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Globalization and commoditization: The transformation of the seafood market
Accepted Manuscript Globalization and commoditization: The transformation of the seafood market James L. Anderson, Frank Asche, Taryn Garlock
PII:
S2405-8513(17)30227-1
DOI:
10.1016/j.jcomm.2017.12.004
Reference:
JCOMM 48
To appear in:
Journal of Commodity Markets
Received Date: 9 November 2017 Revised Date:
23 November 2017
Accepted Date: 20 December 2017
Please cite this article as: Anderson, J.L., Asche, F., Garlock, T., Globalization and commoditization: The transformation of the seafood market, Journal of Commodity Markets (2018), doi: 10.1016/ j.jcomm.2017.12.004. This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
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By
Frank Aschea,c and
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Taryn Garlocka
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James L. Andersona,b,
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Globalization and Commoditization: The Transformation of the Seafood Market*
Abstract
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The seafood market has changed dramatically in recent decades. Increased trade has created a global market for groups of species with similar characteristics, and the number of species that are becoming part of these global market segments continue to grow. Increased trade and stagnating landings of wild fish has also facilitated the rapid growth of the aquaculture industry and made it the world´s fastest growing food production technology. The growth in aquaculture has been sufficient to also increase the per capita consumption of seafood globally. These two factors have allowed scale, modern logistics and marketing practices to be used also for seafood, increasingly commoditizing the main species groups.
Institute for Sustainable Food Systems, University of Florida Food and Resource Economics Department, University of Florida c School of Forest Resources and Conservation, University of Florida b
Financial support from the Norwegian Research Council and the Norwegain Fiinance Fund is acknowledged
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Abstract
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Globalization and Commoditization: The Transformation of the Seafood Market
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The seafood market has changed dramatically in recent decades. Increased trade has created a global market for groups of species with similar characteristics, and the number of species that are becoming part of these global market segments continue to grow. Increased trade and stagnating landings of wild fish has also facilitated the rapid growth of the aquaculture industry and made it the world´s fastest growing food production technology. The growth in aquaculture has been sufficient to also increase the per capita consumption of seafood globally. These two factors have allowed scale, modern logistics and marketing practices to be used also for seafood, increasingly commoditizing the main species groups.
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1. Introduction In recent decades, the seafood market has been fundamentally changed. While the traditional source for seafood, landings of wild fish, stagnated in the mid-1980s, total
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production continued to increase as a new production technology, aquaculture, became increasingly important. In addition, since the mid-1970s, seafood trade has increased by over 350% as measured by quantity as well as by real value (FAO, 2017). This rapid growth
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has made seafood the most traded major food, and combined trade with seafood is higher than for all other animal proteins (beef, chicken, pork and mutton) combined (Asche et al,
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2015). This has created global markets where there earlier were regional markets, and it has allowed toolkit of commodity markets to be used for an increasing number of seafood products.
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As seafood is increasingly sourced globally, there has been a commoditization of many important segments of the seafood market.1 A consequence is that individual species have become less important as species is becoming a less important product attribute in many
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markets. For instance, there is a whitefish market where the leading species cod is an
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attribute with some value, while lower valued species like saithe and tilapia is just whitefish (Asche et al, 2009; Bronnmann et al, 2016). Species groups have become more important, as there is an increasing degree of substitutability within many species groups, facilitating the commoditization. This has also allowed a number of technologies in production, transportation and marketing commonly used in advanced terrestrial food chains to be
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Commoditization of a market occur when the importance of product attributes that can distinguish a product disappear. Hence, commoditization is the opposite of differentiation.
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applied in the seafood sector (Asche, 2008; Kvaløy and Tveteras, 2008; Anderson et al, 2010; Larsen and Asche, 2011; Kumar and Engel, 2016; Ankamah-Yeboah et al, 2017).
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The main objectives of this paper are: 1) to show why the commoditization is so recent for seafood, 2) to discuss the primary factors that have facilitated this commoditization
process, and based on this, 3) discuss why this process is likely to continue. Doing so will
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highlight the benefits of better market organization for seafood in terms of creating
economic opportunity and contributing to food security. Bringing different strands of the
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literature together to provide a larger picture than what can be done in individual case oriented studies, will show how insights from various parts of the commodity market literature act in concert to create real change, which facilitates further development of the seafood market. The insights should also have more general interest, particularly for
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regional markets that are still poorly organized. Moreover, being so recent, the commoditization of seafood also provides a good illustration of this process and the factors that are driving it that generally receives little attention for established commodities like
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grains and oil, because it is largely taken for given.
The paper is organized as follows: First, the barriers to commoditization of seafood and why this process was so late are discussed. This is followed by an overview of seafood supply and how this has changed, highlighting the increased importance of aquaculture. The next topic addressed is the development of seafood trade, before logistics, supply chain and market development is discussed. The final section provides some concluding remarks.
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2. Why is the commoditization of seafood markets so recent? The main reason the commoditization of seafood is so recent is based on the fact that fishing is our last major hunting industry. As long as fish were treated as a common pool
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resource with no or limited management, the tragedy of the commons was allowed to play out with varying degrees of intensity (Wilen, 2006). A consequence was that supply chains remained as traditional food supply chains with a high degree of heterogeneity, where
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markets cleared at each level, and with no obligations from the supplier/seller as soon as a transaction was complete (Gobillon et al, 2016). With no or poor fisheries management,
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landings are seasonal, irregular and with little control over quality (Anderson, 2002). This made seafood a highly heterogeneous market with a number of relatively small market segments, and therefore not very susceptible to commoditization.
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This heterogeneity also led to poor capacity utilization in not only the fishery, but also at other upstream stages in the supply chain that had to be able to handle the landings in the peak season. As most large markets are in population centers, often far from the landing
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locations, conservation technologies are required and the lack thereof often led to
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substantial loss of value (Roheim et al, 2007). Finally, and the production process did not lend itself to standardization and exploitation of economies of scale to any large extent (Kvaløy and Tveteras, 2008), thereby preventing commoditization.
As fishing technologies improved stocks were fished down (Squires and Vestergaard, 2013; Gordon and Hannesson, 2015; Kvamsdal, 2016), and as the tragedy of the commons intensified the need for regulations became obvious. However, while initial regulations and
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management schemes protected stocks, they created races to fish (or Olympic fishing) with even more problematic economic incentives leading to harvest seasons in several fisheries that were measured in hours rather than days and months (Homans and Wilen, 1997;
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2005). The introduction of individual fishing quotas (IFQs) and catch share systems largely corrected this incentives problem. Fishers could then focus on maximizing the profits of their quota, rather than competing for the maximum share of the catch, and each improved
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set of management gives a new margin for fishers to optimize (Smith, 2012). Although far from all fisheries are managed by such systems, this increased control sufficiently in a
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number of fisheries to allow more efficient supply chains to develop. As such, it is not the hunting process that is the main challenge with respect to commoditization, it is the poor control with the production process that poor management systems yields (Anderson, 2002; Klinger et al, 2013), and that also determines which supply chains can be served
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(Homans and Wilen, 2005; Smith, 2012).
While improved fisheries management in a number of fisheries improved control with the
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production process, two other developments were more important in facilitating the
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commoditization of seafood markets. Improved processing and conservation technologies as well as improved logistics made the seafood market global, allowing sourcing to be used as a tool to overcome seasonality and increase efficiency and profitability. In addition, seafood from aquaculture started entering international trade in significant quantities in the 1990s, thereby adding seafood supply from a technology with much better control with the production process. In the following we will discuss how increased trade and
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aquaculture have facilitated the commoditization of the seafood market, as well as some of the more important supply chain developments.
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3. Seafood production
The availability of seafood has increased almost 9 times from 1950 to today, and it has been multiplied by a factor of 2.6 since 1970. Total production reached 167.7 million mt (metric
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tons) in 2015 (FAO, 2017). This production growth is strong enough to increase not only the total supply of seafood, but also the global per capita consumption, as per capita
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consumption of seafood passed 20kg in 2014, the highest on record (FAO, 2016).
As noted in the introduction, seafood is provided with two main production technologies fisheries and aquaculture. Until the 1970s, aquaculture was relatively unimportant as a
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source of seafood. After that, the production patterns for the two technologies have been very different, as shown in Figure 1. The left hand panel shows how fisheries landings increased until the mid 1980s, before they stabilized around 90 million mt (the mean
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landings in the period 1986-2015 is 88.7 million mt). On the other hand, fish farming was
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quite limited in 1970 with a harvested quantity of about 2.6 million metric tons representing 3.9% of the total seafood supply. Since then there has been a virtual explosion in aquaculture production and in 2015, farmed seafood made up 45.2% of the total seafood supply with a production of 75.9 million mt. Hence, aquaculture is essentially the only reason why global seafood supply has continued to increase since 1990. Moreover, it is already larger than wild fisheries as a source for food, as it made up over 50% of seafood for human consumption in 2014 since about 20 million mt of the landed fish goes to reduction
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to fishmeal and other non-food uses (FAO, 2016). It is also worthwhile to note that while there are a number of species being farmed, there are substantially fewer that are important than in fisheries, where the harvests are much more heterogeneous in terms of
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species (FAO, 2017).
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Figure 1. Global production of wild and farmed seafood Source: FAO (2017)
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Aquaculture is a technology that has its origins in ancient Egypt, China and Rome (Parker, 2011). In the 1970s, an important change took place as increased control over the
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production process facilitated an increased R&D effort, leading to a number of new aquatic production technologies and practices. To a large extent these innovations were based on knowledge from the agro-sciences; such as breeding, feed and nutrition, and as diseases became a challenge, veterinarians and disease prevention and treatment. These developments improved the competitiveness of aquaculture products for subsistence as well as a source of income, and has made aquaculture the world´s fastest growing food
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production technology in recent decades (Kumar and Engle, 2016; FAO, 2016). The control of the supply further enhanced the competitiveness of aquaculture throughout the supply chain by also facilitating product development, marketing and the use of modern logistics
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(Asche, 2008).
Aquaculture production is expected to continue to increase. The WorldBank/FAO´s Fish to
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2030 project (Kobayashi et al, 2015), estimate that aquaculture production will be 93.6 million mt in 2030, or a 50% increase from 2011. Kobayashi et al (2015) estimate an
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average annual growth rate of 2.5%. While this is lower than the growth rate has been in recent decades, it is likely to maintain aquaculture´s position as the world´s fastest growing food production technology. Moreover, it is worthwhile to point out that the most recent production numbers from FAO indicate that actual production is already higher than the
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projected path of Kobayashi et al (2015). This also highlights that here is substantial uncertainty in the estimates, and Kobayashi et al (2015) provides projections for six different scenarios to highlight some of this uncertainty. The projections in the various
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scenarios vary from 90.7 million mt to 116.2 million mt. A notable feature of these
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outcomes is that the most likely estimate at 93.6 million mt is much closer to the most negative scenario than the most positive scenarios. Hence, the distribution of estimates is skewed, indicating a larger upside potential than downside potential. It is also important to note that the growth is uneven between countries and regions, and that production in Africa will continue to be limited. The main demand driver for increased demand for aquaculture products is economic growth and the associated higher incomes, while population growth is substantially less important.
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There are, of course, also a number of barriers to aquaculture growth, and there is a large literature focusing on the limitations, and in particular environmental effects (Abate et al,
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2016). As shown by Abate et al (2016), there are a number of species and countries where the management system directly prevents growth, or where lax management that allows diseases to thrive prevents growth. The first category, largely contains wealthy countries
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and regions like the US and EU, were aquaculture activity accordingly are limited, and were prospects for growth is even more limited (Knapp and Rubino, 2016). Hence, growth in
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aquaculture production has and continues to take place mostly in developing countries (Chu and Tudur, 2014). However, as quality of governance systems varies substantially, there are countries that mine some locations for a period, and there are also wealthy counties were aquaculture is allowed to take place like Canada and Norway (Chu et al,
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2010; Osmundsen et al, 2017).
The uncertainty with respect to how fast aquaculture production will grow do not detract
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from the main message, aquaculture production is likely to continue to grow rapidly. This is
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important for the commoditization of seafood because the increased production share from the technology where most control is exercised over the production process allows the standardization of products that facilitate the commoditization process. 4. Seafood trade
During the last 30 years, seafood trade has increased even faster than seafood production. Figure 2 shows the exported quantity from 1976, the first year when these data are available. 8
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Figure 2. Global seafood exports by quantity, 1976-2013 Source: FAO (2017)
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The increased trade has also changed the world´s seafood markets profoundly. Seafood has become the most traded food group with 36 % of production being traded in 2013 (FAO,
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2016) and 78% exposed to trade competition (Tveteras et al, 2012). The market for the main species groups have expanded to become global in the sense that there is a global
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price determination process, such as for salmon (Asche et al, 1999; Landazuri-Tveteras et al, 2017), shrimp (Vinuya, 2007; Asche et al, 2012; Pincinato and Asche, 2016), tuna (Bose and McIlgrom, 1996; Jeon et al, 2007; Jiménez-Toribio et al, 2010) and whitefish (Gordon and Hannesson, 1996; Asche et al, 2002; 2004; Nielsen, 2005; Bronnmann et al, 2016).
There are, of course, a number of factors that explain this development, which are both benefits from the commoditization and drivers of the development. Seafood is regarded as
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an industrial product by the World Trade Organization (WTO), and therefore not included among agricultural products (Asche et al, 2016). Hence, trade barriers have not been a major obstacle to trade, particularly for product forms with a limited degree of processing.2
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The increased seafood trade has been facilitated by technological innovations and improved logistics (Anderson, 2003; Anderson et al., 2010). Transportation and logistics have not only improved significantly, but also led to substantial reductions in transportation costs by
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surface and air, giving new producers and products access to the global market.
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Improved logistics and standardization of products have also allowed economies of scale to be exploited through the supply chain, and particularly in the retail sector where retail chains have replaced fishmongers and local markets as the main outlet (Murray and Fofana, 2002; Guillotreau et al, 2005). Improvements in storage and preservation technologies have
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continued, allowing a wider range of seafood products to be traded. Most importantly, freezing technology has improved to such an extent that many product forms can be frozen twice, allowing products to be processed in locations with competitive advantages in
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processing fish rather than in locations close to where the fish is caught. This has created
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seafood processing clusters, and commoditization with the global sourcing to these clusters, and increasing trade to and from them. The leading clusters are in China, but one increasingly can observe other clusters being formed with a global reach (e.g. Vietnam) and a regional reach (e.g Poland) (Zhang et al, 2014; Asche et al, 2016).
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It should be noted that the increased imports of farmed fish has created a number of trade conflicts, as indicated by the prevalence of farmed products in anti-dumping and countervailing duty cases. Not surprisingly, the two most valuable farmed species, shrimp and salmon show up most often in these cases, but a number of other species have also been involved in such cases. Kinnucan and Myrland (2002) and Keithly and Poudel (2008) provide two case studies for respectively salmon and shrimp.
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An increasing number of producers having access to the global market and who can exploit new market opportunities create increasing trade competition in exports as well as imports
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markets. For consumers who are able and willing to pay, these trends increase the available supply of seafood. Hence, the share of the imports to wealthy developed countries – such as the European Union, Japan, and the US– remains high. However, economic growth in many
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developing countries also increases demand in other markets (Kobayashi et al, 2015). As a result, there is a declining import share for developed countries despite growth in total
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values of seafood exports from developing to developed countries (Asche et al, 2015).
Asche, Roll and Trollvik (2009) provides a more detailed overview of the development of the whitefish market which well illustrates the globalization and commoditization of one of
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the most important segments of the seafood market. For centuries, the whitefish market was a regional market in the North Atlantic with cod as the leading species, and with a number of cheaper substitutes (saithe, haddock, pollock, flounders, etc.). In the 1980s it was
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realized that Alaska pollock and other Pacific whitefish species that primarily was used to
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produce surimi, also had neutral flavored white fillets and that it could be more profitable to sell these into the whitefish market. This introduced Alaska Pollock to the whitefish market, and nearly doubled the supply of whitefish. In the 1990s, the market was expanded to take whitefish from other oceans such as Argentinian and Namibian hake and New Zealand hoki. In fact, for most whitefish products, which are marketed as breaded, battered or dried salted, any white neutral flavored fillet would do. As e consequence, tropical species like Nile perch and new aquaculture species like tilapia and pangasius have become
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increasingly important. For instance, in the USA where more than 90% of the seafood is imported, tilapia is now dominating the whitefish market as shown in Figure 3. The total whitefish market is now about 15 million mt, and the traditional north Atlantic species
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makes up less than one third of this quantity. This process has created the commodity
whitefish, a commodity that is truly global being produced and consumed in all corners of
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Figure 3. U.S. Whitefish imports, 1990-2013 Source: NMFS
The increased trade has also been instrumental in creating large parts of the aquaculture industry. In particular, the two most valuable aquaculture species, shrimp and salmon, are also among the most traded species (Asche et al, 2016). Hence, it is not obvious if there is
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increased seafood trade because aquaculture production increases, or if aquaculture production increases due to the economic opportunities created by increased trade in a more global market. Either way the most important consequence of this development is
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that large volumes of similar products have become available year round, facilitating the commoditization of the seafood market.
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5. Logistics, supply chains and markets
Salmon was one of the first species for which production started to grow more rapidly to
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create the aquaculture revolution. Salmon has remained important as a species for which the growth rate is higher than for aquaculture in aggregate, but also because it is leading in a number of dimensions when it comes to technology development and organization (Asche, 2008; Smith et al, 2010; Kumar and Engle, 2016). Logistics may well be the most
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important dimension. The general trade literature show how scale reduces transportation cost and facilitates increased trade (Behar and Venables, 2012). Moreover, standardization and relation specific investments that can be justified with prolonged trade relationships
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further reduce trade costs and facilitate trade and commoditization (Kvaløy and Tveteras,
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2008; Olsson and Criddle, 2008).
Salmon aquaculture revolutionized seafood logistics and thereby the seafood market. In the mid-1980s most salmon available was wild, landed in remote coastal areas during a short season and marketed as canned or frozen as most other seafood (Knapp et al, 2007). The control with the production process in salmon aquaculture allowed farmers to plan when to and how much to harvest. This made fresh salmon a product that was available year round,
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and truck and plane became the dominant transportation modes (Straume, 2017). Moreover, since one could time the harvest, one could sell to the highest paying market segments. This rapidly created a global market, and between them, the two largest salmon
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producing countries (Norway and Chile) now export fish to more than 160 countries. Of course, other producers copied this development, and for instance Icelandic cod which comes from one of the most well managed fisheries in the world, now sell large quantities of
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cod using salmon logistics (and ironically, Norwegian cod cannot to any extent be sold this way due to poorer regulations that maintain a highly seasonal landing pattern (Pettersen
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and Myrland, 2016)).
Most traded seafood is still sold as frozen, which allows the use of the world’s shipping lanes, and it generally cost less than USD 0.50/kg to carry fish any distance on ship. With
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globalization and more countries and regions being linked to this trade network, those producers that can use this logistics system has access to the world, and the supply chains continue to develop and create new market opportunities. Among the more interesting are
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the segmentation of the US tilapia market into one fresh segment served by South American
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producers and a frozen segment served from Asia, with logistics and transportation costs as the main reason the Asian producers cannot compete in the fresh market (Norman- López and Asche, 2008; Tveteras, 2015). Hence, while generally facilitating globalization, better logistics can also contribute to market segmentation.
6. Concluding remarks
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Increasing production, primarily due to aquaculture, and increased trade during the last few decades have turned a significant part of the seafood market into a global commodity market, although segmented by the main species groups. The globalization and increased
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scale of many seafood operations have made the seafood sector and its supply chains more similar to other modern food producing sectors. For instance, the two largest producers of fish feed, Skretting and EWOS are integrated into the large feed companies NUTRECO and
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Cargill, with common strategies for research and marketing for aqua feeds and terrestrial feeds. Futures markets have been established for shrimp and salmon, although the attempts
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at shrimp futures markets in the US have failed (Martinez-Garmendia and Anderson 1999; 2001; Asche, Misund and Oglend, 2016a,b; Ankama-Yeboah et al, 2017). Contracts are increasingly important (Kvaløy and Tveteras, 2008; Larsen and Asche, 2011), and
2013).
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companies are getting larger and better able to exploit economies of scale (Asche et al,
This development is likely to continue, as aquaculture production is expected to continue to
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increase partly due to continued innovations that improves technology and reduce cost and
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partly due to increased demand caused by economic growth and higher incomes (Kobayashi et al, 2015). Moreover, there is still considerable untapped knowledge and technology used in production and trade of terrestrial food stuffs that can be transferred to seafood, increasing the scope for further productivity growth.
As in terrestrial food production systems, not all market segments will be commoditized, as some producers will be too small or remote to be a part of the larger market, and some may
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succeed in differentiating themselves from the larger market. However, the increased domination of large species groups with a high degree of substitution within the groups and an increased presence of aquaculture products from more controlled production processes
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than wild fisheries is likely to continue. This will also be helped by the fact that there are few strong seafood brands, and in markets like Germany, private labels with a high degree of flexibility in the sourcing that already dominate the market (Bronnmann and Asche,
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2016; Bronnmann et al, 2016). Hence, the commoditization of seafood is likely to continue.
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Gobillon, L., Wolff, F-C., & Guillotreau, P. (2016) The effect of buyers and sellers on fish market prices. European Review of Agricultural Economics, 44(1), 149-176. Gordon D.V. & Hannesson, R. (1996). On Prices of Fresh and Frozen Cod. Marine Resource Economics 11, 223-38. Gordon D.V. & Hannesson, R. (2015) The Norwegain Winter Herring Fishery: A Story of Technological Progress and Stock Collapse. Land Economics, 91(2), 362-385. Guillotreau, P., Le Grel, L. & Simioni, M. (2005) Price-Cost Margins and Structural Change: Sub-Contracting within the Salmon Marketing Chain. Review of Development Economics, 9, 581-597.
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Homans, F. R. and J. E. Wilen. 1997. “A Model of Regulated Open Access Resource Use.” Journal of Environmental Economics and Management 32:1-21. Homans, F.R., and J.E. Wilen. 2005. “Markets and Rent Dissipation in Regulated Open Access Fisheries.” Journal of Environmental Economics and Management 49:381-404.
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Jeon, Y., C. Reid and D. Squires (2007) Is there a global market for tunas? Policy implications for tropical tuna fisheries, Ocean Dev. Int. Law 39 (1) (2007) 32–50. Jiménez-Toribio, R., Guillotreau, P., and Mongruel, R. (2010). Global integration of European tuna markets. Progress in Oceanography, 86(1), 166-175.
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Keithly, W. R. Jr., and P. Poudel. 2008. "The Southeast U.S. Shrimp Industry: Issues Related to Trade and Antidumping Duties." Marine Resource Economics 23:459-83.
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Kinnucan, H.W. and Ø. Myrland. 2002. “The relative impact of the Norway-EU Salmon Agreement: A mid-term assessment.” Journal of Agricultural Economics 53:195-220. Klinger, D., M. Turnipseed, J. L. Anderson, F. Asche, L. Crowder, A. G. Guttormsen, B. S. Halpern, M. I. O’Connor, R. Sagarin. K. A. Selkoe, G. Shester, M. D. Smith, P. Tyedmers (2013) Moving Beyond the Fished or Farmed Dictomy, Marine Policy, 38, 369-374.
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Knapp, G., Roheim, C. A. & Anderson, J. L. (2007) The Great Salmon Run: Competition Between Wild and Farmed salmon, Washington, TRAFIC. Knapp, G., & Rubino, M. C. (2016). The political economics of marine aquaculture in the United States. Reviews in Fisheries Science and Aquaculture, 24(3), 213–229.
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Kobayashi, M., Msangi, S., Batka, M., Vannuccini, S., Dey, M. M., & Anderson, J. L. (2015). Fish to 2030: The role and opportunity for aquaculture. Aquaculture Economics & Management, 193, 282-300.
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Kumar, G. & C. Engle (2016) Technological advances that led to growth of shrimp, salmon, and tilapia farming. Reviews in Fisheries Science & Aquaculture, 24(2), 136–152. Kvaløy, O., & Tveteras, R. (2008). Cost structure and vertical integration between farming and processing. Journal of Agricultural Economics no. 59 (2):296-311. Kvamsdal, S. (2016). Technical Change as a Stocastic Trend in a Fisheries Model. Marine Resource Economics, 31, 403–419. Landazuri-Tveteraas, U., F. Asche, D.V. Gordon and Sigbjørn Tveteraas (2017) Price Transmission in French and UK Salmon Markets. Forthcomming in Aquaculture Economics and Management.
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Larsen, T. & Asche, F. (2011). Contracts in the Salmon Aquaculture Industry: An analysis of Norwegian Salmon Exports. Marine Resource Economics, 26(2): 141-150.
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Martinez-Garmendia, J. and J.L. Anderson (2001) Premiums/Discounts and Predictive Ability of the Shrimp Futures Market, Agricultural and Resource Economics Review, 30(2): 160–167. Martinez-Garmendia, J. and J.L. Anderson (1999) Hedging Performance of Shrimp Futures Contracts with Multiple Deliverable Grades, Journal of Futures Markets, 19(8): 957–990.
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Murray, A. D., and Fofana, A. (2002)."The Changing Nature of Fish Retailing." Marine Resource Economics, 17, 335-339. Nielsen, M. (2005). Price Formation and Market Integration on the European First-hand Market for Whitefish. Marine Resource Economics, 20, 185– 202.
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Norman-López, A. and F. Asche (2008) Competition between imported Tilapia and U.S. catfish in the U.S. market. Marine Resource Economics, 23, 199-214. Olsson, T.K. & Criddle, K. (2008). Industrial evolution: a case study of Chilean salmon aquaculture. Aquaculture Economics and Management, 12, 89–106.
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Osmundsen, T., P. Almklov and R. Tveterås (2017) Fish Farmers and Public Servants Coping with the Wickedness of Aquaculture. Aquaculture Economics & Management, 21(1): 163183. Parker, R.O., 2011. Aquaculture Science, 3rd edition. Cengage Learning, NY.
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Pettersen, I. K., & Myrland, Ø. (2016). A cod is a cod, but is it a Commodity? Journal of Commodity Markets. 3:70-75. Pincinato, R. and F. Asche (2016) Market Integration in Brazilian Shrimp Markets, Aquaculture Economics and Management. 20(4), 357-367.
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Roheim, C. A., Gardiner, L., & Asche, F. (2007). Value of Brands and Other Attributes : Hedonic Analysis of Retail Frozen Fish in the UK. Marine Resource Economics, 22, 239–253. Smith M.D. 2012. The New Fisheries Economics: Incentives Across Many Margins. Annual Review of Resource Economics 4:379-402. Smith, M. D., C. A. Roheim, L. B. Crowder, B. S. Halpern, M. Turnipseed, J. L. Anderson, F. Asche, L. Bourillón, A. G. Guttormsen, A. Kahn, L. A Liguori, A. McNevin, M. O’Connor, D. Squires, P. Tyedemers, C. Brownstein, K. Carden, D. H. Klinger, R. Sagarin, K. A. Selkoe (2010) Sustainability and Global Seafood, Science, 327, 784-786. Squires, D., and N. Vestergaard. 2013. “Technical Change and the Commons.” Review of
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Straume, H. M. (2017). Here today, gone tomorrow: The duration of Norwegian salmon exports. Aquaculture Economics & Management, 21, 88-104.
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Tveteras, S. (2015). Price analysis of export behavior of aquaculture producers in Honduras and Peru. Aquaculture Economics & Management, 19(1), 125–147. Tveteras, S., F. Asche, M. F. Bellemare, M. D. Smith, A. G. Guttormsen, A. Lem, K. Lien, S. Vannuccini (2012) Fish Is Food - The FAO’s Fish Price Index, PLoS ONE 7(5): e36731. doi:10.1371/journal.pone.0036731.
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Vinuya, F.D. (2007). Testing for Market Integration and the Law of One Price in World Shrimp Markets. Aquaculture Economics and Management 113:243-65.
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Wilen, J. E. (2006). Why Fisheries Management Fails: Treating Symptoms Rather Than the Cause. Bulletin of Marine Science 78(3):529-46.
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PII:
S2405-8513(17)30227-1
DOI:
10.1016/j.jcomm.2017.12.004
Reference:
JCOMM 48
To appear in:
Journal of Commodity Markets
Received Date: 9 November 2017 Revised Date:
23 November 2017
Accepted Date: 20 December 2017
Please cite this article as: Anderson, J.L., Asche, F., Garlock, T., Globalization and commoditization: The transformation of the seafood market, Journal of Commodity Markets (2018), doi: 10.1016/ j.jcomm.2017.12.004. This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
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By
Frank Aschea,c and
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Taryn Garlocka
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James L. Andersona,b,
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Globalization and Commoditization: The Transformation of the Seafood Market*
Abstract
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The seafood market has changed dramatically in recent decades. Increased trade has created a global market for groups of species with similar characteristics, and the number of species that are becoming part of these global market segments continue to grow. Increased trade and stagnating landings of wild fish has also facilitated the rapid growth of the aquaculture industry and made it the world´s fastest growing food production technology. The growth in aquaculture has been sufficient to also increase the per capita consumption of seafood globally. These two factors have allowed scale, modern logistics and marketing practices to be used also for seafood, increasingly commoditizing the main species groups.
Institute for Sustainable Food Systems, University of Florida Food and Resource Economics Department, University of Florida c School of Forest Resources and Conservation, University of Florida b
Financial support from the Norwegian Research Council and the Norwegain Fiinance Fund is acknowledged
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Abstract
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Globalization and Commoditization: The Transformation of the Seafood Market
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The seafood market has changed dramatically in recent decades. Increased trade has created a global market for groups of species with similar characteristics, and the number of species that are becoming part of these global market segments continue to grow. Increased trade and stagnating landings of wild fish has also facilitated the rapid growth of the aquaculture industry and made it the world´s fastest growing food production technology. The growth in aquaculture has been sufficient to also increase the per capita consumption of seafood globally. These two factors have allowed scale, modern logistics and marketing practices to be used also for seafood, increasingly commoditizing the main species groups.
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1. Introduction In recent decades, the seafood market has been fundamentally changed. While the traditional source for seafood, landings of wild fish, stagnated in the mid-1980s, total
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production continued to increase as a new production technology, aquaculture, became increasingly important. In addition, since the mid-1970s, seafood trade has increased by over 350% as measured by quantity as well as by real value (FAO, 2017). This rapid growth
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has made seafood the most traded major food, and combined trade with seafood is higher than for all other animal proteins (beef, chicken, pork and mutton) combined (Asche et al,
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2015). This has created global markets where there earlier were regional markets, and it has allowed toolkit of commodity markets to be used for an increasing number of seafood products.
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As seafood is increasingly sourced globally, there has been a commoditization of many important segments of the seafood market.1 A consequence is that individual species have become less important as species is becoming a less important product attribute in many
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markets. For instance, there is a whitefish market where the leading species cod is an
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attribute with some value, while lower valued species like saithe and tilapia is just whitefish (Asche et al, 2009; Bronnmann et al, 2016). Species groups have become more important, as there is an increasing degree of substitutability within many species groups, facilitating the commoditization. This has also allowed a number of technologies in production, transportation and marketing commonly used in advanced terrestrial food chains to be
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Commoditization of a market occur when the importance of product attributes that can distinguish a product disappear. Hence, commoditization is the opposite of differentiation.
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applied in the seafood sector (Asche, 2008; Kvaløy and Tveteras, 2008; Anderson et al, 2010; Larsen and Asche, 2011; Kumar and Engel, 2016; Ankamah-Yeboah et al, 2017).
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The main objectives of this paper are: 1) to show why the commoditization is so recent for seafood, 2) to discuss the primary factors that have facilitated this commoditization
process, and based on this, 3) discuss why this process is likely to continue. Doing so will
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highlight the benefits of better market organization for seafood in terms of creating
economic opportunity and contributing to food security. Bringing different strands of the
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literature together to provide a larger picture than what can be done in individual case oriented studies, will show how insights from various parts of the commodity market literature act in concert to create real change, which facilitates further development of the seafood market. The insights should also have more general interest, particularly for
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regional markets that are still poorly organized. Moreover, being so recent, the commoditization of seafood also provides a good illustration of this process and the factors that are driving it that generally receives little attention for established commodities like
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grains and oil, because it is largely taken for given.
The paper is organized as follows: First, the barriers to commoditization of seafood and why this process was so late are discussed. This is followed by an overview of seafood supply and how this has changed, highlighting the increased importance of aquaculture. The next topic addressed is the development of seafood trade, before logistics, supply chain and market development is discussed. The final section provides some concluding remarks.
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2. Why is the commoditization of seafood markets so recent? The main reason the commoditization of seafood is so recent is based on the fact that fishing is our last major hunting industry. As long as fish were treated as a common pool
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resource with no or limited management, the tragedy of the commons was allowed to play out with varying degrees of intensity (Wilen, 2006). A consequence was that supply chains remained as traditional food supply chains with a high degree of heterogeneity, where
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markets cleared at each level, and with no obligations from the supplier/seller as soon as a transaction was complete (Gobillon et al, 2016). With no or poor fisheries management,
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landings are seasonal, irregular and with little control over quality (Anderson, 2002). This made seafood a highly heterogeneous market with a number of relatively small market segments, and therefore not very susceptible to commoditization.
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This heterogeneity also led to poor capacity utilization in not only the fishery, but also at other upstream stages in the supply chain that had to be able to handle the landings in the peak season. As most large markets are in population centers, often far from the landing
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locations, conservation technologies are required and the lack thereof often led to
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substantial loss of value (Roheim et al, 2007). Finally, and the production process did not lend itself to standardization and exploitation of economies of scale to any large extent (Kvaløy and Tveteras, 2008), thereby preventing commoditization.
As fishing technologies improved stocks were fished down (Squires and Vestergaard, 2013; Gordon and Hannesson, 2015; Kvamsdal, 2016), and as the tragedy of the commons intensified the need for regulations became obvious. However, while initial regulations and
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management schemes protected stocks, they created races to fish (or Olympic fishing) with even more problematic economic incentives leading to harvest seasons in several fisheries that were measured in hours rather than days and months (Homans and Wilen, 1997;
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2005). The introduction of individual fishing quotas (IFQs) and catch share systems largely corrected this incentives problem. Fishers could then focus on maximizing the profits of their quota, rather than competing for the maximum share of the catch, and each improved
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set of management gives a new margin for fishers to optimize (Smith, 2012). Although far from all fisheries are managed by such systems, this increased control sufficiently in a
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number of fisheries to allow more efficient supply chains to develop. As such, it is not the hunting process that is the main challenge with respect to commoditization, it is the poor control with the production process that poor management systems yields (Anderson, 2002; Klinger et al, 2013), and that also determines which supply chains can be served
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(Homans and Wilen, 2005; Smith, 2012).
While improved fisheries management in a number of fisheries improved control with the
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production process, two other developments were more important in facilitating the
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commoditization of seafood markets. Improved processing and conservation technologies as well as improved logistics made the seafood market global, allowing sourcing to be used as a tool to overcome seasonality and increase efficiency and profitability. In addition, seafood from aquaculture started entering international trade in significant quantities in the 1990s, thereby adding seafood supply from a technology with much better control with the production process. In the following we will discuss how increased trade and
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aquaculture have facilitated the commoditization of the seafood market, as well as some of the more important supply chain developments.
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3. Seafood production
The availability of seafood has increased almost 9 times from 1950 to today, and it has been multiplied by a factor of 2.6 since 1970. Total production reached 167.7 million mt (metric
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tons) in 2015 (FAO, 2017). This production growth is strong enough to increase not only the total supply of seafood, but also the global per capita consumption, as per capita
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consumption of seafood passed 20kg in 2014, the highest on record (FAO, 2016).
As noted in the introduction, seafood is provided with two main production technologies fisheries and aquaculture. Until the 1970s, aquaculture was relatively unimportant as a
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source of seafood. After that, the production patterns for the two technologies have been very different, as shown in Figure 1. The left hand panel shows how fisheries landings increased until the mid 1980s, before they stabilized around 90 million mt (the mean
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landings in the period 1986-2015 is 88.7 million mt). On the other hand, fish farming was
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quite limited in 1970 with a harvested quantity of about 2.6 million metric tons representing 3.9% of the total seafood supply. Since then there has been a virtual explosion in aquaculture production and in 2015, farmed seafood made up 45.2% of the total seafood supply with a production of 75.9 million mt. Hence, aquaculture is essentially the only reason why global seafood supply has continued to increase since 1990. Moreover, it is already larger than wild fisheries as a source for food, as it made up over 50% of seafood for human consumption in 2014 since about 20 million mt of the landed fish goes to reduction
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to fishmeal and other non-food uses (FAO, 2016). It is also worthwhile to note that while there are a number of species being farmed, there are substantially fewer that are important than in fisheries, where the harvests are much more heterogeneous in terms of
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species (FAO, 2017).
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Figure 1. Global production of wild and farmed seafood Source: FAO (2017)
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Aquaculture is a technology that has its origins in ancient Egypt, China and Rome (Parker, 2011). In the 1970s, an important change took place as increased control over the
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production process facilitated an increased R&D effort, leading to a number of new aquatic production technologies and practices. To a large extent these innovations were based on knowledge from the agro-sciences; such as breeding, feed and nutrition, and as diseases became a challenge, veterinarians and disease prevention and treatment. These developments improved the competitiveness of aquaculture products for subsistence as well as a source of income, and has made aquaculture the world´s fastest growing food
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production technology in recent decades (Kumar and Engle, 2016; FAO, 2016). The control of the supply further enhanced the competitiveness of aquaculture throughout the supply chain by also facilitating product development, marketing and the use of modern logistics
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(Asche, 2008).
Aquaculture production is expected to continue to increase. The WorldBank/FAO´s Fish to
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2030 project (Kobayashi et al, 2015), estimate that aquaculture production will be 93.6 million mt in 2030, or a 50% increase from 2011. Kobayashi et al (2015) estimate an
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average annual growth rate of 2.5%. While this is lower than the growth rate has been in recent decades, it is likely to maintain aquaculture´s position as the world´s fastest growing food production technology. Moreover, it is worthwhile to point out that the most recent production numbers from FAO indicate that actual production is already higher than the
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projected path of Kobayashi et al (2015). This also highlights that here is substantial uncertainty in the estimates, and Kobayashi et al (2015) provides projections for six different scenarios to highlight some of this uncertainty. The projections in the various
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scenarios vary from 90.7 million mt to 116.2 million mt. A notable feature of these
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outcomes is that the most likely estimate at 93.6 million mt is much closer to the most negative scenario than the most positive scenarios. Hence, the distribution of estimates is skewed, indicating a larger upside potential than downside potential. It is also important to note that the growth is uneven between countries and regions, and that production in Africa will continue to be limited. The main demand driver for increased demand for aquaculture products is economic growth and the associated higher incomes, while population growth is substantially less important.
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There are, of course, also a number of barriers to aquaculture growth, and there is a large literature focusing on the limitations, and in particular environmental effects (Abate et al,
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2016). As shown by Abate et al (2016), there are a number of species and countries where the management system directly prevents growth, or where lax management that allows diseases to thrive prevents growth. The first category, largely contains wealthy countries
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and regions like the US and EU, were aquaculture activity accordingly are limited, and were prospects for growth is even more limited (Knapp and Rubino, 2016). Hence, growth in
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aquaculture production has and continues to take place mostly in developing countries (Chu and Tudur, 2014). However, as quality of governance systems varies substantially, there are countries that mine some locations for a period, and there are also wealthy counties were aquaculture is allowed to take place like Canada and Norway (Chu et al,
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2010; Osmundsen et al, 2017).
The uncertainty with respect to how fast aquaculture production will grow do not detract
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from the main message, aquaculture production is likely to continue to grow rapidly. This is
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important for the commoditization of seafood because the increased production share from the technology where most control is exercised over the production process allows the standardization of products that facilitate the commoditization process. 4. Seafood trade
During the last 30 years, seafood trade has increased even faster than seafood production. Figure 2 shows the exported quantity from 1976, the first year when these data are available. 8
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Figure 2. Global seafood exports by quantity, 1976-2013 Source: FAO (2017)
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The increased trade has also changed the world´s seafood markets profoundly. Seafood has become the most traded food group with 36 % of production being traded in 2013 (FAO,
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2016) and 78% exposed to trade competition (Tveteras et al, 2012). The market for the main species groups have expanded to become global in the sense that there is a global
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price determination process, such as for salmon (Asche et al, 1999; Landazuri-Tveteras et al, 2017), shrimp (Vinuya, 2007; Asche et al, 2012; Pincinato and Asche, 2016), tuna (Bose and McIlgrom, 1996; Jeon et al, 2007; Jiménez-Toribio et al, 2010) and whitefish (Gordon and Hannesson, 1996; Asche et al, 2002; 2004; Nielsen, 2005; Bronnmann et al, 2016).
There are, of course, a number of factors that explain this development, which are both benefits from the commoditization and drivers of the development. Seafood is regarded as
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an industrial product by the World Trade Organization (WTO), and therefore not included among agricultural products (Asche et al, 2016). Hence, trade barriers have not been a major obstacle to trade, particularly for product forms with a limited degree of processing.2
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The increased seafood trade has been facilitated by technological innovations and improved logistics (Anderson, 2003; Anderson et al., 2010). Transportation and logistics have not only improved significantly, but also led to substantial reductions in transportation costs by
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surface and air, giving new producers and products access to the global market.
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Improved logistics and standardization of products have also allowed economies of scale to be exploited through the supply chain, and particularly in the retail sector where retail chains have replaced fishmongers and local markets as the main outlet (Murray and Fofana, 2002; Guillotreau et al, 2005). Improvements in storage and preservation technologies have
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continued, allowing a wider range of seafood products to be traded. Most importantly, freezing technology has improved to such an extent that many product forms can be frozen twice, allowing products to be processed in locations with competitive advantages in
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processing fish rather than in locations close to where the fish is caught. This has created
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seafood processing clusters, and commoditization with the global sourcing to these clusters, and increasing trade to and from them. The leading clusters are in China, but one increasingly can observe other clusters being formed with a global reach (e.g. Vietnam) and a regional reach (e.g Poland) (Zhang et al, 2014; Asche et al, 2016).
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It should be noted that the increased imports of farmed fish has created a number of trade conflicts, as indicated by the prevalence of farmed products in anti-dumping and countervailing duty cases. Not surprisingly, the two most valuable farmed species, shrimp and salmon show up most often in these cases, but a number of other species have also been involved in such cases. Kinnucan and Myrland (2002) and Keithly and Poudel (2008) provide two case studies for respectively salmon and shrimp.
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An increasing number of producers having access to the global market and who can exploit new market opportunities create increasing trade competition in exports as well as imports
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markets. For consumers who are able and willing to pay, these trends increase the available supply of seafood. Hence, the share of the imports to wealthy developed countries – such as the European Union, Japan, and the US– remains high. However, economic growth in many
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developing countries also increases demand in other markets (Kobayashi et al, 2015). As a result, there is a declining import share for developed countries despite growth in total
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values of seafood exports from developing to developed countries (Asche et al, 2015).
Asche, Roll and Trollvik (2009) provides a more detailed overview of the development of the whitefish market which well illustrates the globalization and commoditization of one of
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the most important segments of the seafood market. For centuries, the whitefish market was a regional market in the North Atlantic with cod as the leading species, and with a number of cheaper substitutes (saithe, haddock, pollock, flounders, etc.). In the 1980s it was
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realized that Alaska pollock and other Pacific whitefish species that primarily was used to
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produce surimi, also had neutral flavored white fillets and that it could be more profitable to sell these into the whitefish market. This introduced Alaska Pollock to the whitefish market, and nearly doubled the supply of whitefish. In the 1990s, the market was expanded to take whitefish from other oceans such as Argentinian and Namibian hake and New Zealand hoki. In fact, for most whitefish products, which are marketed as breaded, battered or dried salted, any white neutral flavored fillet would do. As e consequence, tropical species like Nile perch and new aquaculture species like tilapia and pangasius have become
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increasingly important. For instance, in the USA where more than 90% of the seafood is imported, tilapia is now dominating the whitefish market as shown in Figure 3. The total whitefish market is now about 15 million mt, and the traditional north Atlantic species
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makes up less than one third of this quantity. This process has created the commodity
whitefish, a commodity that is truly global being produced and consumed in all corners of
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the world.
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Figure 3. U.S. Whitefish imports, 1990-2013 Source: NMFS
The increased trade has also been instrumental in creating large parts of the aquaculture industry. In particular, the two most valuable aquaculture species, shrimp and salmon, are also among the most traded species (Asche et al, 2016). Hence, it is not obvious if there is
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increased seafood trade because aquaculture production increases, or if aquaculture production increases due to the economic opportunities created by increased trade in a more global market. Either way the most important consequence of this development is
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that large volumes of similar products have become available year round, facilitating the commoditization of the seafood market.
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5. Logistics, supply chains and markets
Salmon was one of the first species for which production started to grow more rapidly to
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create the aquaculture revolution. Salmon has remained important as a species for which the growth rate is higher than for aquaculture in aggregate, but also because it is leading in a number of dimensions when it comes to technology development and organization (Asche, 2008; Smith et al, 2010; Kumar and Engle, 2016). Logistics may well be the most
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important dimension. The general trade literature show how scale reduces transportation cost and facilitates increased trade (Behar and Venables, 2012). Moreover, standardization and relation specific investments that can be justified with prolonged trade relationships
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further reduce trade costs and facilitate trade and commoditization (Kvaløy and Tveteras,
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2008; Olsson and Criddle, 2008).
Salmon aquaculture revolutionized seafood logistics and thereby the seafood market. In the mid-1980s most salmon available was wild, landed in remote coastal areas during a short season and marketed as canned or frozen as most other seafood (Knapp et al, 2007). The control with the production process in salmon aquaculture allowed farmers to plan when to and how much to harvest. This made fresh salmon a product that was available year round,
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and truck and plane became the dominant transportation modes (Straume, 2017). Moreover, since one could time the harvest, one could sell to the highest paying market segments. This rapidly created a global market, and between them, the two largest salmon
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producing countries (Norway and Chile) now export fish to more than 160 countries. Of course, other producers copied this development, and for instance Icelandic cod which comes from one of the most well managed fisheries in the world, now sell large quantities of
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cod using salmon logistics (and ironically, Norwegian cod cannot to any extent be sold this way due to poorer regulations that maintain a highly seasonal landing pattern (Pettersen
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and Myrland, 2016)).
Most traded seafood is still sold as frozen, which allows the use of the world’s shipping lanes, and it generally cost less than USD 0.50/kg to carry fish any distance on ship. With
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globalization and more countries and regions being linked to this trade network, those producers that can use this logistics system has access to the world, and the supply chains continue to develop and create new market opportunities. Among the more interesting are
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the segmentation of the US tilapia market into one fresh segment served by South American
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producers and a frozen segment served from Asia, with logistics and transportation costs as the main reason the Asian producers cannot compete in the fresh market (Norman- López and Asche, 2008; Tveteras, 2015). Hence, while generally facilitating globalization, better logistics can also contribute to market segmentation.
6. Concluding remarks
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Increasing production, primarily due to aquaculture, and increased trade during the last few decades have turned a significant part of the seafood market into a global commodity market, although segmented by the main species groups. The globalization and increased
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scale of many seafood operations have made the seafood sector and its supply chains more similar to other modern food producing sectors. For instance, the two largest producers of fish feed, Skretting and EWOS are integrated into the large feed companies NUTRECO and
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Cargill, with common strategies for research and marketing for aqua feeds and terrestrial feeds. Futures markets have been established for shrimp and salmon, although the attempts
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at shrimp futures markets in the US have failed (Martinez-Garmendia and Anderson 1999; 2001; Asche, Misund and Oglend, 2016a,b; Ankama-Yeboah et al, 2017). Contracts are increasingly important (Kvaløy and Tveteras, 2008; Larsen and Asche, 2011), and
2013).
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companies are getting larger and better able to exploit economies of scale (Asche et al,
This development is likely to continue, as aquaculture production is expected to continue to
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increase partly due to continued innovations that improves technology and reduce cost and
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partly due to increased demand caused by economic growth and higher incomes (Kobayashi et al, 2015). Moreover, there is still considerable untapped knowledge and technology used in production and trade of terrestrial food stuffs that can be transferred to seafood, increasing the scope for further productivity growth.
As in terrestrial food production systems, not all market segments will be commoditized, as some producers will be too small or remote to be a part of the larger market, and some may
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succeed in differentiating themselves from the larger market. However, the increased domination of large species groups with a high degree of substitution within the groups and an increased presence of aquaculture products from more controlled production processes
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than wild fisheries is likely to continue. This will also be helped by the fact that there are few strong seafood brands, and in markets like Germany, private labels with a high degree of flexibility in the sourcing that already dominate the market (Bronnmann and Asche,
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2016; Bronnmann et al, 2016). Hence, the commoditization of seafood is likely to continue.
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