The Economics of Value Adding for Fish ProductsGunnar KnappInstitute of Social and Economics ResearchUniversity of Alaska AnchorageSecond International Congress on Seafood TechnologyAnchorage, AlaskaMay 12, 2010“Value Adding”Not a well-defined term in economics or marketingMy definition:Changes to fish processing intended to increase the total value ofseafood products produced from fishExamples:Secondary processing to produce higher unit-value productsUtilization of by-productsFrozen headed and guttedsockeye salmonA “value-added” product:sockeye salmon filletValue adding represents an opportunity for companies and regions toderive greater economic benefits fromthe fish that they produce andprocess.But significantly less value-adding occurs in manyfish-producing regions than would be possiblegiven existing production technologies.Typically Alaska processors receive much higher prices for frozen andfresh salmon fillets than for frozen headed & gutted salmon.Average Monthly First Wholesale Prices,Bristol Bay Sockeye Salmon Products$0.00$1.00$2.00$3.00$4.00$5.00$6.00Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10Source: Alaska Department of Revenue Salmon Price Reports

$/l bFrozen andFreshFilletsFrozenH&GBut fresh and frozen salmon fillets account for a much smaller share of Alaskasalmon production than frozen headed and gutted (H&G) production.Whydoes significantly less value-adding occurs in manyfish-producing regions than would be possiblegiven existing production technologies?Many of the reasons are economic.The Economics of Value Adding: Eight Basic Points1. Not all value adding is not necessarily profitable or optimalfor a fish processor.2. Where and how fish are produced in wild fisheries and aquaculturehas important implications forthe economics of value-adding.3. The choices which maximize theprofitability of the processingindustry are not necessarily optimal for byproduct utilization.4. The most profitable locations for value-adding are not necessarilywhere the fish are produced.5. Different groups within a region may be affected in different ways byvalue-adding.6. A variety of policies may be usedto promote value-adding within aregion.7. Opportunities and challenges associated with value-adding maychange significantly over time.8. Marketing is critical tosuccessful value-adding.1. Not all value adding is necessarily profitable or optimalfor a fish processor.• Whether producing a higher-valuedproduct is profitable or optimaldepends 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 produce higherunit-value products total value?Secondary processing increases value if:Price of thesecondaryproductPrice of theprimaryproduct>Volume of theprimaryproductVolume of thesecondaryproductYieldPrice of thesecondaryproductPrice of theprimaryproduct>Volume of theprimaryproductVolume of theprimaryproductYieldPrice of thesecondaryproductPrice of theprimaryproduct>“Secondary processing” increases value if:Price of thesecondaryproduct 1Price of theprimaryproductYield>“Secondary processing” increases value only if the priceincreases sufficiently to make up for the loss in volume.Under what conditions does “secondary processing” increase profit?“Secondary processing” increases profit only if the price increasessufficiently to make up for theadditional labor costs and other costsand any loss in volume.Labor useper unit ofsecondaryproductwageratePrice of thesecondaryproductOtherinputs useper unit ofsecondaryproductOtherinputsunit cost1Price of theprimaryproductYield>Additionallabor costOther additionalcosts2. Where and how fish are producedin wild fisheries and aquaculturehas important implications forthe economics of value-adding.• 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 marketsHow wild fisheries are managed hasimportant implications for theeconomics of value-adding.• Management regulations may affect– When fishing is allowed– What gear is allowed• The management system (competitive vs. catch shares) affects:– Ability of harvesters and processors to plan and scheduleharvest and production timing– Ability of processors to time production to market demand– Season length and processing capacity requirementsAquaculture may have significant advantages over wild fisheries withrespect to the economics of value-adding:• Greater control over:– Volume of production– Location of production– Timing of productionActual Alaska sockeyesalmon harvests typicallydiffer from pre-seasonprojections by 30%.010,00020,00030,00040,00050,00060,00070,000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

thousands of fishPre-season projectionsActual harvestsThis computer at a Norwegian salmonfarm can tell the producer exactly howmany fish of what size are in each pen(and in the pens ofall the farms ownedby this company on three continents)Inconsistent and unpredictable supplymakes it much more difficultfor wild salmon producers thanfor farmed salmon producers toplan for production and for marketing.Because it processes farmed salmonyear round, this relatively small BritishColumbia facility processes as muchsalmon as the largest Alaska facilities.The fact that many Alaska fishingboats and processing plants areidle for much of the year is ahuge cost disadvantage.Norwegian salmonprocessed in winterThe seasonality of wild salmon fisheries increasesproduction costs relative to farmed salmon, and makes itrelatively more difficult to market wild salmon.Very large harvests inshort time periodsmakes canning the onlypractical option in somewild salmon fisheries.Because it can choose when toprocess fish, this BC farmedsalmon processor doesn’tprocess salmon until it alreadyhas a buyer. It can processvalue-added fish to that buyer’sspecifications.Grades at a southeast Alaska processing plantWide variation in sizes and quality increases costs of processingand marketing wild salmon. Only some of the catch is suitable forvalue-adding.3. The choices which maximize theprofitability of the processingindustry are not necessarily optimal for byproduct utilization.• Fundamental production decisions include:– Species processed– Timing of production– Locations of facilities– Scale of facilities– Product mix• These decisions are driven primaryby what is most profitable forprocessing of the highest valued food products• They are not necessarily optimal for byproduct utilization.The scale needed for profitable byproduct utilization is likely to behigher 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 may beunprofitable:– If the scale of production is too low– If production is too seasonalIn Alaska, large volumes of pollockare processed both onshore and offshore.Fish meal production is a much higher share of Alaska pollock harvestvolume for onshore processing than for offshore processing.Bering Sea Pollock Fishmeal Production:Percentage of Harvest Volume0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%2004 2005 2006 2007

% of harvest volumeFishmeal,onshoreFishmeal,offshore(Data for 2006are notavailable)4. The most profitable locations for value-adding are notnecessarily where the fish are produced.A large and growing share of Alaska salmon harvestsis exported to China for value-added processing.United States Exports of Frozen Salmon to Chinaas a Percentage of Alaska Harvest Volume0%5%10%15%20%25%30%35%2005 2006 2007 2008 2009ChumPinkSockeyeIn China, frozen H&G Alaska salmon are thawed, filleted, portioned andpackaged for re-export to U.S. and European markets.The most profitable location for value-adding depends on numerous factors:• Relative costs of processing inputs• Potential economies of scale from secondary processing volumes• Relative transportation costs to end markets• Transportation costs from primary processing location to secondaryprocessing locationSuppose “foreign” wage rates and other unit processing costs are lowerthan “local” wage rates and other unit processing costs.“Local” value adding will be most profitable only if:Savings onwages and otherprocessing costswith “foreign”value addingIncrease intransportation costswith “foreign”value adding<“Local” value adding is most profitable only if:Labor useper unit ofsecondaryproductForeignwagerateLocalwagerateOtherinputs useper unit ofsecondaryproductLocalotherinputsunit costForeign savings on labor costsper unitForeign savings on other costsper unitForeignotherinputsunit cost+Transport cost perunit of secondaryproduct from“local” plant to endmarketTransport cost perunit of secondaryproduct from“foreign” plant toend marketTransport cost perunit of primaryproduct from“local” plant to“foreign” plantYield+<Increase in transportation cost per unit5. Different groups within a region may be affected in differentways by value-adding. The interests of fish producing regions arenot necessarily the same as the interests of fish processors,fishermen, or fish farmers.• Local communities tend to benefit from and advocate local valueadding:– Processors employ more workers– Processors buy more from local businesses– The tax base is higher• Processors do not necessarily benefit from local value-adding:– Local value-adding may reduce profits– Local value-adding may be less profitable than “foreign” valueadding• Fishermen and fish farmers do notnecessarily benefit from localvalue-adding– If processors earn lower profits they may pay less for fish– If processors are capacity-constrained they may buy less fish6. A variety of policies may be used to promote value-adding within aregion. Their benefits and costs may vary for different groups.• 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-addingAlthough there are fish processing plants in dozens of Alaska communities,there are only about ten onshore fishmeal processing plants in Alaska.Where fish meal plants have been builtreflects partly where large volumesare harvested, but also waste disposal regulations.The yellow dotsshow thelocations andapproximatescale of fish mealplants.7. Opportunities and challenges associated with value-addingmay change significantly over time.• Seafood industry technology, prices, costs, consumer tastes, andbuyer preferences are subject tosignificant and sometimes rapidchange.8. Marketing is criticalto successful value-adding.• It is critical to– Understand what markets want and can pay– Produce products which respond to market demands– Communicate to markets aboutthe benefits of value-addedproducts