Marketing Canadian Lobster

The Canadian lobster industry is set to undergo significant changes this year that will not only affect fishers and processors, but also consumers. At the Canadian Lobster Value Recovery Summit, held in Halifax last week, stakeholders agreed to implement a levy system by next year (although, the details are incomplete). The hope is that applying a levy on each pound of lobster meat caught and processed would go to marketing these as reliable, high standard, Canadian products. Doing so will expectantly expand consumer interest and demand, aiding this unique industry. However, the additional cost could potentially dissuade those who currently enjoy Canadian lobster at current prices–which are at all-time lows.

Implementing a levy does have some potential to bolster the industry. Charging $0.01/pound from both harvester and processor would raise an estimated $25 million annually according news reports on the Summit. The lobster landings have been increasing in recent years with an average between 50,000 and 55,000 tonnes, but exceeding 74,000 in 2012, the expected revenue could potentially increase if this trend continues. Money from the levy will help brand Canadian lobster and market it to consumers. Having a recognizable and well known product is becoming more and more important as companies in the US have started their own marketing initiatives causing increased trade competition. Yet, there are concerns about the effectiveness and efficiency of using a universal marketing scheme for a product that has such a diverse group of producers.

Furthermore, it will likely stabilize the price of lobster. Atlantic Canada’s lobster haul is high lately, which has reduced prices to extraordinarily low levels. Harvesters are not reducing supply to control demand, because they are also in competition with one another and, therefore, each individual company wants to reach their quota. By increasing the marketing effort, in addition to taking advantage of new trade opportunities, however, the lobster industry is confident that it can support a greater consumer base, which would also lift prices to a more sustainable level. Trade agreements between Canada, Europe, and South Korea bolster this opportunity and proper marketing will help attract new consumers.

Domestic consumers are unlikely to welcome the price increase that will result from the proposed levy, though, and when it comes into effect, those who have become accustomed to inexpensive lobster during years when supply exceed demand could reduce their demand. Unfortunately, however, the price of lobster is unsustainable for the industry as a whole. Some fishermen have had to exit the industry lately, unable to break even with expenditures on wages and rising operating costs (such as oil). If the Canadian lobster industry can increase their customer base through marketing and sustain this increase in prices, it has the opportunity to expand and become a profitable industry in the Canadian economy.

There are already quota and licensing systems in place for harvesting Canadian lobster and, so long as the levy functions efficiently, the lobster industry stands to achieve significant gains from the proposed changes. The supply of lobster depends largely on the systems already in place and the new system aims to increase demand in order to meet the available resources. It is important for the rest of Canada to understand that increasing lobster prices and selling in new markets will benefit the entire country by strengthening the Canadian lobster industry and, as a result, the economy.

Rachel Lowe is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Against farm subsidies

Many countries, especially those in the West, support their farmers with generous agricultural subsidies. In 2011, for example, Canada spent $6.9 billion on them. These programmes, however, create inefficiency and lead to morally questionable outcomes.

Farm subsidies artificially reduce the cost of farming. In other words, farmers produce more in jurisdictions with subsidies than those without, i.e. subsidized farmers produce more than what would otherwise be profitable under purely competitive market conditions.

For instance, consider a developed country without farm subsidies. Farmers would use land that allows them to earn as much, or more, money than they could by renting it to the highest bidder. If this country introduced agricultural subsidies, farmers would purchase or rent additional land, since it would increase their revenue from the additional land above its market price (which, all things equal, was uneconomical before subsidization). Under competitive conditions, farmers would not utilize the additional land, whereas providing subsidies encourages them to do so.

Now, imagine a farmer who plans to purchase land in one of two countries. He must choose between Country A, which has extremely fertile land, and Country B, which has only passable land. If the cost of doing business and renting land were equal in both countries, he would likely choose Country A. However, if Country B offered subsidies that compensate him for utilizing less productive land, then he may opt to operate there, instead. In other words, agricultural subsidies are inefficient, in that they encourage farming on land that could be useful for building shopping malls, restaurants, or movie theatres. Moreover, subsidies create inefficiencies between countries with different agricultural policies.

These subsidies are more pervasive in the developed world than in its developing counterpart. Farmers in poorer countries are unable to compete with farmers in richer countries that offer artificially low factor prices resulting from lavish subsidies. As a result, these subsidies encouraging production in areas that are not especially suitable for agriculture, while discouraging production in areas that are suitable for farming. It is in the interest of developing countries to end agricultural subsidies, as it would allow them to expand their agricultural industries, which currently underperform due to subsidies in rich countries, and would alleviate rural poverty by boosting production and prices. Currently, however, richer countries “dump” their subsidized products in poorer countries, not only deteriorating their ability to generate economic activity, but also creating a dependency trap. From the perspective of richer countries that provide billions in annual subsidies, it is more efficient to stop transferring wealth to their agricultural industry and, instead, purchase foodstuffs from abroad.

Agricultural subsidies additionally affect wealth distribution at the domestic level. Policymakers fund the subsidies using tax revenue, which they transfer to farmers and landowners that tend to be wealthier than most; in 2011, the average income of a farm family was $93,426. That is, they redistribute wealth from the general population to a small group of wealthy individuals and firms. Indeed, contemporary “farming” is much different from its predecessor: most “farmers” are wealthier individuals and many farm operations involve large firms that use factories.

Farm subsidies also have a tendency to remain politically relevant–the special interest group behind farm subsidies is very powerful. It is politically expedient for governments to stay these benefits, as they require little funding per capita, yet, provide massive benefits to a small group. In other words, the cost of fighting these subsidies exceeds to cost of providing them in the first place. Moreover, when subsidies increase, this group begins to sense that they can generate more profit by lobbying the government than by actually producing foodstuffs or agricultural commodities.

Lastly, the farming lobby provides a massive obstacle to potential trade deals. In 2007, for instance, American and European governments’ objected to limiting their agricultural subsidies, which threatened the World Trade Organization’s Doha talks. India and Brazil, the countries proposing that western farm subsidies recede, in turn, refused to open their markets.

Proponents of agricultural subsidies typically defend their position by arguing that they benefit farmers and increase food security. However, in world of institutionalized trade relationships, there is little reason why any country should strive for food autarky at the expense of efficiency. Additionally, the age of rural poverty in rich countries is essentially over: farmers whom subsidies support tend to be quite wealthy. For these reasons, and those mentioned above, all states would be wise to stop subsidizing agriculture.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Obamacare: An Intro

This week was the fourth anniversary of passing the Affordable Care Act (ACA), colloquially known as Obamacare. Many, including Canadians and numerous Americans, thought first that it meant universal health insurance and were subsequently surprised to realize this is not the case.

The ACA’s intent is primarily to increase the number of Americans who have health insurance. Of the roughly 46 million Americans who were “uninsured” in 2009, a substantial chunk could not afford insurance. Several others–roughly half and most of whom are young and healthy– thought it not worth their while to have it. However, if they got injured, hospitals picked up the bill, which was then dispersed among other people’s insurance premiums.

There are three provisions in the bill:

1)    Mandates requiring individuals to purchase health insurance or else suffer a significant penalty: either purchase health insurance from a private company or pay a fee to the federal government

The Supreme Court’s (SCOTUS) ruling in 2012 confirmed the bill’s constitutionality and it has been gradually taking effect since 2013. The second mandate requires employers with more than fifty employees to provide all full-time staff with health insurance or, similarly, pay a substantial fine. Alternatively stated, this means that employers cannot hire (or retain) full-time workers unless hey can also afford to pay for that person’s health insurance. Labour unions caught on to this and many of them now voice strident opposition to Obamacare. Thus far, there have been thousands of documented layoffs because of the employer mandsate.

2)    Expansion of state Medicaid programs

Canadians unfamiliar with American healthcare should know that while private firms insure a majority of Americans, Medicaid is a safety-net health insurance program for those without the means of acquiring insurance (typically the poor). It is run at the state level, which bears the cost and financial responsibility for their expansion. Because of this, nearly 33 states have refused to expand their Medicaid programs in the wake of Obamacare, citing fear of future insolvency issues. In addition, the Medicaid fee schedules for doctors seem to be so low that many of them no longer accept Medicaid patients.

3)    “Health insurance exchanges”

Essentially, an exchange is a regulated and subsidized marketplace where the uninsured can shop for health insurance policies, the price of which adjusts to their annual income. They came into effect in October 2013 and were the subject to scrutiny due to technological errors precluding consumers from accessing the website.

In sum, Obamacare is not universal health insurance. Principally, it is a mandate requiring Americans to purchase their own health insurance. If employers fail to provide coverage, individuals may hope to find subsidized policies through the marketplace exchange or become eligible for Medicaid in certain circumstances. While the implementation of each of these reforms has been shaky and mixed with unintended consequences, the policy community remains divided on whether, on balance, the bill has been a success thus far.

Michael Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute