Your daily newsfeed is likely filled with stories of rising prices at both the pump and the grocery store. Economists point to a number of reasons, from the injection of pandemic relief funds to supply-chain disruptions and shipping delays. Meanwhile, the conflict in Ukraine has added a new layer of uncertainty.
Commercial fishing is not insulated from these national and global trends. While the maritime industry has largely moved past disruptions caused by the COVID-19 pandemic, the effect of international sanctions on Russia and rising prices at home are just beginning to be felt. Understanding what’s happening and how it directly impacts the commercial maritime industry is critical to making sound financial decisions in these turbulent times.
Looking Back on the Pandemic
The commercial fishing industry experienced significant impacts early on in the pandemic. For a while, there was a question of whether fishermen would even be able to deliver their fish. COVID outbreaks at processing facilities resulted in facility closures, with some closing more than once. Alaska saw 13 outbreaks among seafood processing facilities and on processing vessels by early fall 2020, according to the Centers for Disease Control and Prevention.
Restaurant closures added to an already difficult situation, as much of the money Americans spend on seafood is spent while dining out, according to a 2020 study published in the academic journal Fish and Fisheries. While there was a noticeable increase in delivery and takeout services in the first several months of the pandemic, the decline in overall consumer demand from restaurants was only partially offset, according to the study.
Despite such challenges, the industry worked through these extraordinary disruptions in unprecedented ways. Direct-to-consumer sales grew as an alternative to restaurants. Additionally, some processors gave the green light for fishermen to deliver their fish to competitors, a move which typically would not have happened pre-pandemic.
While the pandemic’s effects are still evident, the industry is much more adept at dealing with them. Furthermore, with the resumption of restaurant dining, updated safety precautions at processing facilities and vaccine availability, COVID-19 has become less of a disruption to the industry.
Good News Ahead? Sanctions and Global Prices
International sanctions on Russia in response to the invasion of Ukraine in late February introduced new challenges for commercial fisheries, both at home and abroad. The two primary impacts are on the supply of oil and fish.
Russia is the world’s third-largest oil producer and the world’s largest exporter of oil to global markets, according to the International Energy Agency (IEA), which monitors global oil supply. What this means is that Russia generates—and sells—a substantial percentage of the oil to markets around the world.
While the U.S. gets only 3% of its oil from Russia, the countries of Europe import just over a third of theirs from Russia, according to the IEA. Sanctioning Russian oil imports means that those countries now have to look to other places, like Saudi Arabia and the U.S.
With increased demand on a more limited supply of oil, prices inevitably go up. Oil is a global commodity, so when prices go up anywhere, they go up everywhere, resulting in higher fuel prices for everyone, including commercial fishermen.
Fuel prices are always a major concern in commercial maritime considering vessels take fuel loads in the thousands of gallons. When the average person is feeling it at the pump, commercial fishermen feel it even more so. Not only do their vessels have larger tanks, they consume more fuel to operate, from drive engines to generators.
Higher fuel prices certainly increase the cost of operating, which doesn’t help fisheries. What does help is that fish prices are also on the rise because of these same limitations we’re seeing with oil.
One expectation is that sanctions on Russia will improve the outlook in specific areas where plentiful supply has kept prices low. The crab fishery is one of those areas. Russian crab has long flooded markets in the U.S., driving down prices because the industry is subsidized by its government. Limiting the Russian supply of seafood should put strong upward pressure on prices.
An early indication of this trend is being seen in Japan. While Japan had not included a ban on Russian seafood as part of its sanctions, Japanese consumers are feeling the impact nonetheless. About 60% of its imported crab comes from Russia, according to Japan’s Fisheries Agency. In March alone, the price of crab increased by 20%, according to financial newspaper Nikkei Asia.
Supporting New Opportunities Amid Rising Interest Rates
It is still too early to know whether the inflationary trend seen with higher prices in oil and fish will help or hurt the maritime industry as a whole. So, how should commercial fisheries plan and prepare for the future with everything that is going on?
In thinking about this question, there has been a lot of attention given to rising interest rates and their effect on commercial maritime businesses as they seek financing to create new growth. In commercial fishing, the impact is not as sensational as might be seen in other sectors of the economy, like real estate.
Such is the case because maritime lending generally happens for one of three reasons: for maintenance and improvements to vessels, for quota financing or for acquisitions or consolidation of ownership. Borrowers typically seek loans based on anticipated needs and income versus the idea that now is a good time to borrow or refinance because of a certain interest rate.
Many borrowers frequently—and mistakenly—get caught up in the cost of a loan. A loan with a 15-year payment schedule may cost less over the life of the loan than a 25-year schedule because you pay less interest. However, it has a higher annual payment because you’re dividing the same amount borrowed over a shorter period of time.
Typical thinking like this may not work best for commercial fisheries, especially considering that their cash flow may vary seasonally or from year to year. That’s before weighing the added uncertainty of where fuel and fish prices will go and for how long, given the evolving conflict in Europe and inflation here at home.
Those looking to borrow money to support their business should seek out loans that offer flexibility. Flexibility is key when you’re dealing with fluctuating cash flow. Borrowers should worry less about the cost of a loan than their ability to pay on a schedule that makes sense for their business or that allows them to pay ahead without penalty.
By obtaining loans that allow prepayment without penalty, borrowers have the option to make a lump payment if they have extra cash or income on hand. Loans that offer alternative schedules for payment also can be very beneficial. The ability to make one annual payment at a time of year that works best for the business is critical given the unpredictable and often cyclical nature of the commercial maritime industry.
Interest rates are another area to watch. While rates have gone up, they have not gone up dramatically. Where borrowers may have been able to find loans in the high threes to fours a couple years ago, they’re looking at high fours or low fives today.
Given all of these factors, is now the right time for commercial fisheries to consider financing for new growth? The truth is a half or one percentage point increase in interest rates really doesn’t change the feasibility of a project or an acquisition. Fuel and fish prices, as well as fish abundance, are the bigger factors to consider. In general, the cost of financing is never the major expense.
Fortunately, we can now look back and say that the commercial maritime industry has largely moved past the unprecedented challenges caused by the pandemic and has become more nimble and adept at dealing with COVID-related disruptions as they occur. However, new challenges face the industry as the effect of the conflict in Ukraine and inflation at home lead to rising fuel costs and interest rates. Despite these trends, there are still many good financing options for commercial fisheries to plan for their financial futures and create new growth ahead.
Curtis ‘Arne’ Arnesen is a Senior Vice President and Commercial Market Leader at the Peoples Bank Ballard Financial Center where he manages a team of bankers committed to serving the diverse needs of West Coast fisheries. To learn more, visit www.peoplesbank-wa.com/maritime.