Economics of the PacificWhiting, Merluccius productus, Fishery

ERIC ANDERSON

Introduction

Interest in the economics of Pacificwhiting, Merluccius productus, pro­duction and consumption has beenstimulated in recent years by expand­ing U.S. participation in the fisheryformerly dominated by foreign fish­ing and processing. This has raisedseveral questions within the U.S.fishing industry: I) Will it be profit­able for additional U.S. fishermanand processors to enter the fishery? 2)What configuration will the U.S.Pacific whiting industry take? and 3)What will be the nature of marketsfor Pacific whiting products? Thispaper summarizes the conclusions ofseveral reports and studies which bearon these questions.

The answers to the questions will bedetermined by the forces of supplyand demand for Pacific whiting prod­ucts and, to some extent, by govern­ment action. The first subject dis­cussed here is potential markets forthe various Pacific whiting products,and constraints on the demand forthese products. This discussion isfollowed by an examination of thecost factors which affect supply, andwhich determine how the fish will becaught and processed.

Markets

The most obvious potentialmarkets for U.S.-processed Pacificwhiting products are those which cur­rently consume the output of theforeign and joint-venture fisheries.However, these markets are primarilyin Communist Bloc countries whichdo not have normalized trade rela­tions with the United States. While it

42

is possible that provisions for trade inPacific whiting and other fisheryproducts could be negotiated withthese countries, it is not consideredlikely (Earl R. Combs, Inc.').Therefore, entirely new markets willprobably have to be found.

Although some authors suggestthat Pacific whiting fillets, both freshand frozen, could be successfullymarketed (Pacific Fishery Manage­ment Council, 1982; and Richards2 )

this seems unlikely due to the problemof flesh fragility and rapid decay.

Another possibility is that Pacificwhiting could compete in the hugefrozen groundfish fillet block market.There are several obstacles to thisdevelopment which some writers feelare insurmountable (Kramer, Chin,and Mayo, Inc. 3 and Richards2). Tobegin with, the problems ofparasitism and flesh fragility willprobably prevent successful penetra­tion of the highly quality-consciouswestern European segment of the

'Earl R. Combs, Inc. 1979. Study of theeconomics of the Pacific hake fishery. Unpub!.manuscr. prep. for Coos-Curry-Douglas Eco­nomic Improvement Association and theOregon Department of Economic Develop­ment. Earl R. Combs, Inc., 2737 77th S.E.,Mercer Island, WA 98040.'Richards, J. A. 1982. Economic informationfor the management of the groundfish fisheriesof Washington, Oregon, and California. Un­pub!. manuscr., 117 p. Northwest Reg. Off.,Natl. Mar. Fish. Serv., NOAA, 7600 SandPoint, Way, N.E., Seattle, WA 98115.lKramer, Chin, and Mayo, Inc. 1982. Systemstrategy for California, Oregon, andWashington fishing industry and public ponsinfrastructure needs and assessment, final reportand technical analysis. Unpub!. manuscr., prep.for West Coast Fisheries Development Founda­tion and the National Oceanic and AtmosphericAdministration. Kramer, Chin, and Mayo, Inc.,1917 1st Ave., Seattle, WA 98101.

Eric Anderson, formerly with the Northwestand Alaska Fisheries Center, NMFS, NOAA,Resource Ecology and Fisheries ManagementDivision, 2725 Montlake Boulevard East, Seat­tle, WA 98112, is currently with the Departmentof Economics, Old Dominion University, Nor­folk, VA 23508.

market (Earl R. Combs, Inc. I ). In theUnited States, the same problem willleave Pacific whiting at a serious com­petitive disadvantage if attempts aremade to sell it in retail stores as frozenbreaded or battered portions cut fromblocks. This might change if con­sumers could be persuaded to adoptthe cooking method required to avoidenzymatic softening of the flesh,namely deep-fat frying without firstthawing. However, consumers mayresist changing their cooking habits,and since they are unfamiliar with thisspecies, a great deal of consumereducation effort may be required.

One marketing channel in whichhandling methods could be carefullycontrolled, thereby reducing thequality impediment, is the sale offrozen portions to institutionalbuyers, who usually deep-fry theirproducts (Earl R. Combs, Inc. I). Tomake inroads into this segment of thegroundfish market, it will benecessary to overcome the resistanceof buyers to frying without first thaw­ing the fish (Fisherman's MarketingAssociation of Washington4 ) and toassure the buyers of reliable supply

'Fishermen's Marketing Association of Wash­ington. 1980. Offshore factory trawler demon­stration project. Unpub!. manuscr., prep. forWest Coast Fisheries Development Foundationand National Oceanic and Atmospheric Ad­ministration under cooperative agreement80-ABH-00052, 49 p.

Marine Fisheries Review

quantities of consistent quality. Thelatter is not an easy task for any newindustry. Converters, the firms whichcut blocks into fish sticks and por­tions to varying specifications of theircustomers, may prefer not to buyblocks of a species which can be soldonly to a limited class of customers.Therefore, it may be that Pacificwhiting processors will have to investin the capability to do their own con­verting and sell directly to institu­tional customers if they are to marketblocks successfully (Earl R. Combs,Inc.')

Other product forms which havebeen considered for Pacific whitinginclude such products as frozenblocks of headed and gutted (H&G)fish, precooked breaded portions,chowders (where the flesh character­istics are less important), cured prod­ucts, and industrial products suchas meal, oil, and fertilizer. Some orall of them may eventually play minorroles in the industry, but the marketsfor these product forms are notthrought to be large (Earl R. Combs,Inc.'). Two studies have been released(one based on actual experience)which predict that on-board headingand gutting will be profitable(Philbin, 1980; Fishermen's Market­ing Association of Washington4

).

Shore-based production of frozenH&G whiting is currently supportedby the relatively small Puget Sound,Wash., stock. This production isprofitable because the fish are close toshore, do not deteriorate as rapidly asdo the oceanic variety, and are smallerthan the oceanic stocks. Their smallersize makes them attractive to low in­come and ethnic markets in easternand southern states.

One problem not considered in thecited studies is that H&G Pacificwhiting is a product for which there isa relatively small market in the UnitedStates, and for which there are fewclose substitutes, so any large-scale in­crease in production may depress theprice significantly. However, Earley(1981) suggests that the product couldbe marketed successfully in Mediter­ranean countries, despite qualityproblems.

47(2),1985

Assuming that markets can befound, there are still obstacles to prof­itability. One, which can be categor­ized as a demand phenomenon, is thelow wholesale prices at which Pacificwhiting products must be sold. Theprices are constrained by the fact thatother ground fish, including otherspecies of whiting, are higher qualitysubstitutes for Pacific whiting in thewhitefish fillet and block market.Since Pacific whiting maximum sus­tainable yield (MSY) is small com­pared to total U.S. and world ground­fish consumption (175,000 metric tons(t) Pacific whiting MSY; about1,200,000 t round weight U.S.ground fish consumption in 1981),producers of Pacific whiting productsface a more or less rigid upper limiton the price they receive. They cannothope to significantly replace otherspecies unless they offer their productat a price that is somewhat lower thanthis upper limit. It has not thus farproved profitable to do so.

Only if and when growth in worlddemand for groundfish outstripsgrowth in world supply will the pricesof all groundfish products, includingPacific whiting, rise enough to makeexpanded Pacific whiting processingworthwhile, assuming that costs donot rise proportionately (not aforegone conclusion). There is somereason to believe that this rise in de­mand might eventually occur. First,demand for groundfish can be ex­pected to grow as population and in­come in North America and Europegrow (Kramer, Chin, and Mayo,Inc. 3). However, income growth isnot certain, and because the prices ofsubstitute protein sources like beef,pork, and poultry must be assumed toremain approximately constant, theprice of groundfish is expected to berelatively unresponsive to increases indemand. The rapid growth in demandfor frozen groundfish products byfast food operators and retail foodchains (which constitutes a structuralchange in demand) is apparently nearan end (Kramer, Chin, and Mayo,Inc. 3). Second, while there is room forexpansion in the New England andSouth American whiting harvests

(Richards 2), maxima will be reachedthere eventually, and total world pro­duction of groundfish will stabilize.

The only other hope for a rise in theprice ceiling is a technological im­provement in the processing of Pacificwhiting which would eliminate itstendency to deteriorate. This wouldraise the quality to a level approx­imately equal to that of other speciesand allow Pacific whiting to be sold ata comparable price.

Processing

Onshore

Turning now to supply aspects ofthe Pacific whiting industry, we canmake some general statments aboutthe relative merits and costs of at-seaand on-shore processing, and aboutwhy foreigners are processing largequantities of Pacific whiting and U.S.firms are not. Currently, the limitedU.S. processing of this species is doneon shore, where processing is general­ly less expensive than at sea for severalreasons. For production on a smallscale, there already exists plant spaceon shore which can be used for expan­sion of Pacific whiting processing attimes when it is not being used forother species. All that is required insome additional equipment and labor(Earl R. Combs, Inc.'). Thus, thecurrent low level of U.S. productioncan be sustained or slightly increasedat relatively low cost. This cannot besaid of U.S. motherships or factorytrawlers, of which there are only afew, all fishing for other species. Fora large-scale expansion of the industryto occur, additional plant space orvessels would have to be built. On­shore plants are cheaper to constructthan are factory ships of the samecapacity, unless land costs are highenought to reverse the relationship.Foreign-built factory trawlers couldbe purchased new or used at muchlower prices than new U.S.-madevessels (Earley, 1981), but they areprohibited from fishing in U.S. watersby the Jones Act. A similar prohibi­tion against foreign-built motherships

43

no longer applies, since the U.S.Customs Service has ruled that fishprocessed aboard such ships may belanded in U.S. ports if the ships areregistered in the United States.

With regard to variable costs, shoreplants have some advantages overprocessing ships, since they do not re­quire fuel to propel them, andbecause shore-based processing laborcan be paid less than workers whomust be compensated for the incon­venience and discomfort of living atsea for long periods. On the otherhand, at-sea processing enjoys exemp­tion from some of the taxes, pollutionabatement regulations, and wastedisposal costs that are imposed onshore-based plants.

More importantly, however, thereare two features of Pacific whitingbiology which may explain the failureof the existing small-scale on-shoreprocessing operations to expand ap­preciably. First, the fish migrate alongthe U.S. west coast during the sum­mer fishing season, so that the stock israrely within practical fishing range ofany given shore plant for more than 3months (Earley, 1981). It is simply noteconomical to build new plant capaci­ty dedicated to a low-valued fishwhich is available less than 3 months ayear. Since most of the other Pacificcoast species which might also beprocessed in a new plant are alreadyat or near maximum yield (PacificFishery Management Council, 1982),the expansion would have to be sup­ported mostly by Pacific whiting.Processing ships, in contrast, can par­ticipate in Alaska groundfish fisheriesduring the winter when Pacificwhiting are not available.

Second, the high incidence of para­sitic infestation of the flesh can resultin unacceptable product quality whenthe fish must remain in the boats'holds for more than 2 days (Earl R.Combs, Inc. I; Philbin, 1980), evenwhen the hold is refrigerated. This re­quires short trips in which actualfishing time is only a small proportionof total trip length. There is somecontroversy about whether productquality can be maintained after even afew hours in the hold (Richards2).

44

Offshore

Offshore processing takes twoforms: Delivery at sea to mothershipsby catcher boats and the combinationof fishing and processing on a factorytrawler. Motherships and catcherboats are used primarily in joint ven­tures, while factory trawlers are usedby the foreign fishing fleet. Deliveryat sea is less costly to fisherman thandelivery on shore because 1) less timeand fuel are diverted from fishing torunning to and from port, delivery ismade to the processor on the grounds,and some supplies are provided by themothership; 2) refrigeration in thefish hold is unnecessary since deliverycan usually be made very soon afterthe fish are caught; 3) the fishingvessel crew can be smaller because thefish are not brought on board thecatcher boat, but are transferred tothe processor while still in thedetachable codend; and 4) fishingboats can stay with the movingschools of whiting, instead of havingto spend time searching for them afterreturning from a delivery in port.

As a consequence of these cost ad­vantages, fisherman are willing to fishfor at-sea delivery for a lower ex­vessel price than they require fordelivery to on-shore processors. Forcomparable harvest volumes, the dif­ference is about $0.02 per pound, ac­cording to Richards2 • At the ex-vesselprices paid by joint venture buyers inthe recent past (about $0.06 perpound in 1982), there have been moreapplicants for fishing contracts thanthere are openings (McNair, 1982). Itshould be pointed out that there is nosingle price which is required to per­suade fisherman to participate in jointventures or in shore-based fishing.Rather, there is a supply function;more fishermen participate when theprice is higher than when it is lower.

Of the two fishing-processingmodes which do not involve catcher­processors, at-sea delivery is the modeof operations which is less costly forfisherman, while on-shore processingmay be the mode which is cheaper forprocessors (not counting the cost ofpurchasing fish from fisherman).

What matters in determining the finalconfiguration of the industry, if anentirely domestic industry doesdevelop, is the total cost of harvestingand processing combined, along withconsiderations like the feasibility ofmaintaining adequate quality and theavailability of off-season employmentin other fisheries. Which of the twomodes satisfies these criteria is not yetknown, but the quality and limitedseason considerations would appearto be the deciding factors in favor ofat-sea delivery and processing, at leastfor the major proportion of the out­put (Earl R. Combs, Inc. I) It is possi­ble, however, that the use of large, ef­ficient fishing vessels with improvedrefrigeration, improved proceduresfor unloading fish at shore plants, andchanges in processing procedurescould negate the apparent advantageof at-sea processing (Richards2).

The third possible mode, combin­ing fishing and processing in a factorytrawler, has some advantages overmothership fishing. First, the time in­terval between capture and processingcan be even shorter than when thecatch must be transferred to themothership. The risk of losing a cod­end full of fish during the transferoperation is eliminated. The harvestrate can easily be matched to theship's processing capacity, so thereneed not be any backup of harvestedfish waiting to be processed (Earl R.Combs, Inc.'). Finally, there is noneed to arrange for a fleet of catcherboats, through contract or purchase,in each fishery that the vessel par­ticipated in (Earl R. Combs, Inc.').

One disadvantage of a catcher­processor, compared with a mother­ship and catcherfleet, is inflexibility ofharvest capacity, especially when theship fished in fisheries or seasonswhere the optimal catcher-vessel sizevaried markedly. Another problem isthe large size of catcher-processors:One study of Alaska groundfishingcosts and returns suggests that, underaverage conditions, the optimalfishing vessel size is only about 85 feet(Kramer, Chin, and Mayo, Inc. 3). Asimilar cost structure may exist in thePacific whiting fishery. Processing,

Marine Fisheries Review

however, may embody substantialeconomies of scale, with the optimalsize being considerably larger than ispractical in a factory trawler. At best,a factory trawler can only com­promise between the optimal scales ofits two functions. Finally, there is thehigh acquisition cost imposed by theJones Act.

Earley (1981) concluded that, giventhe constraints raised by the Jones Actand the difficulty of training or im­porting skilled processing labor, prof­itable factory trawler operations onPacific whiting are not feasible forU.S. firms. If those constraints wereremoved, profitability might beachieved.

The few existing U.S. factorytrawlers have more attractive alter­native opportunities year-round inAlaska (i.e., the Arctic Trawler'sfrozen cod fillet operation). One ofthem was used on an experimentalbasis for Pacific whiting fishing andprocessing in 1980 (Fishermen'sMarketing Association of Washing­ton4 ), and it was found that produc­tion of frozen fillet blocks was notprofitable. The experiment did sug­gest that production of H&G whitingby factory trawlers might prove com­mercially successful, but no furtherwork in that direction has been done.

With factory trawler fishing forPacific whiting shown fairly convinc­ingly to be economically unfeasible,the question arises, "Will domesticmothership fishing soon characterizethe fishery?" Earl R. Combs, Inc. l • 5

predicted that it will, while the morerecent reports by Kramer, Chin, andMayo, Inc. 3 and Richards2 assert thatrapidly rising costs and the lowwholesale price of Pacific whitingproducts will continue to discourageentry of U.S. processing into thefishery, beyond the present small­scale shore-based activity.

Joint Ventures

Operators of foreign processing

'Earl R. Combs, Inc. 1979. Prospectus for de­velopment of the United States fisheries. Un­pub!. manuscr. prep. for NOAA's FisheriesDevelopment Task Force. Earl R. Combs, Inc.,2737 77th S.E., Mercer Island, WA 98040.

47(2),1985

ships have found it worthwhile to pur­chase Pacific whiting from U.S.fishermen at sea, at ex-vessel pricessufficiently high to attract a largenumber of fishermen to these jointventures (Kaczynski 6). Foreign pro­cessing vessels have lower costs thanU.S. motherships would; in somecases, their actual direct costs may belower than those of U.S. ships, andanother important factor is that theseships have often been excluded fromthe extended economic zones of coun­tries whose waters they were built tofish in. Therefore, they have limitedalternative opportunities (that is tosay, low opportunity cost), and ratherthan let them stand idle, their ownersare willing to use them even whenprofits are low or negative. The sameis true of the skilled crews of thesevessels. In addition, since the factoryships used in Pacific whiting jointventures are owned by CommunistBloc nations, profit is a secondary ob­jective in their operation, with conser­vation of foreign exchange andemployment playing more importantroles (Earley, 1981). Furthermore, asa result of the U.S. "fish and chips"policy, foreign countries have beenagreeing to operate joint ventures as acondition of receiving direct harvestallocations. It may be that receivingthis allocation is even worth sustain­ing losses in their joint venture opera­tions. This is not true of the SovietUnion, which participates in thelargest Pacific whiting joint venture,but which for political reasonsreceives no allocation. But politicalconditions can change, and it hasbeen suggested that U.S. fishermencould successfully engage in collectivebargaining or obtain governmentassistance in negotiating a higher ex­vessel price for their joint venturecatch (Richards 2).

On the basis of the factors de­scribed above, Kramer, Chin, andMayo, Inc. 3, and Richards2 conclud­ed that for the foreseeable future, the

6Kaczynski, V. 1981. Foreign fleets in the N.E.Pacific hake fisheries: Economic efficiencyanalysis. Instil. Mar. Stud. Univ. Wash., 3707Brooklyn Ave. N.E., Seattle, WA 98105. Un­pub!. manuscr., 98 p.

Pacific whiting industry would con­tinue to be dominated by joint ven­tures consisting of U.S. fishermenselling their catch to foreign proc­essors. In this form, the industry willexpand in the next few years, with thenumber of U.S. trawlers involved ex­pected to increase, at least slightly.The additional vessels will be largelydrawn from the existing west coastfresh groundfish fleet, converted tomidwater trawling - and, to some ex­tent, from converted Alaska crabbers.Some new vessels may also be con­structed. The west coast trawlers willbe attracted to the fishery despite thecontinuing opportunity to harvesttraditional species of groundfish.

Richards2 addresses the issue ofwhether permitting joint ventures isharmful to the development ofdomestic processing interest andcapability. He concludes that it is not,because the two modes of fishing takeplace in different areas of the ocean:Offshore and inshore. This minimizesthe effect that each fleet has in reduc­ing the abundance of the stock onwhich the other is fishing, whichwould increase fishing costs and theex-vessel price which must be paid theprocessors. It should be observed,however, that while this may be truein the short run, in the long run joint­venture fishing may affect the abun­dance of inshore Pacific whiting if allthe whiting are members of a singlestock. In addition, joint venture proc­essors increase the competition forwhiting fisherman, probably drivingthe ex-vessel price up. Moreover, it ispossible that the nations now engagedin joint-venture processing mightbecome importers of U.S. processedPacific whiting products if joint ven­tures were prohibited. But, as notedabove, this may be unlikely, and forreasons already discussed, it is prob­able that Pacific whiting processingwould be unprofitable for U.S. firmseven in the absence of joint ventures.

Conclusion

The evidence presented in theliterature on the economics of Pacificwhiting suggests that, for the nearfuture, and possibly for the long run,

45

too, the industry will be primarilycharacterized by joint ventures. Ac­tion by the United States to restrictjoint ventures would likely not resultin large-scale expansion of domesticprocessing, and would sharply reduceopportunities for domestic fishermen.Joint ventures will probably expand,if permitted to do so, and will involvesomewhat greater numbers of U.S.fishing vessels. Processed productsfrom the fishery will continue to flowto the Communist Bloc nations, withsome of the output being exported bythem to other parts of the world.

Acknowledgments

I would like to thank ThomasDark, Jack Richards, and EdwardUeber, National Marine FisheriesService, NOAA, for helpful sugges­tions and comments.

Literature Cited

Earley, J. 1981. Analysis of U.S. andforeign utilization of Pacific whiting. InSocioeconomic report for the project systemdynamic model of the fishery for Pacifichake. Oreg. State Univ. Sea Grant Coil. Pro­gram, 26 p.

c air, D. 1982. Botlomfish update. Whatthis country needs is a good six-cent pollock.Pac. Fishing 3(12):44-52.

Pacific Fishery Management Council. 1982.Pacific coast groundfish plan. Pac. Fish.Manage. Counc., Portland, Oreg., 232 p.

Philbin, C. W. 1980. Three different deliv­ery modes for fresh-caught Pacific whiting,Merluccius producluS. Mar. Fish. Rev.42(2):30-36.

46 Marine Fisheries Review