An Introduction to Fish Prices Prepared for the United Nations University Fisheries Training Program Reykjavik, Iceland Gunnar Knapp Professor of Economics Institute of Social and Economic Research Anchorage, Alaska USA [email protected] January 2013 Prices are critically important to the fish business. • How much money a fisherman makes depends just as much—or more—on the price he gets paid as on the amount of fish he catches or grows. • You can’t tell how well fishermen or fish farmers are doing just from how many fish they are catching or growing. • Fishery and aquaculture managers and regulators can’t think of prices and markets as industry’s concern and not their concern. – How fisheries, fish farming, and the seafood industry are regulated may have important implications for prices throughout the value chain. Fish products reach consumers through supply chains • Supply chains may include many different stages or functions, such as processing, transportation, warehousing, distribution to retail outlets, and retailing. • Different functions may be undertaken by different companies or multiple functions may be performed within a single company. • Products may be bought and sold multiple times as they move through the supply chain, by different companies which perform different functions. • Each time a product is bought and sold, the price typically increases Fish go up the supply chain from fishermen to consumers Money goes down the supply chain from consumers to fishermen Some general characteristics of fish prices: • Fish prices can and do fluctuate widely over time • Prices are higher at each new level of the value chain • Prices at different levels of the value chain tend to move in the same direction. • Fishermen typically receive only a small share of the retail price paid by the consumer • Similar products tend to command similar prices in the same place at the same time • Prices for similar products may differ widely between – Different places – Different types of stores – Different purchase volumes • . Fish prices can and do fluctuate widely over time Prices are higher at each new level of the value chain Prices at different levels of the value chain tend to move in the same direction. Fishermen typically receive only a small share of the retail price paid by the consumer What explains these general characteristics of fish prices? What explains the price of any particular fish or fish product? Fish prices are complicated. • Economics can explain a lot but not everything about fish prices. • It’s a lot easier to explain what happened to prices in the past than predict what will happen in the future. • I would be a lot richer if I could predict what is going to happen to fish prices next month or next year. Fish prices are hard to define and measure • Every sales transaction has its own price. • At any given time, prices for the same product may vary for different buyers and sellers, for different places, for different sales volumes and for other sales condition. • For any given product, prices may change over time—from year to year, month to month, day to day, or even hour to hour • The price a particular buyer paid or seller received for a particular sale may vary widely from the “average” price for the product or species or period of time. • Most buyers and sellers are reluctant to share price information, or they may have an incentive to overstate or understate the prices they received or paid. • Be careful when you use price data: think about how the data were collected and whether they are really representative of the prices you are interested in. A price tag is not a price. • A price tag is a price offer. • It isn’t the real price unless someone actually pays that price. • Just because I say the price of my fish is $50/lb doesn’t mean I can sell it for $50/lb. • Don’t assume that prices you see in a store or hear about are necessarily representative of overall market conditions. Your own experience can teach you a lot about fish markets and prices. • You probably – shop around for the best deals. – try to buy low and sell high. – bargain if you think you can buy for a lower price or sell for a higher price. • You don’t necessarily – tell people the price you could afford to pay or sell for – tell people price you actually paid or sold for – Think or care about how the price affects the person you’re buying from or selling to • How much you pay or sell for probably depends on: – how urgently you need the product or the money. – whether you (or the person you’re selling to or buying from) has cash or needs credit. – how well you know or trust the person you’re doing business with. – what else you’re buying and selling as part of the deal. All the money in the fish supply chain comes from consumers • The ultimate constraint on prices for everyone in the supply chain is what consumers are willing to pay. • Collectively, the participants in the supply chain can’t earn more than consumers are willing to pay for the final product. Prices and margins • What matters for fishermen is the price they receive • What matters for consumers in the price they pay • What matters for everyone else in the supply chain is the margin they earn: Margin = Price received – Price paid Everyone in the supply chain depends on everyone else • Everyone needs: – Fishermen to catch the fish – Processors to process the fish – Wholesalers to distribute the fish – Stores and restaurants to sell the fish • No level of the supply chain can stay in business by putting other parts of the supply chain they depend on out of business. The constraints on fish prices are different in the long run than in the short run • In the long run: – Businesses have to cover their costs--or they go out of business – Prices have to be at levels at which businesses at every level of the supply chain can cover their costs • In the short run: – Businesses don’t necessarily have to cover their costs – Prices don’t necessarily have to be at levels at which businesses at every level can cover their costs For a supply chain to last over time, over the long term, at every level of the supply chain . . . • Margins must be: – high enough to cover costs – low enough for businesses at other levels to cover costs • The price can’t be: – lower than cumulative costs below that level – higher than the price consumers are willing to pay minus cumulative costs above that level. Price consumers are willing to pay Total costs of businesses at higher levels Potential price range Total costs of businesses at lower levels If buyers or sellers face limited competition, they may have market power. • If there is only one or a few sellers, they may be able to sell for higher prices than if they had competitors • If there is only one or a few buyers, they may be able to buy for lower prices than if they had competitors • Who has market power affects who earns profits in the value chain. • The margins at each level of the supply chain depend in part on how much competition and market power there is at each level. Competition and bargaining power drive where in the potential price range actual prices fall—and who in the supply chain earns profits • At any level of the value chain: – The less competition, the greater the higher the price and margin is likely to be – The more competition, the lower the price and margin is likely to be Price consumers are willing to pay Total costs of businesses at higher levels Potential price range Total costs of businesses at lower levels Competition plays a key role in pricing. • • • At any level of the value chain: – the more competition there is among sellers, the lower the price tends to be—because buyers prefer to buy from the sellers offering the lowest price. – the more competition there is among buyers, the higher the price tends to be, because sellers prefer to sell to the buyers offering the highest price. Competition explains why prices tend to be similar—and to move together—for similar products at a given time and place. – Buyers don’t want to pay higher prices than competing sellers are offering. – Sellers don’t want to accept lower prices than competing buyers are offering. Competition can make the fish business a tough business to be in. – If your competitors are willing to raise the prices they are paying, or cut the prices they are selling for, you may have no choice but to raise or cut your prices too. Anything that affects what a buyer is willing to pay or a seller is willing to sell for can affect prices. • How much the buyer and seller trust each other • How much they depend on each other for other types of business (such as buying and selling other kinds of fish at other seasons) • How easy or convenient it is for them to do business with each other • How much each of them needs money • What kind of financing and payment arrangements they are able to provide each other. The higher the price, the less consumers will buy The lower the price, the more consumers will buy To sell more, the consumer price must be lower To sell less, the consumer price can be higher • The more fish the supply chain tries to sell, the less everyone in the value chain the make collectively. • The less fish the supply chain tries to sell, the more everyone can make collectively In the short-term, not everyone in the supply chain necessarily has to make money all the time. • Prices can and do fluctuate widely in the short run. • Some of the time, companies have to buy or sell for prices at which they lose money—sometimes a lot of money Supply and demand analysis • Supply and demand analysis provides a very powerful and useful way to explain how different factors may affect prices in a market • Supply and demand analysis is taught in almost every introductory economics course • Supply and demand is more subtle and complicated than many people realize • Many people who think they understand supply and demand don’t really understand it! A supply and demand graph Price (P) Supply curve (S) Equilibrium price (P*) Demand curve (D) Equilibrium quantity (Q*) Quantity supplied (Q) Quantity demanded (Q) The supply curve (S) shows how much sellers would be willing to supply for any given price. Price (P) Supply curve (S) P2 P1 Quantity supplied (Q) Q1 Q2 The demand curve (D) shows how much buyers “demand” or would be willing to buy for any given price. Price (P) P2 Demand curve (D) P1 Q2 Q1 Quantity demanded (Q) Where the demand and supply curves cross shows what economists call the equilibrium price (P*) and the equilibrium quantity (Q*) in the graph). At the equilibrium price, the quantity supplied equals the quantity demanded. In competitive markets, price and quantity tend to move towards the equilibrium price and quantity. Price (P) Supply curve (S) Equilibrium price (P*) Demand curve (D) Equilibrium quantity (Q*) Quantity supplied (Q) Quantity demanded (Q) Competition between buyers or sellers is what drives prices towards the equilibrium price. Price (P) At prices above P*, the quantity supplied is more than the quantity demanded. S PH P* PL D At prices below P*, the quantity supplied is less than the quantity demanded. Quantity (Q) Changes in factors other than price can cause the supply or demand curves to shift in or out Bad weather might cause the supply curve for fish to shift inwards. Price (P) S’ S P2 P1 Quantity supplied (Q) Q1’ Q1 Q2’ Q2 A safety scare might cause the demand curve for fish to shift inwards. Price (P) P2 P1 D’ Q2’ Q2 Q1’ Q1 D Quantity demanded (Q) When the supply or demand curve shifts the equilibrium price and quantity shift. We can predict the how different factors affect prices and quantities by how they shift the supply and demand curves. Bad weather might cause the price of fish to rise and the quantity of fish sold to fall. Price (P) S2 S1 P*2 P*1 D Q*2 Q*1 Quantity (Q) A food scare might cause the price of fish to fall and the quantity of fish sold to fall. Price (P) S P*1 P*2 D2 Q*2 Q*1 D1 Quantity (Q) To think of how something may affect quantity and price, think about how it would shift the supply or demand curve Examples of factors which shift the supply or demand curves Increase in fish abundance Increase in cost of fuel Marketing campaign Fish safety scare Effect on equilibrium quantity Effect on equilibrium price Supply curves shifts out (sellers are willing to sell more at any given price) Increase Decrease Supply curve shifts in (sellers are willing to sell less at any given price) Decrease Increase Demand curve shifts out (buyers are willing to buy more at any given price) Increase Increase Demand curve shifts in (buyers are willing to buy less at any given price) Decrease Decrease How the supply or demand curve shifts What happens to prices at any given time reflects the combined effects of many different factors which may be shifting the demand and supply curves in different ways. • You can’t predict how prices will change from the effects of any one factor: you have to look at the combined effects of all the factors together. • If your fishery has a big catch, by itself this would tend increase supply and lower your price. • But if you have an effective marketing campaign which increases demand, that could offset the effect of the bigger catch—causing your price to rise. • So many different factors can affect prices at the same time that it can be very difficult to explain why prices change in a particular way. Changes in supply and demand occur differing time scales and affect prices on differing time scales • Supply tends to vary more from year to year – Year to year changes in price are usually driven by changes in supply • Demand changes more gradually over time – Consumer tastes change only gradually over time – Incomes tend to change only gradually over time – Demand may change a lot over time and affect prices a lot over time Fishermen’s prices tend to change relatively more than prices at higher levels in the value chain • Competition causes prices to tend to rise and fall by relatively similar absolute amounts at different stages of the supply chain. • The same absolute price changes are greater relative price changes at lower levels of the value chain Value chain level Price last year Price this year Absolute change Relative or % change Price the consumer pays the store $4 $3 -$1 -25% Price the store pays the processor $3 $2 -$1 -33% Price the processor pays the fisherman $2 $1 -$1 -50% What can fishermen do to get better prices? • Gain market power – Increase competition among buyers – Reduce competition among themselves • Increase demand – By selling to more markets – By increasing quality • Reduce costs at other levels in the value chain (so that there is more money left to be shared with fishermen) • Reduce catches Getting better prices for fishermen is not easy!