ANNUAL LOBSTER MARKET REVIEW John Sackton SeafoodNews.com MARCH 24-25, 2014 New Brunswick

Background Crab, shrimp and lobster market analyst since 1997 Preseason price and market outlooks on shrimp and crab for 17 years – Atlantic Canada, Alaska, and US West Coast Price arbitrator for Alaska king crab, snow crab annually since 2005 Publisher of Seafood.com News

INTRODUCTION

LOBSTER 2014 Low prices and ample supplies expanded the market. Lobster tail prices have fallen steadily from 2011 until this summer. For first time in five years, landings slowed this fall, and the smaller volumes led to a run up in prices Chinese demand continues to be a major factor -sales of Nov-Dec lobster now continue right to the Chinese new year Live market prices are volatile, having already peaked for this year. In 2014 high prices will impact customer demand 4

Are We Seeing the End of Low Priced Lobster Overall demand has increased Supply has stabilized, not increasing More processing in Maine; competition for raw material New markets for tails -New England retailers and restaurants -EU will get more Canadian tails and meat with no tariff -More substitution for shrimp, scallops 5

Topics covered today Review of supply situation US Market Other export Markets, including China Recent price history and price issues Outlook: What are some issues on the Horizon -Market expansion -Promotion -Lobster Aquaculture

SUPPLY

US Supply Continues at a High Level 8 Imports from Canada Increased 3.5%; Mostly from Live

Total US Imports Increased in

US IMPORTS OF LOBSTER BY SPECIES 10 Source: Urner Barry and US customs data

US LOBSTER SUPPLY WITH EXPORTS 11 Source: US Census Data, Canadian Export Data, NMFS

Global Supply of Homarus is Increasing 12 FAO Fishstat database; data are industry estimates

HOMARUS LOBSTER LANDINGS DECLINED SLIGHTLY IN Source: FAO data plus estimates for 2012 and 2013 based on Canadian and Maine lobster councils

LFA 34 had lower reported landings in

REASONS FOR DECLINE Some LFA’s in Canada had strong or record landings, but bad weather this fall / winter and slow catches have meant lower landings in Nova Scotia, the largest single landings area. Maine did not experience the glut of lobsters in 2013 as in 2012 but ended up at 126 million lbs vs in

MAJOR TRENDS IN 2013 More Maine processing capacity meant expansion of market for tails and meat – especially at retail in New England Global landings of spiny lobster trending upward again; US Imports increased China increased its imports of lobster over 2012 despite luxury crackdown Volatility in pricing this spring may impact customers as costs for raw materials are up We may have seen the end of low priced lobster 16

US MARKETS

US REMAINS THE LARGEST MARKET FOR CANADIAN LOBSTER 18 NEW BRUNSWICK PEI NOVA SCOTIA DEMAND IN US MARKET STILL MOST IMPORTANT FACTOR FOR CANADIAN EXPORTERS

US DEMAND HAS BEEN INCREASING BECAUSE OF LOW PRICES FOR PAST TWO YEARS RETAIL -Expanded use of Frozen lobster -Walmart added 3 lobster items this year -Whole Foods increased promotion Foodservice -Took Advantage of low priced tails -Used in competitive market position -Red Lobster helped by ‘lobsterfest’ in February 19

US LOBSTER CONSUMPTION IS HIGHLY REGIONALIZED: 63% in Northeast With change in laws regarding processing in Maine, more lobster tails, meat consumed in Northeast Retailers offering tails as well as live lobster 20

Retailers Doubled the number of lobster promotions in the US in Jan-Feb Retail promotions up 100% in Jan / Feb

Lobster was seen as a value compared to shrimp and crab 22 Source: Urner Barry Retail Database

Lobster tails on sale at Whole Foods 23

Changes in Massachusetts laws helped market Massachusetts is one of the highest per capita consumption areas for lobster Until two years ago, lobster could only be sold whole in many circumstances Change in processing laws meant opening market to tails Has had a big impact on volume of frozen tails sold in New England - especially from Maine processors 24

Foodservice expanding as well Lobster appeared on 35% more menus in 2013 than in 2012 according to data essentials, a menu tracking service 2013Restaurants with lobster specials include -Golden Corral, Darden, Quiznos, dozens more Based on 2013 tail prices: Golden corral bought 200,000 lbs at $13 per lb., a 20 year low price according to their buyer Even Long John Silver’s featuring ‘lobster’ – although actually a Nephrops which the FDA allows to be called lobster 25

Monthly Supply of live, meat and tails to US market 26 Domestic produced tails and meat is still a very small amount Source: Urner Barry Lobster Insider report

Price and Volume for Canadian frozen lobster imports 27

EXPORTS

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EXCHANGE RATE WILL BE HUGE FACTOR IN 2014: CANADIAN DOLLAR HAS WEAKENED 33

BUT CA DOLLAR HAS WEAKENED EVEN MORE AGAINST EURO 34

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CHINA’S CURRENCY HAS WEAKENED AGAINST CANADA 36

CURRENCY WILL MAKE US A VERY ATTRACTIVE MARKET THIS YEAR The US is a better market for lobster exporters -In the past, being tied to US when the CA dollar was at parity was the kiss of death, now the movement is the other way A weaker Canadian currency will also help exporters to Europe It will not help sales to China, but with only an 8% swing in value, currency is not the major factor in whether Chinese buy more Canadian lobster or not 37

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GROWTH OF CHINA’S IMPORTS OF LIVE N. AMERICAN LOBSTER 39 Source: Global Trade Atlas, GTIS, China Customs 2013 YTD OCT PROJECTED FULL YEAR

CETA agreement will be major boost to Lobster Exporters 40

New Brunswick Fzn Exports 41

PEI Exports 42

Nova Scotia Exports 43

Export Summary New Brunswick is seeing less exports to both US and Europe, China, although US shipments increased in 2013 PEI has seen big gains In US exports – likely due to larger companies like Mazzetta and Red Chamber/Aquastar buying plants to serve US customers Nova Scotia is seeing jump in live sales to both US and China 44

PRICING

Lobster tail prices began rising this summer 46 Source: Urner Barry Comtell Prices have Returned to 2011 levels

Long term picture of 4 oz tail price is mixed: Below PPI index; but at same level that caused market reaction in

US volumes have increased and prices are increasing also 48 Source: Urner Barry

Live Prices have come down from their seasonal peak 49

What happened to tails and meat? 50 CK 2 lb vac pack 4 oz tail

LOBSTER MEAT SHOWS LESS VOLATILE PRICING BECAUSE IT IS A FOODSERVICE PRODUCT 51

Pricing Outlook Shore prices heavily impacted by two factors: -Overall market demand -Pace and quantity of landings We had a very strong year for demand, and it will not continue the same in 2014 in all areas: -Users of tails will back off due to higher prices -Live buyers will gain due to currency -Currency factors allow cushion for sellers to better compete -Chinese buying shows no signs of slowing for North American Lobster Cannot predict pace and quantity of landings for opening May 1 st. 52

OUTLOOK AND DISCUSSION

LOBSTER MARKET IS CHANGING: Processing Bigger and Financially strong companies have entered market: Red Chamber/Aquastar and Mazzetta in PEI. On the US side: Harbor Seafoods, Mazzetta’s Gloucester Plant; East Coast / Paturel new Plant in Maine; Linda Bean’s in Maine, and general growth of Maine Processing These companies have better financial ability to hold inventory and develop programs for value-added lobster products. Positive development for market expansion 54

FINANCING MAY BECOME ISSUE IN 2014 Lobster Processors have historically depended on advances to pay for purchases Some major purchasers facing problems with debt repayment – leading to uncertainty about loans. -Some outstanding loans may not be paid by start of season -May be harder to get loans to pay harvesters; that would lessen competition on the wharf -EDC could make adjustments in companies it supports this year; could have impact However, some stronger financial players could see opportunity to expand market share 55

Changing Live Market Historically live market has responded to supply change with big swings in price. The reason is that the US live market can only absorb limited product; when there is a glut no one wants lobster. Chinese demand is changing this equation -Sales of live now continue to Chinese New Year (Feb 1 st ) -Other Asian demand increasing also -N. American lobster is well positioned in China as a ‘value’ product Live Prices to China declined this year, according to Clearwater, which saw increased volume but lower price. 56

AQUACULTURE LOBSTER COMING In the 1980’s, Alaska salmon producers had great markets and a strong industry. Then came farmed salmon and by the mid-1990’s salmon values had plummeted and many companies/fishermen went bankrupt. In Malaysia, a massive Darden lobster Aquaculture Project has developed the first closed cycle aquaculture for warm water lobster. They grow to stage 4; then supply local farmers with seed to grow out in local cages. First lobsters are now being shipped to China. 57

POTENTIAL CHANGES In ten years, wild lobster will see competition from aquaculture, and it will have a price impact. Costs for aquaculture product generally decrease. Canadian lobster prices won’t be set by local supply alone. 58

IMPORTANCE OF PROMOTION These changes make lobster promotion very important Lobster currently is in a very favorable climate with expansion of demand -Good time for promotion; not a time to relax -Promotion has higher benefit in expanding market Important to help establish a positive image for wild lobster -MSC is a big step forward in this context -Need to position lobster in terms of animal welfare -Need to prepare for competition from Aquaculture 59

LOBSTER HAS RANGE OF PRODUCT FORMS LIVE WHOLE COOKS TAILS MEAT VALUE ADDED PRODUCTS SOUPS, BISQUES, DIPS 60 Important that pricing in one area – such as live – not cripple markets in other areas. With a large supply, all product forms needed. China can be a destabilizing factor when live supplies may be short.

Whole cooks Untreated: 86% of live weight Treated with retention agents – 91% of net weight Live weight of.8 lbs (350 gms) = whole cooked weight of.72 lbs, or 315 gram Still get whole cooks in 10 lb. box at 76 mm.

Buffet and Cruise lines Major users of whole cooks are Casinos and cruise lines, which put them on buffets. Buyers care about piece count Change in lobster size will not make much difference, piece count for 10 lbs will still be around 12-14, which is widely accepted.

Tails Small tails (2.5 oz) are not economical for processors to produce because of high labor cost for throughput. Some buyers have in the past used small tails when prices were much higher. No economic advantage to produce small tails in current pricing environment Higher profitability in larger sizes for entire industry.

LOBSTER SUMMARY Shortfall in production in US and Canada in fall 2013 Going into 2014 raw material costs are higher China’s buying of North American lobster now major factor in pricing at shore China’s long term appetite for lobster is changing the market US consumption is highly regionalized by geography and product form; more use of tails and meat in New England is a new phenomenon After big expansion of market based on relatively low prices, lobster prices are returning to more average levels. We have seen the end of low priced lobster. Market will react to current price levels, favorable currency will help Canadian exporters manage sales 64

Thank you Time for Questions 65