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POFO - Standing Committee

Fisheries and Oceans


Proceedings of the Standing Senate Committee on 
Fisheries and Oceans

Issue 11 - Evidence - November 20, 2012

OTTAWA, Tuesday, November 20, 2012

The Standing Senate Committee on Fisheries and Oceans met this day at 5:40 p.m. to study the lobster fishery in Atlantic Canada and Quebec.

Senator Fabian Manning (Chair) in the chair.


The Chair: I am pleased once again to welcome you to a meeting of the Standing Senate Committee on Fisheries and Oceans. My name is Fabian Manning. I am a senator from Newfoundland and Labrador, and I am the chair of the committee.

Before I ask the witness to introduce himself and to begin his presentation to us, I would like to invite the members of the committee to introduce themselves, please, starting with Senator Greene.

Senator Greene: Steve Greene from Nova Scotia.

Senator MacDonald: Michael MacDonald from Nova Scotia.

Senator Enverga: Tobias Enverga from Ontario.

Senator McInnis: Tom McInnis, senator from Nova Scotia.

Senator Cordy: Jane Cordy from Nova Scotia.

Senator Raine: Nancy Greene Raine from British Columbia.


Senator Chaput: Maria Chaput from Manitoba.


Senator Watt: Charlie Watt from Nunavik.

The Chair: The committee is continuing its study of the lobster fishery in Atlantic Canada and Quebec and is hearing today from the president of Gardner Pinfold Consultants Inc. In 2009, Gardner Pinfold Consultants Inc. was commissioned by the Lobster Council of Canada to undertake a review of the structure and competitive environment of the lobster industry in Canada with the view to assessing its strengths and weaknesses and developing a long-term value strategy for the industry.

A report entitled From Trap to Table was released in October of 2010. Mr. Gardner will provide us with an update of the report. On behalf of the members of the committee, I thank Mr. Gardner for being with us here today. I now ask him to make his introductory remarks, and I am sure our senators will have some questions.

The floor is yours, Mr. Gardner. Welcome.

Michael Gardner, President, Gardner Pinfold Consultants Inc.: Thank you very much, Senator Manning. I am pleased to be here. I am pleased to see such a substantial contingent of Nova Scotians, but welcome to others. I hope you are all familiar with the subject matter of the discussion, the lowly lobster.

We embarked on this study almost three years ago now, and it took us about a year to complete it. In the course of that, we had many discussions with fishermen, processors, shippers, buyers, governments and so on around the Atlantic region. It is a study that has, I think, broad industry input. I think the key points that will emerge from this presentation are that the industry has suffered considerably as a consequence of a number of factors — not just the economy or the global economy, but factors that are also a function of the way the industry is structured and how it operates.

Today I will run through some of the highlights. I know time is short. I have been instructed that 10 or 15 minutes would be the maximum. I think I have already used 45 seconds, so I am well behind. I think the thing to focus on in this presentation is the kinds of numbers that the industry is working with and the factors, the constraints and the opportunities that it faces as well.

The Chair: Mr. Gardner, before you begin, I would like to welcome Senator Don Oliver, another fellow Nova Scotian, to the table.

Mr. Gardner: Thank you. I will not read all of what is here. You have the information, but this first slide simply indicates the significance using a number of facts from the industry, both in Canada and the United States, because let us keep in mind that not quite half the lobster that is pushed into the global markets comes from the U.S. Most of it comes from Canada, but the U.S. is a major producer as well.

Overall, we are looking at an industry that is somewhere in the range of $1.5 billion to $2 billion, both countries combined. Here you see some of the facts and figures on the industry.

Global supply is up about 30 per cent. At a time when the economy, since 2007-08, has slid into recession globally, supply has continued to increase. In other words, we are pushing more and more lobster into a market that is less and less able to absorb it.

For American lobster, which is the species that we fish off the Atlantic coast in Canada and the U.S., the supply has increased 50 per cent since 2003. There is no limit on the quantity of lobster harvesters are permitted to catch. There are no quotas, no limits. If it is legal, can be caught and crawls into a trap, it can be caught and brought ashore. The only constraints are seasons, number of traps, weather conditions, and so on. Otherwise, there is no limit. It is a competitive fishery and everybody wants to catch as much as they can and as fast as they can. Supply has increased by about 50 per cent in Canada and the U.S.

You can see from this slide — the green line is the U.S. and the red is Canada —the quantities in 2011 were just about the same, somewhere in the 55,000 to 60,000 tonne range for each country.

This is one of the implications of that increased supply. If we see the peak in about 2005, $1.2 billion was the combined value of landings in Canadian dollar terms. After 2005, approximately, the value has been sliding ever since. It took an upturn in 2011, but there has been a consistent slide, in part, as I mentioned, because of the state of the economy, but mainly, and we will see this in more detail, because of exchange rates.

Here is the exchange rate chart. In 2002, when the Canadian dollar was at its worst — a Canadian dollar was worth $1.60 in American funds, if you will, or vice versa, American funds would buy you $1.60 Canadian. At that time the industry was in great shape because roughly 80 per cent of the exports go to the U.S. Every U.S. dollar of revenue was getting you $1.60 in Canadian funds. After 2002, it was a fairly rapid slide to 2008 when the dollar was roughly at parity. There was a little bump in 2009, technical more than anything else, but since then through 2012 it has been trading more or less at parity. That has taken 40 per cent right off the top or out of the pockets of the Canadian lobster industry, just because of the exchange rate.

This illustrates the impact from a price standpoint. The yellow line at the top is the Canadian dollar value of a lobster sold on the U.S. market. The green line shows you the U.S. dollar. The U.S. is paying, if you start in 2002, just over $5 a pound. That was worth just over $8 a pound to a Canadian shipper. As the exchange rate declined, you can see those lines converge until we get to 2010, when they are at parity. You can see that there has been a steady decline from 2002 in the prices paid to the Canadian industry from exports to the U.S.

I should also add that if we look at the other exchange rates, the countries we export to, the EU, the U.K., Japan, South Korea, it has been an adverse trend in virtually every case, almost consistently since the early 2000s, because the Canadian dollar has strengthened.

Looking at exports, the yellow line represents U.S. landings; the blue line represents exports to Canada. You can see that in 2011, over 20,000 tonnes of just over 55,000 tonnes of landings in the U.S. was exported to Canada, mainly to the Gulf of St. Lawrence processing plants. We do not consume it live; we process it and turn around and ship more or less all of it right back to the United States. The processing industry relies very heavily on those imports from the U.S. in part because they occur at a time of the season when the Canadian fishery has more or less finished. The seasons are finished, the U.S. season picks up, and there are huge exports from the U.S. to Canada. You notice that it has climbed a long way from next to nothing in 1990, over the 20 years, to over 20,000 tonnes.

This shows you the relationship of the landings in the U.S. and the exports to Canada. You see that the U.S. landings are peaked very sharply in that July-September-October period. In that same period is when most of the exports are shipped to Canada. The balance is consumed locally in the United States. You can see that from about July 2009 there has been a huge increase in the quantity exported to Canada in part because the landings in the U.S. have gone up by so much.

I will just touch on this. This slide is simply meant to illustrate the relationship of landings, the cycle of landings, and the prices in the United States. The United States is our main buyer; 80 per cent of what we ship, live and processed, goes to the U.S. We have to pay attention to that market.

The yellow line you see there, like the two humps on a camel, represents U.S. landings. They are peaked in that July to roughly October period. The red line shows Canadian landings, and there are two peaks per season: one in southwest Nova Scotia, which will come on-stream in another week to 10 days; and the other, the second peak later on, is the spring season in the Gulf of St. Lawrence and some of the other areas in Atlantic Canada.

They complement each other. The green line at the top is prices. Over a two-year cycle, you see those prices go up and down, up and down in response to the supply and also of course to the demand. However, prices reach their bottom when the U.S. fishery is at its peak in roughly that July-August period, and the prices peak in roughly the January period when supplies from southwest Nova Scotia come on stream. It is just the relationship between supply demand and pricing.

If we look at what has happened on the shore, these are prices that fishermen receive in various parts of Atlantic Canada and in Maine. You can see that in 2002 prices peaked. Since then, they have been sliding fairly steadily over the next eight to nine years. Levels in 2010-11, if you just glance to the left, were as low as they were 20 years ago. We have come a long way in 20 years, huge increase in supply, but the Canadian dollar price is more or less where it was 20 years ago.

This is another important slide. I know fishermen always argue they always get screwed in this industry because there are conspiracies or cartels, and the world is out to get them, et cetera. This shows the relationship between shore prices in Nova Scotia and the U.S. wholesale price. This is for live lobster. You can see when the wholesale price goes up that the price goes up in Nova Scotia. When it goes down, it goes down. In other words, there is a very close relationship between those prices. The second thing to notice is just how narrow the gap is between the shore price and the wholesale price. That gap is what the buyer and shipper of lobster earns out of that sale into the U.S. market. It is not much. It is about 20 to 25 per cent; 75 to 80 per cent of the export price is earned by fishermen.

That price is very sensitive to changes in the market, and you can see that there are a number of changes occurring because it is a live product, supply-demand; and secondly, there is a fairly narrow gap between those two prices. The shore price is driven very much by the wholesale price in the U.S.

I will not go into a lot of detail on this slide, but what we looked at in our report two years ago was what has happened to fishermen's incomes in the last few years as a consequence of the exchange rate change and the impact of the recession. The yellow bar shows the average incomes, net income, by LFA, by lobster fishing area, across Atlantic Canada. This is 2004. In 2004, before exchange rates had a real impact, life was good on the shore. Incomes were solid, catches were good. By 2009 the red shows the change that has occurred, and in most cases the net incomes have gone from positive, yellow, to negative, red, and it varies depending on where you are. In Area 34, which is the largest fishing area in southwest Nova Scotia, incomes have dropped substantially as a consequence of the price and revenue changes.

The anomaly, that area between 28 and 32, is the huge increase in landings after 2004. This is the area around Canso, Chedabucto Bay. I am not clear why it has occurred, but it is an anomaly. This is a huge increase, and this is an area with typically very low landings, a weak economy, a few thousand pounds per boat, so they have done well in the last several years, despite the price declines and despite the exchange rate drop.

This just shows product prices and what has happened. The process products, the yellow line is five-to six-ounce tails; the red line is a two-pound, just a meat pack, claw knuckle pack. As you can see, again, since 2002, the exchange rate declined. Those prices have dropped. They dropped precipitously after 2008 once the recession took hold. Similarly, there has been a steady decline in the export price of live lobster.

This slide shows us where our lobster goes — 80 per cent goes to the U.S., roughly 9 per cent to the EU, 10 per cent to Asia, and less than 1 per cent to other countries. If there is a bright spot here, it is that China has increased its imports of Canadian lobster. They virtually doubled in the last year or so, but it is still only a fraction of that billion-dollar market. It is about $20 million, but there is huge growth potential there. There are many in the industry, you mentioned Stewart Lamont earlier, and he is a major exporter into China. These are small companies. There are many small companies in this industry, and that in itself is an issue, as we will see in a moment.

Very simply, exports back in 2002 where production had been about 50-50, live product and processed product, it is now 60-40, that 60 per cent is processed and only about 40 per cent is live trade.

If you want to look at these details, by all means do. This just simply shows the breakdown of that export dollar, in whose pocket it goes — retailers, distributors, shippers, buyer and harvesters — but I will not go into that detail because it is more than we need, and this is for processed lobster, the same thing. If you have specific questions about that, I will be happy to answer them, but it is perhaps more detail than we need.

This chart shows you the same information, the export price and the share of that price that accrues to harvesters, to fishermen, and as I said, it is about 70 per cent to 80 per cent of the export price, and that is pretty consistent over the last 20 years.

I have used the term in the lobster report that it is an industry that is structured to underperform. By that I mean it does not extract the maximum value from the resource. There is money left on the table because of wastage, because of poor quality, because of the fragmentation of the industry, the difficulty of dealing with large distributors. There are a number of issues that the industry faces, both on the harvesting and the shipping and the processing sectors. Some problems are the way supply comes ashore, the difficulty of maintaining quality, in whose hands the lobster falls, et cetera, so it is an industry that could be extracting more, but there are structural issues at work to prevent that.

This slide is not lobster; this is salmon. I have this chart here to show that, as you can see, in the decade from 1992 to about 2002 there was a steady decline in the global price of farmed salmon, and that is because the industry was geared to produce volume. It produced, and it was a production-driven industry. It had not developed the real marketing capability to make sure that that production was absorbed effectively in the markets, and as a consequence, price just kept on falling.

It went from $8 a kilo down to about $3 a kilo at its bottom. Over that period, there were all kinds of bankruptcies and consolidation of the industry. In the late 1980s, there were about 100 independent salmon companies producing in British Columbia and about 40 in New Brunswick. Today there are 4 in each of those provinces.

In British Columbia the four are Norwegian, and in New Brunswick the four are New Brunswick companies. However, this represents the consolidation that took place. They were cutting each other off at the knees trying to buy market share. After that consolidation and with improved marketing, you can see what happened to price. It began to increase against the backdrop of a doubling of total production over that period from about 1 million to about 2 million tonnes.

Therefore, it is possible to take hold of an industry and do something with it if the structure is right. I do not think we are going to see the same kind of structural change in the lobster industry; it does not lend itself to that. Nonetheless, it is an example of what can happen with the right circumstances.

What are the challenges? Getting the structure of the industry right — there are details there — what that means, and establishing the brand. We would have no quality standards of lobster in this country, none. Therefore, it is very difficult to brand without those standards to indicate what this brand stands for, when, and what supports it.

Getting the right product to the right market. One of the things with exchange rates is that when they go tumbling, everyone is scrambling to find the next market, where can you make that margin. It is a real challenge.

Improving the terms of trade. By that I mean we have a fragmented industry, hundreds of shippers competing for the same markets, and they undercut each other regularly. Same with processers — they undercut each other regularly trying to get market share. I think a more consolidated approach and a more coordinated approach would change those terms of trade.

The distributors in most countries are getting bigger and bigger. The grocery chains and retailers are getting bigger. It is difficult. It is easy for them to play one shipper or one processor against another.

What do we focus on that we can influence? We can influence supply and we can also influence demand through marketing, advertising and brand development. Quality and timing are both within the hands of the industry. Quality is certainly making sure that the fish is caught at a time when it is at its best quality and held so that the quality does not deteriorate.

With marketing and selling, a lot of companies simply sell their product. They just put it on the market, off it goes. There is no attempt to look for the best markets. It is just a matter of trying to turn a dollar, and that is a cash flow constraint. That is a real problem, but the structure of the industry contributes to that.

We cannot influence exchange rates. We cannot influence the substitutes for lobster, shrimp and so on that restaurants put on their menus when lobster prices increase, nor can we influence the market structure. We have to recognize that those are issues and try to deal with them with the levers that we do control.

This is a picture of my son on a lobster fishing trip a couple of years ago. He likes lobster and he likes to catch it, so he is both supply and demand.

I would be happy to answer any questions that anyone has.

The Chair: Thank you very much. That was very interesting with a lot of points. There is certainly some great information for us.

Could you touch for a moment on the structure? You made a comment almost as you finished of why we would not see the same type of change in the lobster industry as we would in the salmon industry, but you did not elaborate. Could you touch on that a bit more?

Mr. Gardner: Sure. The global salmon industry now is a handful of companies dealing with a handful of major distributors and retailers internationally. There is equality in the bargaining strength and how you set prices. There is still price competition, but there is also non-price competition, how we deliver and how we serve our customers and our clients.

In the lobster industry in the Atlantic region and Quebec, there are about 10,000 independent harvesters. Not four or eight companies producing, but 10,000 independent companies fishing at different times of the year. You have hundreds of buyers and shippers of live product and about 30 or so significant processors of product.

The industry is fragmented. It looks a lot like the salmon industry did, even more fragmented, 20 years ago. The challenge is how to get these groups — harvesters, shippers and processors — to work in a more coordinated fashion. At this point, they are at each other's throats; there is no trust in the industry and there is no mechanism for gaining the value that is lost because of either quality deterioration or bargaining strength in international markets.

We are our own worst enemies when it comes to marketing this product. It is a tremendous resource, but we do not do a great job at marketing it. Part of that is just the structure of the industry.

The Chair: One more before we go to Senator Greene. You talked about the increase in supply and said there are some major numbers there when you look at the past 10 years or so.

Mr. Gardner: Yes.

The Chair: Did you sense any fear of overfishing of the supply?

Mr. Gardner: The Fisheries Resource Conservation Council, which I think has been terminated at this point, produced a wonderful report, I guess it would be about four years ago now, on the lobster industry. They expressed concern, as did some scientists, about the exploitation rates in some areas. By ``exploitation rates,'' I think they simply mean the proportion of the legal-sized biomass that is harvested in any given year. There are numbers in the 70 per cent to 80 per cent range in some areas. That is always a concern.

Years ago, Minister Anderson took a number of steps to try to improve the chances of a sustainable industry should there be adverse environmental conditions. One of the big problems now is that scientists are unable to explain why abundance has increased as much as it has. Broad-scale environmental change is presumably the answer. The absence of predators, cod and other groundfish is also a contributing factor. We are not really sure why lobster catches have gone up so much.

A third factor is increased fishing effort because as prices have come down, fishermen try to catch more to maintain their revenues. That is contributing to any resource abundance issues that may occur as we go forward.

The answer to your question is that I do not think the research is clear enough to know where that exploitation rate is and whether it is essentially a recruitment fishery; in other words, as soon as the animals are large enough, they are caught, which could certainly be an issue for sustainability were there to be a change in environmental conditions.

The Chair: I want to apologize for the jack hammering that you can hear outside. We are supposed to be advised of work that is ongoing, but we have not been this evening. I apologize to the committee members and to our witness, but there is nothing we can do about it at this point.

Senator Greene: Thank you. I have a couple of questions. On the harvesting side, with regard to the structure of the industry and that chart you had up before, could you outline a couple of very specific things that you think ought to be considered on the harvesting side that would deal with the structure of the industry and make it more rational that are within the capability of the federal government?

Mr. Gardner: One thing that has been suggested within the last year is to do away with the fleet separation policy, the owner-operator policy. For those who are not aware of what that means, only those who hold a fishing licence may own and operate a boat; you cannot have a fish plant or a processing plant actually owning the licence and running the boat.

One of the implications of that is that anyone who has substantial investment in processing or holding facilities — not just for lobster but for a number of other species — has no guarantee that they will get any supply of raw material. The only thing they can do is try to secure that through whatever mechanisms they can.

You have to pay top dollar, that is a given, but people supply bait, ice on loading facilities; they take care of employment insurance, taxation, filling out the forms and so on. They provide a number of services in order to secure that supply. Sometimes it works, but as soon as you deviate from the going price you lose that boat no matter what occurs. Insecurity of supply is an issue, and that is largely because of the independence of the buying sector and the harvesting sector.

That said, let us be clear: Trying to tamper with that to change it is very unpopular within the fishing industry, at least on the harvesting side. There have been some noises about that over the years, but there has been no action because it would just be such an unpopular activity.

Senator Greene: The fact that you named that one first means that it would be a very important thing to do if it could be done and that it is very difficult to change the structure of the industry in any meaningful way to create a viable lobster industry, one that does not have to be bought back every couple of years without that.

Mr. Gardner: I am not convinced that that is essential to running a viable and vibrant industry. In fact, I think there are a number of indications that even if licences were held by processing companies or by shippers, they would not behave in exactly the manner as the fishermen do, and that is to maximize their catches and share because, after all, it is a competitive fishery.

Competition is the incentive that gets you taking as much as you can, harvesting as fast as you can. How do you deal with that? We have dealt with that in Canada in all kinds of fisheries by introducing quotas. There could be boat quotas, in other words a fixed amount per boat, or they could be tradeable quotas, and those exist on the West Coast and in a number of fisheries on the East Coast. Again, lobster fishermen, not all but many, are opposed to quotas. The department really is not interested in pursuing that. There are technical issues around being able to set a quota, but I do not think that is the issue.

Senator Greene: Tradeable quotas, ITQs or enterprise allocations, however you want to describe them — there has always been resistance initially in the fishery wherever they have been introduced, but there has never been a fishery that has given up on them once they have been. It strikes me that a lot of work needs to be done in that area. How you would devise tradeable quota when you have no quotas globally is difficult, but it might be based on traps; I do not know.

Mr. Gardner: There are a number of technical ways of addressing that kind of rationalization mechanism. I think there is a real issue in a number of the fishing areas that there are too many vessels in the fishery and it is very difficult for individuals to make a decent living.

There are a number of mechanisms but, even without any of those, a better relationship between harvesters and shippers would improve immeasurably the state of the industry. That has been an intractable problem because there are suspicions and lack of trust. Even being able to rely on getting the right price, as it were, or you are offering the right price and accepting it, moving your product into better storage facilities, for example, would make a huge difference.

Senator Cordy: Thank you for your presentation. You spoke about things that we can influence and things we cannot, and I guess we can leave those things alone. However, let us look at the things we can influence. Senator Greene touched on many of them, such as supply and demand and whether we have quotas or shorter seasons or whatever.

Human nature is such that if you are not getting the amount of money that you got five years ago for your product, for each individual pound of lobster, then you will try to increase the supply that you are fishing. That is human nature.

You certainly see in Nova Scotia all the trucks parked by the side of the road in December, and around Christmas lobster is $5 a pound. That was unheard of even 10 years ago in Nova Scotia. You tie that to the marketing and selling or the quality of the lobsters we are getting.

Where do we start? Where do we start in terms of making it a viable industry? We saw the people in southwest Nova Scotia whose incomes have dropped. They are not making any money, basically. You are seeing them in the minus area. Where do we start? You understand the human nature of people fishing more because they are not getting as much per pound. Who steps in to say you have to maintain the amount you were fishing ten or five years ago, and how do we work together? Right now are the four Atlantic provinces, Quebec and the federal government sitting down together to say how do we fix the problem, along with industry?

Mr. Gardner: There are a lot of questions there. What I am hearing is, ``Where do we start?'' I think one of the issues common to all areas pretty much in the Atlantic region is the rate at which the resource comes ashore once the season opens. You will see in southwest Nova Scotia, in the next 10 days I think it is roughly, when the season opens, the boats will be fishing 24 hours, double hauls, two crews. Not all of them but many of them, the larger ones, will not come ashore until the holds are full. Some of them have washers and dryers on the vessels now, and these are 45- or 50-foot boats. They are not huge, but very wide.

Slowing down the supply would be one approach, even if it is just the early part of the season. The harvest is about double what the market wants at that time of year. What happens to it? The best place to leave those lobsters is on the bottom of the sea, but they come ashore. Fishermen hold them in their cars; they are holding things off the side of a wharf and so on. These are not good holding facilities.

Last year in particular, literally millions of pounds were destroyed because there was too much volume, poor quality to begin with; they could not hold it and they tried to hold it. A lot of it went to processing in New Brunswick. It really is an embarrassment, as Canadians, to see this kind of wastage of this resource. Part of that is a timing issue, when in the season the fishery occurs, and part of it is the transaction, how to get the lobster out of the boat and into the hands of someone who knows how to hold it. That is not occurring. It occurs some, but a large percentage of the catch in southwest Nova Scotia is held by fishermen because they expect that if they hold it the price will go up. Sometimes it does; sometimes it goes the other way. They miss the boat, as it were, for the market.

Slowing down the supply, gaining some control, getting that supply into the hands of shippers or processors who can do something with it — both of those factors would contribute.

Controlling the supply is done in other fisheries. It has been done in Prince Edward Island with the processing sector when they said we cannot take any more than 500 pounds a boat per day. There are ways of introducing this kind of discipline, but from a market standpoint, or from an economic standpoint, one of the interesting things is that price plays no role as a signal to either increase or decrease supply. It does not. As soon as the season opens everybody goes fishing. It is not for a week to 10 days before people know what the price is. It seems to be chaotic, but it is chaotic every year. People are comfortable with that level of chaos; some even thrive on it.

There is loss through wastage and a loss of value, and those are the important things we have to keep in mind.

Senator Cordy: If we look at marketing and the quality, what do we have in terms of quality other than a lobster has to be a certain size? Are there any other criteria for taking a lobster from the ocean?

Mr. Gardner: The only other constraint is that fishermen are not permitted to take females that have eggs.

Senator Cordy: I forgot about that.

Mr. Gardner: Otherwise we have fisheries open, I am sad to say, in Atlantic Canada, where it is guaranteed the quality is going to be poor for much of the season. The timing is just all wrong, but that is an historical artifact; that is when the season is. Getting rid of that season, altering it somehow, would make a huge difference, but there is a reluctance to do that because that is the way it is.

You could alter the number of traps that are set as a mechanism for adjusting the timing of supply. Any number of measures could be taken, but when you have seen these kinds of prices, how things have slid and how the incomes have changed, no one wants to hear about doing anything that will compromise the ability to earn income.

Senator Cordy: Canso was an anomaly when you showed that slide. The amount of money people were making was significantly higher than it was a few years ago, and certainly significantly higher than any other region in the Atlantic or on the East Coast. Did they do anything differently or is it just an anomaly?

Mr. Gardner: It is an anomaly. It is just environmental change. I do not think anyone really knows why that occurred there, except the conditions were good for egg production and survival and recruitment to the fishery. That is a series of events over a period of years. There is a huge crop.

Senator Raine: Thank you very much for your information. I am not familiar with the lobster industry, and I just cannot fathom how a boat comes in full of lobster and looks for someone to buy it. They do not have any pre-arranged signal? That is bizarre and I cannot imagine it.

Mr. Gardner: It is not quite like that. They have buyers, but they are also prepared to move to another buyer if someone offers them more. That is the thing. There are people on the wharf who will buy the lobster, but the buyers try to develop relationships with individual boats. However, it is an intensely competitive environment, and you can see that reflected in the way the price moves. As soon as there is an increase in the export price, prices will jump up.

There have been attempts — and some of the senators will be familiar with these — to try to influence prices with some of the major shippers and buyers getting together and saying we are not paying more than $4 or $5 a pound. It does not work. The competition is too intense despite the many efforts. These efforts by themselves have caused fishermen to be very suspicious of whether they are getting the truth or not. If you look at the difference between the wholesale and shore price, there is no question they are getting the better of the deal.

Senator Raine: The buyers are at the wharf buying X number of pounds of lobster. They then have to go and sell that lobster and they do not know what they will get on that side?

Mr. Gardner: That is one of the enduring mysteries of the industry. That is why you have so many sellers simply flipping it to whomever they can get to buy it, primarily in the United States. It cuts both ways. Very few shippers — and these are people who deal in live lobster — know in advance how much lobster they will get on any given day or week. Their customers are asking for this much lobster at such and such a price. The shipper can say, ``I will try to get that for you, but I am not sure what the price will be.'' In other words, the nature of the industry defeats itself in some ways in trying to engage in developing long-term relationships with customers as you move down the value chain.

Senator Raine: Has there been any discussion of saying this will be our base price and we will split anything above that that we get on export with the fisher?

Mr. Gardner: You have probably read the report that suggested this as one mechanism. That is an excellent suggestion. Some of the shippers are experimenting with this.

Senator Raine: If you did that, you would develop relationships.

Mr. Gardner: The challenge is making sure that the fishermen or the person selling you that lobster accepts that that is the price. I am getting this base price and as long as we get an honest split with the balance, the difference on the selling price, we are happy to play ball.

Senator Raine: If you were going to do that kind of a partnership, it would behoove everyone to work together in marketing it and creating a Canadian lobster brand that is superior to the southern lobster that do not have the pristine, cool water we do, or whatever we want to make up. If we want to get more money at the consumer level for our lobsters, we must create a demand for them.

Mr. Gardner: You are absolutely right. The diagnosis is spot on. That is one avenue that the industry wants to explore, or at least people in the industry want to explore it. However, there are so many moving parts and so much distrust that reaching a point where that objective you describe becomes a reality is a real challenge.

Senator Raine: Obviously when we had a very favourable exchange rate and the economy was not stressed, we could have an inefficient system and get away with it.

Mr. Gardner: Yes.

Senator Raine: Now that it is tough out there, it is a perfect time to fix it. I guess my caution would be if there is ever any thought of the government bailing out the lobster fishermen or any part of the chain, it would not be conducive to changing things.

Mr. Gardner: Again, you are absolutely right. Even though there is a crisis in the industry, and has been for the last couple of years, people know what they know and are reluctant to be too adventuresome in trying something different, surprising as that may seem. There is a great deal of inertia. As I said, some shippers are trying to develop those kinds of relationships, more of a partnership. I think that is the way to proceed.

The trouble with that is — and there is no trouble with that — if I, as a shipper, pay you a little bit more as part of our deal, I may attract some other boats. As soon as word of that gets around, everyone in the business is going to be forced to pay that same price. If you look around the region for the same size lobster — a pound and a half or whatever — virtually everyone is paying the same price. There is no incentive to do any better, to improve quality, because you will always find someone to buy that lobster, regardless of its quality, at that going shore price.

There are ways of establishing quality standards, where they will attract a different price. The Lobster Council of Canada is embarking on this path to try to develop those standards and have the industry accept them. Hopefully, they will be reflected in a difference in price because that is the only thing that will make a difference to improve the quality.

Senator Raine: You mentioned in the report about some pilot projects. Would this be a project where you put together the fisher and the seller or shipper together?.

Mr. Gardner: Yes. The ideal shipper is one who has his or her own holding facilities, a good tank storage with 2 million or 3 million pounds of storage. Then you can take the lobster out of the water and hold it for two or three months in excellent conditions. However, if the lobster fisherman is holding on to it in his own gear, the water temperature is fluctuating and conditions are poor. It is just not going to work. That is the way it works now, particularly in southwest Nova Scotia.

Senator Raine: If you have a situation like that, do they still have the split? I was quite surprised to see that. I think you said up to 75 per cent or 80 per cent of the U.S. wholesale price goes to the harvester.

Mr. Gardner: That is right.

Senator Raine: Out of the 20 per cent that goes to the wholesaler, do they have to pay for the cost of the storage?

Mr. Gardner: Yes, they pay for everything out of that. The buyer, who is a middle person, is getting 60 cents to 70 cents per pound for the purchases they make. Many people have a vested interest in holding on to what they have, so the competition is pretty fierce for the lobster when it comes ashore.

Senator Raine: If the price goes up $1, everybody wins.

Mr. Gardner: Everybody wins, absolutely. The challenge is to make it evident to the industry to accept that everybody wins. However, looking at that chart, fishermen see in the narrow gap that when it goes up, it is great for us but when it goes down, we are the ones who wear it. The point is that the margin is about the same on the up and on the down, and the competitive conditions ensure that that is the case.

Senator Enverga: I see that your best model for lobster is sort of like the salmon farming model. Has any lobster farming been done before?

Mr. Gardner: No, it has defied any kind of husbandry at all.

The other thing is that supply is not the problem. It is abundant in its natural environment, so the challenge of trying to make an economic case for farming it would be very difficult, I think.

Senator Enverga: I would say that the price is a reflection of the peaks and valleys of supply and demand. Is that right?

Mr. Gardner: Yes.

Senator Enverga: If we ever had an even supply of lobster, would it affect the price? Would there still be peaks and valleys? Would it affect the whole market?

Mr. Gardner: We can see the price variation over the year in response to supply and demand. I have no doubt that if supply suddenly started to go down, you would see prices start to rise, for sure.

Senator Enverga: If the supply operates on a level field, would it make our industry better? Would it control the prices?

Mr. Gardner: Given the way the industry runs now with seasons spread around, you will not get that evenness throughout the year. However, good holding facilities can compensate for that. That is the mechanism for smoothing out the catch from the sharp peaks so that it is available to the market when and as the market wants it.

Senator Enverga: We need good holding facilities for each one of the harvesters.

Mr. Gardner: At the moment, although I do not know the exact number, there might be 12 million to 15 million pounds of holding capacity in southwest Nova Scotia. It is a huge holding capacity. The challenge is to get the lobster when it is in the trap out of the fisherman's hands and into those holding facilities. Lobster fishermen in that part of the region want to hold on to their lobsters to try to force the price up.

Senator Enverga: Would it be wise to have these holding facilities scattered throughout the Maritimes?

Mr. Gardner: It depends. In the Gulf of St. Lawrence, there is a large processing industry. They process mainly the smaller lobsters but increasingly the lobsters that could be sold on the live market. Water conditions and water temperatures in that part of the province are too warm, particularly at that time of year. It would be difficult to make it feasible to invest in holding facilities, in part because of the challenge and in part because of the product mix and that so much of it is processed as soon as it is landed. The issue is not quite the same as it is in the rest of the region.

Senator Enverga: Since the investment is so high for small harvesters, would it even out the industry if the government provided holding facilities?

Mr. Gardner: One of the problems with the industry is that over the years there has been too much government money. It has not been so much federal money, but the provinces are anxious to keep processing companies afloat. Prince Edward Island is a classic example. The provincial government there has lost tens of millions of dollars because of subsidies to its processing plants. The trouble is that when a processing plant goes bankrupt, someone else is there to buy it at 10 cents or 20 cents on the dollar. That simply forces up the price for everybody because that new company has more resources to work with. I am not convinced that investing government money is the wise thing to do.

Senator Enverga: Perhaps the government is putting money in the wrong place and should invest in storage facilities. Would that work?

Mr. Gardner: As I say, there is a lot of storage capability. It is not throughout the region, but it is in the region that needs it most. The trouble is getting the lobster into those good storage facilities. That is the challenge.

Senator Enverga: The challenge is to get storage facilities, right?

Mr. Gardner: Getting the lobster into the facilities is the challenge. We do not need more facilities.

Senator Enverga: If we had more storage facilities, would it be better?

Senator Raine: You have to get the lobster fisherman to put it in the storage. He wants to put it in his own fridge, or whatever.

Mr. Gardner: It introduces poor quality — let us put it that way — when fishermen hold on to their own catches. They have to get them into the hands of shippers who can put them into good storage facilities. That has been a huge problem in southwest Nova Scotia. In other parts of the region, it is a lesser issue in part because of the demand-supply balance. Still, the real challenge is to get that into the market in the best shape possible.

Senator Enverga: Thank you.

The Chair: I want to talk to you about one of the slides. There is always a concern in the fishing industry. I come from Newfoundland and Labrador. You touched on the trust factor several times tonight. There has always been mistrust between the harvester and the processer in all aspects of the industry. On consolidation, you mentioned the number of processers years ago and the number today with four on the West Coast and four in New Brunswick, for example. There is always a concern about consolidation from the harvesting point of view for the simple reason of driving down the price.

Your slide showed an increase in price, to a point, from 1992 to 2012, and then it kind of petered out. I realize that the exchange rate and other factors had issues with the price. Can you touch on the fact of consolidation and the fear out there among the harvesters that consolidation of the processing would drive the price down? That is not only for the lobster fishery but pretty well every fishery.

Mr. Gardner: At present, there are approximately 25 to 30 processing plants in the Atlantic region and Quebec. They operate completely independently. A small group in New Brunswick is affiliated with a marketing organization that has strong ties with the major buyers like Darden Restaurants, Inc. in the United States, which has the Red Lobster chain. There are always concerns and suspicions that if you get enough consolidation of power, that organization will try to influence the price and keep the price down.

There has been no evidence that ``cartelization,'' let us call it, has actually occurred. Certainly, there is no evidence that it has actually worked, if there has been any attempt to form a buying cartel. There are too many companies anxious to get hold of the raw material; and the same kind of price relationship that we have seen with live occurs on the process side as well.

Here it is important to understand the structure of the industry again, because just as it is with shrimp in Newfoundland, crab in Newfoundland and crab elsewhere in the region, so it is with lobster processing. The industry has enough capacity to process all the lobster that comes ashore in the busiest week of the season, and then the rest of the year it is relatively idle, whether it is at 90 per cent, 80 per cent, 50 per cent or shut down. The average utilization is well below the peak. If I am a company and I want to keep my plant going, want to hold on to my workers and so on, I will continue to bid up the price of lobster to make sure I get that supply. I will try to steal your boats and your boats, and so on, if I can. This occurs all the time.

This is partly a function of the way the seasons are, so there is a May-June, huge fishery in the gulf in May and June. That supplies those plants. There is another one in the fall, in September, but a lot of that lobster now comes from Maine to supply those plants so they get as much of the year as possible to operate.

However, it is a volume business, and everybody knows that if I have overheads to meet I will keep on buying more lobster in those off-peak times to make sure that I have as much coverage of my overheads as possible. That will keep the price up. It will make consolidation difficult. All these plants, as I said, are independent. Some work through a marketing company, but by and large the competition is so strong that those prices keep on getting bid up.

Senator Chaput: I found your presentation quite interesting, sir. I do not know much about lobster fishing. All I know is that I love eating lobster; that is for sure.

You have said that lessons learned from salmon cannot really apply to lobsters. By what you have told us tonight, I think I can say that lobster fishing at the present time has always been done this way. It is kind of a historical way of life. It is even a tradition, right?

Mr. Gardner: Yes.

Senator Chaput: We are dealing with that. Lobster fishing is also a critical component of our economy. We have quality lobster in Canada if it is well done, right?

Mr. Gardner: Yes.

Senator Chaput: This slide here says ``focus on what we can influence.'' Who is the ``we''?

Mr. Gardner: We the industry.

Senator Chaput: The industry?

Mr. Gardner: The industry collectively, yes.

Senator Chaput: Is the biggest challenge the industry faces getting the harvesters to look at and accept a different way of fishing? Different means? Different ways? What is the biggest challenge that faces the industry?

Mr. Gardner: I think the biggest challenge is getting the two major parts of the industry, let us call them the harvesters and the shippers or the processers, to work in a way that is more coordinated. Right now, there is internal competition. Even though there is a principle out there that you never want to kill the cow you are trying to milk, often the industry acts as though it is trying to do precisely that. You are trying to extract the last penny from the other side. When it withholds product from the market, it does not allow people to get into the kinds of longer-term arrangements that they could or they might be able to, and then it is self-defeating. The kind of competition that occurs is self-defeating. It reduces the value of the product.

Senator Chaput: Is that understood by them?

Mr. Gardner: I think grudgingly people understand it, but how to change those ingrained habits, the culture, the mistrust, is one of the intractable problems at the moment in the industry.

Senator Chaput: Would one of the solutions be to impose things on them, like a supply and demand, or whatever, an imposition of quotas?

Mr. Gardner: You mean like a supply management?

Senator Chaput: Yes.

Mr. Gardner: There are quotas in a number of products that we produce in Canada. They have implications, but the fishing industry has had quotas. I think lobster may be one of the last species that does not fish according to quota. Whether that is a global quota or whether it is individual quotas or individual tradeable quotas, there are different ways of doing this, but it is one of the last fisheries that are run in a competitive fashion like that.

Senator Chaput: I guess the industry has been holding discussions with the harvesters?

Mr. Gardner: It does, and the harvesters have discussions on their own. I think, to their credit, the management board in Area 34, the big fishing area — I have had discussions with them as well — is saying, look, what if we do this, what if we do this, what if we try that, but there has to be a vote and there has to be an agreement amongst the members that they are going to try something different. There has been an initiative at least to try cutting back on the number of traps, adjusting the timing of the season, and so on, in an attempt to extract that value, but so far those things have been overruled. In some other areas, the fishermen have agreed to cut back on this or to try that, increase the carapace size, or whatever, and it is working.

Senator Chaput: Thank you.

Senator Raine: It is a very complicated system, obviously, and there has been a lot of independence on both sides. I can understand how a lobster fisherman or harvester goes out and he just wants to get to a certain amount of money, whether he has to bring twice as many lobsters or half as many. He needs to pay his mortgage and his boat and whatever.

Mr. Gardner: Yes.

Senator Raine: On the shipping side of things, there must be some economies of scale where if they did not have sort of a glut, and if they could even that out somehow, it would work better for them. Is there not some way they could work on that basis so that the two partners can get together? Who sets the timetable of the season?

Mr. Gardner: That is done by Department of Fisheries. Those seasons have not changed in decades.

Senator Raine: Why are they the way they are? Is it part of the life cycle of the lobster?

Mr. Gardner: Part of that is an important factor. You want to avoid harvesting in the period when they are just moulting or during mating, but it is mainly the post-moult period that you want to avoid because they are soft shelled and the quality is poor.

Senator Raine: You have to have it pre-moult or later?

Mr. Gardner: As soon as you start to head into that moulting period the quality begins to deteriorate. July in the Gulf of St. Lawrence is not the time to have a lobster fishery. There are still areas in Cape Breton where July is okay, but August is not. All the other seasons are closed at the end of May around Nova Scotia. It is really May, June and a bit in the fall in one area in the Gulf of St. Lawrence, and then in the Bay of Fundy it is mainly a fall fishery, broken into two periods. We try to avoid the bad times from a quality standpoint.

Senator Raine: The actual season is set by the geographic location and the quality of the product?

Mr. Gardner: That is right. It is the life cycle of the animal, but also it complements the U.S. The U.S. fishes at exactly the worst time from a quality standpoint because they fish in that July-August period, but that is because the industry was based largely on the demand from tourism. People have grown accustomed to so-called shedders, these soft-shell lobsters, so that is when they fish. The trouble is that the catches have grown so high that that market cannot nearly take all the supply, which is why Canadian processers have benefited. The surplus is exported.

Senator Raine: We have a lot more processers in Canada than they do in the U.S. Are ours smaller? I see we have 25 to 30 and they have 4 to 5.

Mr. Gardner: That is right, and they are relatively small in the U.S.

Senator Raine: Do they like to ship their lobster up to us to process?

Mr. Gardner: There used to be a large canning industry in the U.S., as there was in Atlantic Canada, but once refrigeration came along and fresh markets developed, that industry disappeared. One of the difficulties now is that given the short season that occurs in New England, it would be difficult given the economic and let us call it the safety net, the social safety net that exists in the U.S., or you would be hard-pressed to run a business for two or maybe three months and still be able to get workers, and many of those small communities are really very, very small.

Our environment allows us to sustain an industry that in different circumstances with a more porous or a wider safety net we would be hard-pressed to get workers in those plants.

Senator Raine: Does our unemployment insurance play a role in that?

Mr. Gardner: Of course, sure.

Senator Raine: Is that a positive?

Mr. Gardner: Well, it keeps communities whole. There are so many sides to that question. Is there a Senate committee on employment insurance?

Senator Raine: I think our fishermen do tend to fish a lot more than just one species.

Mr. Gardner: Yes, but at this point it is difficult to find enough fisheries for all the fishermen who want to fish because the groundfish stocks have virtually disappeared on the East Coast.

Senator Raine: We know all about the seals.

Mr. Gardner: The seals are not the culprit as far as eating fish is concerned. They are certainly not the solution. That is a different story, but at best these days a fisherman would have maybe two licences that he can really fish, and so lobster and maybe herring, possibly lobster and crab, maybe some scallop if you are in a different area. There are not that many options; let us put it that way.

Senator Raine: Thank you.

The Chair: Thank you, Senator Raine.

It has been an interesting evening. There has been a fair amount of information presented here that we will certainly absorb over the next little while. We are planning a trip to Moncton at the end of next week to hear from people throughout Atlantic Canada and Quebec, and I am sure that some of the things you have laid before us today will bring forward some questions to the people that we will have as witnesses there. You have raised a variety of concerns. There are great opportunities here, but there are many challenges also.

Mr. Gardner: Yes.

The Chair: Certainly we thank you very much for your presentation and answers to the many questions that were asked here this evening.

As always, we reserve the right to seek information from you again if we need it to go forward with our study.

Mr. Gardner: Certainly.

The Chair: The information you have brought forward has been a great tool here this evening, so thank you for making your presentation.

Mr. Gardner: It was a pleasure, thank you.

The Chair: Honourable senators, next week we will be hearing from the representatives of the Atlantic Canada Opportunities Agency. Representatives of ACOA will provide information on other federal initiatives related to the sustainability of the lobster fishery, so I look forward to seeing you all again. Thank you very much. The meeting is adjourned.

(The committee adjourned.)

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