Frank Asche, Atle Oglend, Marty Smith and I have a new paper that looks at the determinants of prices in different shrimp markets–prices for big and small shrimp; prices for brown, white and pink shrimp; and prices for wild-caught shrimp and farmed shrimp. In particular, we look to see whether prices for different categories of shrimp (different sizes, species, and methods of production) move in tandem. Consumer decisions in markets are a function of relative prices of goods. Thus, if the prices of large and small shrimp move in tandem, then the relative prices of the two sizes of shrimp do not change and consumers choices in the shrimp market should remain unaffected. If this is true across all types of shrimp we say the market is integrated.
There are two important facts to know about the shrimp market. First, we consume a lot of shrimp. Shrimp is the leading seafood product by value. In 2006, shrimp accounted for 17% of all global seafood trade (FAO 2009). It is also the leading seafood product by weight. Americans consume 4.2 pounds of shrimp per capita annually. The next largest seafood product is canned tuna of which we consume only 3.3. pounds per capita (NRC 2007). Second, the method by which shrimp is “produced” has changed dramatically over the last decade. As you can see in Figure 1, farmed (or aquaculture) shrimp has skyrocketed in the last decade and now accounts for more than 50% of global shrimp production.
But why focus on prices and market integration? There are at least four reasons why the nature of the shrimp market matters. First, the increased competition from farmed shrimp has lead to trade disputes. The U.S. enacted trade restrictions on shrimp from a group of countries (all in Asia or Latin America) after domestic shrimp fisherman filed anti-dumping complaints (Keithly and Poudel, 2008). Second, diseases have been an issue for farmed shrimp, particularly white spot disease (Anderson, 2003) Third, there are significant environmental shocks that affect the supply of domestic wild-caught shrimp. For U.S. shrimp fishermen the “dead zone” that occurs seasonally in the Gulf of Mexico potentially influences aggregation, production, and the size distribution of shrimp (Craig 2011; Huang, Smith, and Craig, 2010; Huang et al. 2011). Hurricanes Katrina and Rita caused significant shrimp supply disruptions through destruction of shrimp vessels and processing facilities (Buck 2005), while rising fuel prices are particularly costly for wild-caught shrimp because trawling is fuel-intensive (Ran, Keithly, Kazmierczak 2011), Moreover, costs of complying with the U.S. requirement for shrimp trawlers to use Turtle Excluder Devices decreased domestic supply (Mukherjee and Segerson 2011).
The degree of market integration affects how these environmental and economic stressors affect prices. The impact of all of these stressors (trade, production costs, disease, and environmental) will have a strong impact on the price determination process if the markets are not integrated, while the impact will be weaker in a larger and more integrated shrimp market.
We use monthly price series data from June 1990 through December 2008 to investigate market integration. The details of the statistical analysis are available in the paper, but Figure 2 captures the idea graphically. In Figure 2, we plot the price trends for different sizes of brown shrimp caught in the U.S. The graph shows remarkable co-movement in prices of different sizes. Our statistically analysis bears out this observation. Prices of different sizes of brown, pink, and white shrimp move in tandem. Prices of U.S. wild-caught shrimp and imported farm shrimp move in tandem. The shrimp market is remarkably well integrated.
Why should environmentalist care? Market integration has significant implications for how domestic wild-shrimp fisherman can respond to certain environmental supply shocks. In North Carolina (a much smaller market than Gulf of Mexico), there is evidence that hypoxia has decreased shrimp production in the range of 13% but has not increased prices (Huang, Smith, and Craig 2010; Huang et al. 2011). In the much larger Gulf of Mexico, there is emerging evidence that hypoxia decreases the supply of large shrimp and increases the supply of smaller shrimp likely as a result of aggregation on the edge of hypoxic areas (Bennear, Kociolek, and Smith 2011; Craig 2011). Market integration suggests that the decreased supply of large shrimp cannot be offset by an increase in price. Rather, imports of larger farmed shrimp will increase to satisfy demand. Similarly, domestic supply shocks from hurricanes, oil spill, or fuel price spikes cannot be offset by price increases. In particular, market integration suggests that the economic losses from a significant decrease in 2010 domestic shrimp production – assuming this decrease was caused by the Deepwater Horizon oil spill – was not likely offset by a price increase. Market integration thus has important implications for the long-run economic viability of the U.S. shrimp fishery. The losses from supply shocks are more consequential for producers, and the various shocks are additive as economic challenges to the fishery. But U.S. shrimp consumers are essentially unharmed.
Anderson, J.L. 2003. The International Seafood Trade. Cambridge: Woodhead Publishing.
Bennear, L.S., E. Kociolek, and M.D. Smith. 2011. Estimating the effect of hypoxia on the Gulf Coast shrimp fishery. Selected Paper, AERE Summer Conference. Seattle, WA, June 2011.
Buck, E.H. 2005. Hurricanes Katrina and Rita: Fishing and Aquaculture Industries – Damage and Recovery. CRS Report for Congress, RS22241, Washington DC: Congressional Research Service.
Craig, J.K. 2011. Aggregation on the edge: Effects of hypoxia avoidance on the spatial distribution of brown shrimp and demersal fishes in the northern Gulf of Mexico. Marine Ecology Progress Series (in press).
FAO. 2009. The State of the World Fisheries and Aquaculture 2008. Rome: Food and Agricultural Organization of the United Nations.
Huang, L., L.A.B. Nichols, J.K. Craig, and M.D. Smith. 2011. Measuring Welfare Losses from Hypoxia: The Case of North Carolina Brown Shrimp. In Review.
Huang, L., M.D. Smith, and J.K. Craig. 2010. Quantifying the Economic Effects of Hypoxia on a Fishery for Brown Shrimp Farfantepenaeus aztecus. Marine and Coastal Fisheries: Dynamics, Management, and Ecosystem Science. 2:232-248.
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.
Mukherjee, Z. and K. Segerson. 2011. Turtle Excluder Device Regulation and Shrimp Harvest: The Role of Behavioral and Market Responses. Marine Resource Economics 26: 173-189.
Ran, T., W.R. Keithly, and R.F. Kazmierczak. 2011. Location Choice Behavior of Gulf of Mexico Shrimpers under Dynamic Economic Conditions. Journal of Agricultural and Applied Economics, 43:29–4
This week I’m featuring a guest blog by my colleague, Dr. Martin Smith, Associate Professor of Environmental Economics at the Nicholas School of the Environment, Duke University.
Economists have long understood that the cause of fisheries problems is the inability to exclude users. When no one owns the fish in the sea, fishermen lack incentives to restrain themselves in order to sustain the biological health of the resource and ultimately the long-term economic health of the fishing industry. Each fisherman races to catch the fish before the other guy. Not surprisingly, this race leads to overfishing and economic hardship. [1, 2]
The centerpiece of U.S. fisheries law is the Magnuson-Stevens Fishery Conservation and Management Act. At its core is a mandate to end overfishing by setting catch limits in federally managed fisheries. Historically, this mandate has focused on the symptom of the problem, namely overfishing, without addressing the cause of the problem.  By setting catch limits without addressing the exclusion problem, managers began to control biological overfishing but inadvertently worsened the race to fish. Aggregate catch limits can maintain a biologically healthy stock, while fishermen have incentives to build more and bigger vessels to catch fish before their competitors. Managers respond by shortening season lengths, forcing gluts of product onto the market and the need to sell fish frozen rather than fresh.  Most notoriously, this economically wasteful derby in the Pacific halibut fishery of Alaska shrunk the season length to less than three days by 1994.  In 1995, a solution to address the cause of this problem was introduced: an individually transferable quota program that set the total catch based on biological assessment and divided the catch between resource users into shares that could be traded. Individually transferable quotas were used in only a handful of other U.S. fisheries but appeared to be successful in managing larger numbers of fisheries in Iceland and New Zealand. With the new policy, the Pacific halibut fishery was transformed overnight from a source of tremendous economic waste to one of the great success stories in fisheries management with a season lasting 245 days and a steady flow of fresh high-value product to the market. [2, 5]
The 2007 reauthorization of Magnuson-Stevens provided a means to use new tools like the halibut program in federal fisheries management.  These tools are broadly defined as Limited Access Privilege Programs (LAPPs) and include individual fishing quotas (both tradable like in halibut and non-tradable) and territorial use rights in fisheries (TURFs). In policy circles, individual fishing quotas have now been renamed catch shares. LAPPs address the cause of overfishing and not just the symptoms by solving the exclusion problem, thus aligning the incentives of individual fishermen with the objectives of fisheries management.
A new bill in the house (HR 2772) now threatens to undo recent progress in developing LAPPs. The bill’s title is the “Saving Fishing Jobs Act of 2011,” but the bill will effectively make it illegal to develop new LAPPs that generate economic value. Provisions in the bill are likely to lead to unintended consequences that could exacerbate economic hardship in fishing communities rather than prevent hardships. And it could even eliminate fishing jobs rather than save them. Potential vehicles for harm to fisheries in the bill include 1) a problematic definition of eligible fishermen; 2) the way in which “jobs” are implicitly defined; 3) the termination clause for LAPPs; and 4) the language on fee collection for running LAPPs.
The definition of “eligible fishermen” is problematic. HR 2772 defines eligible fishermen as permit holders and requires two thirds of them to approve a new LAPP. In some fisheries I have researched, as much as half of the permitted vessels record minimal or no landings in some years. This means that if one of these fisheries were to transition to a catch share program, non-fishing permit holders would in all likelihood receive no initial allocations of quota. Under HR 2772, the non- fishing permit holders would thus oppose the catch share program. In essence, non-fishing permit holders would easily be able to block the ability of the actual fishery participants to approve a LAPP that would generate economic value for the fishery and the fishing community .
Even in fisheries that experience some consolidation after a LAPP is put in place, the issue of jobs is more complicated than just numbers of fishermen holding permits. Many jobs in fishing are seasonal or part-time in nature. By eliminating the race to fish, catch share programs can convert seasonal jobs into year-around jobs that pay better. Suppose there were 10 fishermen each making $10,000 per year by fishing seasonally before a catch share program for a total of $100,000. After the program, suppose there are 5 fishermen making $40,000 per year fishing year around for a total of $200,000 of income. For both economic growth and supporting secondary industries in coastal communities, the smaller number of fishermen working year around is better. These benefits would need to be weighed against the loss of some part-time jobs. HR 2772 does not have any way to address this issue and would force managers to choose part-time jobs over full-time jobs.
The bill includes a rule that would terminate any new LAPP if the number of permit holders is 15% less the year after the program goes into place. The clause could inadvertently end a program that successfully reduces redundant capacity, generates economic well being, sustains healthy fish stocks, and is popular with fishermen. In my experience working with individual-level data in fisheries, there is considerable natural attrition in permit holders over time due to changing economic circumstances and retirements of fishermen.  The language in HR 2772 does not account for such natural attrition and would falsely attribute all attrition to a LAPP.
Finally, the language on fee collection appears to inflate the cost of a LAPP because it includes the costs of observer coverage. By charging fishermen for observer coverage under a LAPP but funding observer coverage otherwise with taxpayer dollars, the LAPP will appear more expensive to fishermen than it really is. Naturally, fishermen would be more likely to oppose a program in spite of its promise to generate economic benefits for the fishing sector and for society at large. Here, we find ourselves legitimately in a bind. Many argue that fishermen should pay for the privilege of harvesting a public trust resource. But a sudden change to full cost recovery could fall victim to political inertia and inadvertently preserve the inefficient status quo.
It took decades for fisheries management to evolve from treating symptoms to addressing the root cause of overfishing. Now in one piece of legislation we risk undoing much of that progress and hindering further improvements.
1. Gordon, H.S., Economic theory of a common property resource: the fishery. Journal of Political Economy, 1954. 75: p. 124-142.
2. Wilen, J.E., Why Fisheries Management Fails: Treating Symptoms Rather than Causes. Bulletin of Marine Science, 2006. 78.
3. Magnuson-Stevens Fishery Conservation and Management Reauthorization Act, P.L. 109-479. 2007.
4. Homans, F.R. and J.E. Wilen, A model of regulated open access resource use. Journal of Environmental Economics and Management, 1997. 32(1): p. 1-21.
5. NRC, Sharing the Fish: Toward a National Policy on Individual Fishing Quotas. 1999, National Academy Press: Washington DC.
6. Saving Fishing Jobs Act of 2011, H.R. 2772. 2011.
7. Smith, M.D., Limited-entry licensing: Insights from a duration model. American Journal of Agricultural Economics, 2004. 86(3): p. 605-618.