unit cost

Price of the

primary

product

Additional 

labor cost

Other additional 

costs
2. Where and how fish are produced in wild fisheries and 

has important implications for the economics of value-

• Production volumes• Production timing• Variability and predictability of production• Size mixes• Harvesting practices

– Gear types– Time from harvest to processing– Temperature between harvest and processing

• Distance from purchased inputs• Distance from markets
How wild fisheries are managed has important implication

economics of value-adding.

• Management regulations may affect

– When fishing is allowed– What gear is allowed

• The management system (competitive vs. catch shares) a

– Ability of harvesters and processors to plan and sched

harvest and production timing

– Ability of processors to time production to market dem

– Season length and processing capacity requirements
Aquaculture may have significant advantages over wild fish

respect to the economics of value-adding:

• Greater control over:

– Volume of production– Location of production– Timing of production
Actual Alaska soc

salmon harvests typ

differ from pre-sea

projections by 30

0

10,00020,00030,00040,00050,00060,00070,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

thousands of fish

Pre-season projections Actual harvests

This computer at a Norwegian salmon 

farm can tell the producer exactly how 

many fish of what size are in each pen 

(and in the pens of all the farms owned 

by this company on three continents)

Inconsistent and unpredictable supply makes it much more 

for wild salmon producers than for farmed salmon produ

plan for production and for marketing.
Because it processes farmed salmon 

year round, this relatively small British 

Columbia facility processes as much 

salmon as the largest Alaska facilities.

The fact that many Alaskboats and processing plaidle for much of the year huge cost disadvantage.

Norwegian salmon 

processed in winter

The seasonality of wild salmon fisheries increase

production costs relative to farmed salmon, and mak

relatively more difficult to market wild salmon.
Very large harvests in 

short time periods makes canning the opractical option in somwild salmon fisheries

Because it can chooprocess fish, this BC salmon processor doprocess salmon untihas a buyer. It can pvalue-added fish to tspecifications. 
Grades at a southeast Alaska processing p

Wide variation in sizes and quality increases costs of proce

and marketing wild salmon. Only some of the catch is suita

value-adding.
3. The choices which maximize the profitability of the p

industry are not necessarily optimal for byproduct uti

• Fundamental production decisions include:

– Species processed– Timing of production– Locations of facilities– Scale of facilities– Product mix

• These decisions are driven primary by what is most profita

processing of the highest valued food products

• They are not necessarily optimal for byproduct utilization.
The scale needed for profitable byproduct utilization is like

higher than for food fish production.

• Larger scale production is needed because of:

– Higher relative capital costs– Lower relative unit values– Higher volume requirements of buyers– Much lower yield from harvest volume

• For food fish processors, fishmeal and fish oil production 

unprofitable:

– If the scale of production is too low– If production is too seasonal 
In Alaska, large volumes of pollock are processed both onshore 
Fish meal production is a much higher share of Alaska pollo

volume for onshore processing than for offshore proces

Bering Sea Pollock Fishmeal Production:

Percentage of Harvest Volume

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%

2004 2005 2006 2007

% of harvest volumeFis

onFisoff

(Data for 2006 are not available)
4. The most profitable locations for value-adding a

necessarily where the fish are produced.
A large and growing share of Alaska salmon harvests

is exported to China for value-added processing.

United States Exports of Frozen Salmon to China

as a Percentage of Alaska Harvest Volume

0%5%

10%15%20%25%30%35%

2005 2006 2007 2008 2009
In China, frozen H&G Alaska salmon are thawed, filleted, portio

packaged for re-export to U.S. and European markets.
The most profitable location for value-adding depends on numero

• Relative costs of processing inputs• Potential economies of scale from secondary processing v• Relative transportation costs to end markets• Transportation costs from primary processing location to s

processing location
Suppose “foreign” wage rates and other unit processing cost

than “local” wage rates and other unit processing cos

“Local” value adding will be most profitable only if

Savings on 

wages and other 

processing costs 

with “foreign”

value adding

Increase in

transportation costs

with “foreign”

value adding

< 
“Local” value adding is most profitable only if:

Labor use 

per unit of 

secondary 

product

Foreign

wage

rate

Local wage 

rate

Local

other 

inputs 

unit cost

Foreign savings on labor costs 

per unit

Foreign savings on o

per unit

Foreign

other 

inputs 

unit cost

+

Transp

unit of 

prod

“local” p

m

Transport cost per 

unit of secondary 

product from 

“foreign” plant to 

end market

Transport cost per 

unit of primary 

product from 

“local” plant to 

“foreign” plant

Yield

+

< 

Increase in transportation cost per unit
5. Different groups within a region may be affected in 

ways by value-adding. The interests of fish producing re

not necessarily the same as the interests of fish proc

fishermen, or fish farmers.

• Local communities tend to benefit from and advocate loca

adding:

– Processors employ more workers– Processors buy more from local businesses– The tax base is higher

• Processors do not necessarily benefit from local value-ad

– Local value-adding may reduce profits– Local value-adding may be less profitable than “foreig

adding 

• Fishermen and fish farmers do not necessarily benefit from 

value-adding

– If processors earn lower profits they may pay less for f– If processors are capacity-constrained they may buy le
6. A variety of policies may be used to promote value-add

region. Their benefits and costs may vary for different 

• Mandates for local utilization and value-adding

– May not benefit processors– May not benefit fishermen

• Tax incentives• Subsidies

– May not benefit taxpayers

• Infrastructure development• Marketing and technology research• Fisheries management

– More favorable raw material supply for value-adding
Although there are fish processing plants in dozens of Alaska c

there are only about ten onshore fishmeal processing plants 

Where fish meal plants have been built reflects partly where la

are harvested, but also waste disposal regulations

The y

sh

loca

app

scale 

p
7. Opportunities and challenges associated with value

may change significantly over time.

• Seafood industry technology, prices, costs, consumer tas

buyer preferences are subject to significant and sometimchange.
8. Marketing is critical to successful value-addin

• It is critical to

– Understand what markets want and can pay– Produce products which respond to market demands– Communicate to markets about the benefits of value-a

products