Supply , Demand and Markets for Lobster: Outlook for 2010-2011 Yarmouth, Nova Scotia Oct 13, 2010

1. Supply, Demand and Markets for Lobster: Outlook for 2010-2011Yarmouth, Nova ScotiaOct 13, 2010 • John Sackton Seafood.com

2. Introduction • Following Seafood commodity markets since 1994 • Crab • Snow crab pricing in Newfoundland 1998-2010 • King Crab, Snow Crab Pricing in Alaska 2005-2010 • Dungeness Crab, Oregon 2006-2010 • Shrimp • Newfoundland 1998-2010 • Lobster • Lobster Summit 2007 – Global demand for Lobster • Halifax lobster markets: fall 2008 warning about lower prices • Halifax lobster roundtable feb 2009 • PEI issues on lobster sizing – Feb 2010 • Participant in Canadian Lobster Marketing Strategy Study • Extensive background looking at lobster markets and pricing

3. Outline for Today • Factors that affect Lobster Markets • Review recent history in lobster pricing • Outlook for 2010-2011 Season • Can long term value of Canadian lobster be increased • What this means for Nova Scotia: issues raised in the Lobster Strategy Study • Issues that will impact season opening in December

4. Factors that affect lobster markets • Market structure • Types of products • Types of uses • Whether these are in balance • Production structure • Different provinces produce different types of lobsters at different times • Quality Factors • Size • Quality / shipability

5. World Lobster Species Homarus (Europe) Homarus (N. America) Jasusspp (S. Africa, Australia Panulirusspp (Brazil, Australia)

6. Overview of Global Supply of Lobster Source: FAO Globefish

7. Major Lobster Producing Countries The US and Canada produce 63% of world’s lobster Source: FAO Globefish

8. Major lobster consuming countries

9. Major lobster consuming countries

10. Price relationships among lobster types in U.S. • Cold water lobsters (Australia, South Africa) command highest price • Warm water spiny lobsters, sold as frozen tails, often higher priced than North American frozen lobster tails, but this has changed in the recent recession. • North American lobster has most variation in both product form and price

11. Snapshot of Canadian lobster exports Live exports dominate in total weight

12. Processed products converted to live weight When converted to live weight, processed products are larger share oftotal value

13. By value, processed products represent about 50% of total exports • SignificantProcessed Product exports come fromrawmaterialimportedfrom Maine

14. Breakdown of Canadian processed lobster products (2008 data)

15. Major Lobster Product Forms • Live • Whole cooks • Popsicle • Tails • Meat • Cannot talk about a single market for lobster • Different Product Forms have their own supply / demand dynamic

16. US is primary market for all products except popsicles; some live products re-exported

17. Production issues drive product supply • Up to 40% of markets in some seasons too weak for shipping, go to processing (imports from Maine) • Cookers should buy about 40% of LFA 34 production as well • Production of tails means also production of meat – claw, knuckle, leg meat • Sometimes volume means it is necessary to produce products that have minimal handling, labor due to capacity issues • Whole cooks, popsicles • Break tails, freeze fronts for later processing • Therefore marketing has to take account of all lobster products, not just one type of product

18. Canadian production specialized by province

19. Why is this important to Nova Scotia • To Maximize value of lobster, you need to understand both the live and processed markets. • If live and processed markets are out of balance; demand falls and prices fall as well. • Maximizing value means recognizing the interaction between the two markets • LFA 33 and 34 production goes to both live shippers and cookers even though live shipper demand sets the price.

20. Yield is key to understanding Lobster pricing and why live lobster demand sets shore prices Live - 100% Whole Cooked - 86% (average cook loss, can be reduced about 5% with STP) Claw knuckle leg meat: 9% to 13% Tail - 20-24%

21. Price relationships between Lobster Products Source: Urner Barry Publications

22. Lobster and all seafood sells to two primary types of markets: Retail and Foodservice • Food service: Higher overall value; uses more processed product forms • Retail: lower price point, uses least expensive product forms; has highest volume • For lobster this means in general: • Retail concentrates on live • Foodservice uses frozen tails and meat as well as live

23. Retail and foodservice purchase of seafood Packers, wholesalers, importers and traders sell equal amounts to foodservice and retail : 50/50 Foodservice adds more value in meal preparation, leading to a larger share of total consumer seafood dollar: 67% Foodservice Data from U.S. NMFS 2007

24. Retail and Foodservice use different lobster products • Retail • Retail is over 90% live product • Foodservice • Approximately 50% restaurant lobster sales volume is tails; 21 % is live, and 26% is meat

25. Foodservice use of CA lobster by value Source: Gardner Pinfold Lobster Strategy Report

26. What the data tells us • Live lobster is the most important product for retail markets • Live lobster represents only 20% of restaurant lobster sales volume; 80% of volume is tails and meat • Means that foodservice cannot easily expand to take on more live lobster if inventories are high • Tails and meat markets are more important to foodservice buyers

27. Characteristics of Retail Seafood • Retailers move most volume on promotion • Volume is highly price sensitive • Promotional lead time is generally less than 12 weeks • Retailers have opportunity to take advantage of value pricing • This is what they have done since summer 2008 and 2009 for lobsters. • Retailers have the ability to respond to opportunity if they see lower lobster prices • Likely to be less true in 2010

28. Retailers not equipped to expand sales of meat or tails • Live lobster is most cost effective purchase for consumer at retail – least expensive way to get lobster • Because meat and tail price points are significantly higher than whole lobster, little opportunity for retail promotion; as these items are too expensive.

29. US Lobster consumption is highly regionalized:

30. 63% of all retail lobster consumed in New England, NY, PA, NJ

31. 3rd highest region is Las Vegas • Mountain region ( Las Vegas, Phoenix, Denver) consume more lobster than Pacific region (California, Washington, Oregon) • Mountain and Pacific combined represent only 15% of U.S. consumption • This area has been hard hit by recession, decline in foodservice / hotel sales

32. Foodservice consumption is also regionalized, but to a lesser degree • Use of lobster by national chains, along with national advertising, breaks down regional differences over time. • Since 2009 improving restaurant climate has led to increased demand for both live and processed lobster products. • Lobster is moving out of “seafood” category to become a more general restaurant item

33. But after 2nd quarter, sentiment deteriorated among restaurant operators

34. Increased demand has led to higher $US prices • Live 1 lb lobster Oct 2010: $4.85 vs $3.95 in 2009 • Lobster meat (2 lb ck dry) Oct 2010: $16.00 vs. 13.75 in Sept. 2009

35. Long term effect of higher price • Initially boosts margins as buyers accept prices and place orders (this is where we are today) • Creates incentives for more production • But higher prices can also cause reduction in purchase volume • Future increases in supply set stage for decline in prices; with falling prices, margins shrink • Price stability can help maintain higher margins

36. Price Stability Difficult to Achieve in Seafood Industry • Salmon has exhibited commodity cycle despite careful production planning • Shrimp was thought to be immune from supply problems in recent years • Aquaculture production does not eliminate commodity price cycles • Crab will be short about 15% in U.S. this year, more so in Japan. This is key factor driving price • Lobster: overall supply seems stable, but price volatility is high due to timing and seasonality.

37. Summary • Live lobster demand sets shore prices • Retailers are the major volume users of live lobsters • Higher prices restrict retail purchases • Foodservice demand is for meat and tails; live product demand is a smaller percentage of restaurant usage • Meat and tails have already increased in price about 15% over past year; poised to increase further • Export markets are important, but low volume • In order to maintain healthy prices into the future, both markets – retail live, live exports to Europe, Asia, and processed products have to maintain demand.

38. Review of recent history in lobster pricing • All lobster products are at higher prices than they were one year ago. • Largely due to recovery in US and global economy • Also due to expansion of demand, as new buyers took advantage of low prices in 2008, 2009.

39. Last two years have seen lowest shore prices since 1994 Source: Gardner Pinfold Lobster strategy Report

40. There has also been price volatility

41. But part of that volatility was due to currency

42. In $CA dollars, Dec 2009 was 15% higher than 2008; in $US dollars it was 33% In 2009 US prices increased more than 33%; while $CA prices increased around 15%

43. There is an established pattern for live lobster holding inventories Decmbr 2008-09 2009-10

44. Market Prices were up 33% inDec 2009, and inventories were down • More people bought lobster in 2009-2010 • Restaurants felt they were coming out of recession • Retailers were still promoting lobster • Orders were increasing for cooked meat and tails • Prices rose “above” market demand • Winter 2010: • Many people pounded lobsters • Prices did not rise further • Result was price weakness into spring: US lobster prices declined from January until May 2010. Since then prices have recovered

45. Most of current seafood price increases are due to supply issues • Salmon: shortfall from Chile • Shrimp: lack of production in Asia • Crab: Cutbacks in wild supply, less poaching • Lobster, however, is seeing increased pricing due to growing demand; supplies are stable or higher than in 2009.

46. Strengthening demand is allowing higher lobster prices to stick • Foodservice business is recovering after two years of decline • Retailers were very successful promoting seafood in 2009 – maintained strong margins, which is allowing them to continue successful promotional strategies on crab and lobster.

47. Live Lobster: 2010 price has crept higher than 2009 over this summer

48. Tails: prices have strengthened; are higher than in 2009

49. Meat Prices have turned up also

50. September 2010: Prices and demand vary by product form • Live prices are only slightly higher than in 2009 – retail is doing fewer promotions as prices rise • Meat and Tail prices are significantly higher than in 2009 • Demand for processed meat and tails is helping to support pricing for live markets • Current pricing reflects increasing usage of lobster meat and tails by foodservice. • Although prices have risen some, historically meat and tail lobster products represent the mid-point of their value range.