The Benefits of Responsible Fishing

Acknowledgements

We would like to thank Teun Visser and the staff of Visafslag Urk for their help in providing the auction market data and useful comments on the text, and Andre Buijsman and the staff of GIBO Groep, accountants and business advisers, for their help in collecting the costs and earnings data. We would also like to thank the vessel-owners who kindly allowed us to have access to their accounts.

Study Team: A. Read (NSFO)

G. Meun (CPO)

P.E. Rodgers (Erinshore Economics Limited)

This report was part-funded by the Commission of the European Communities Directorate-General for Fisheries.

The opinions represented in this report do not necessarily reflect the views of the Commission of the European Communities and do not anticipate the Commission's future policy in this area.

BENEFITS OF RESPONSIBLE FISHING: THE IMPACT OF AN INNOVATIVE TRIAL OF VOLUNTARY RESTRAINT

Executive Summary

In 2002, members of the North Sea Fishermen’s Organisation (NSFO), in the United Kingdom, and of the Cooperative Producentenorganisatie Oost Nederland UA (CPO), in the Netherlands, decided, in conjunction with the other Dutch Producer Organisations to take collective action to prevent their quota being exhausted early and to stabilise the market for their catch.

The vessels of the CPO and NSFO are beam trawlers fishing in the North Sea and their target species are flatfish, especially dover sole, and plaice. Dab, lemon sole and flounder are important by-catch species that may be targeted when quota is short.

Vessels each had (and still have) significantly less quota of sole and plaice than they are capable of catching; they have in the order of 70-80% of their needs for sole but only 50-60% of the plaice they could catch.

NSFO members agreed voluntarily to tie up their vessels for one week in four during the first three months of the year 2002. Similarly, members of CPO limited their fishing to 40 days at sea during the first quarter, with at least 3 weeks without any fishing activity at all.

Bad weather prevailed at the end of 2002 preventing the Dutch fleet from taking the whole of its quotas and the scheme was not repeated in 2003. However, amended versions of the scheme were again operated voluntarily (without government intervention) in 2004 and 2005.

By considering the markets to which they supplied, the fleets hoped that their collective action would serve their own interests by increasing their revenue and to some extent lowering costs, and serve the interests of their customers, the processors, caterers and retailers, and ultimately the consumer, by creating a more durable market with a steadier supply and stable prices.

The objective of this study has been to identify whether, following the voluntary restraint on fishing imposed by the NSFO and CPO during the early part of 2002, and 2004, the expected improved price stability for plaice and sole on the Urk auction market was achieved, and to estimate the amount of the improvement in revenues and cost-savings for the fleet.

A number of earlier studies have found that the price of plaice and sole in countries around the North Sea responds to changes in supply. The nature of the response is that the price changes less in percentage terms than the change in supply and the changes are in the opposite direction, so that if for example supply increases the price falls, other things remaining equal.

The revenue obtained is the price multiplied by the quantity sold. In the example above an increase in quantity supplied to the market leads to a fall in price and revenue. The first purpose of this study has been to calculate what the revenue might have been had there been no tie-up scheme in place and to compare it with what actually happened.

Inverse demand functions which relate the price obtained for fish according to the quantity supplied to the market were calculated for lemon sole, dover sole, and plaice.

The data used cover the quantities and values of sales of plaice and sole at Urk on a daily basis. Data on daily landings and the revenue achieved at Urk have been provided by Visafslag Urk – the Urk fish auction market. They include landings and revenues for lemon sole, dover sole, and plaice by EU market size category from 1^st January 2002 to 31^st March 2004, a total of 584 observations. Sales were disaggregated by nationality of the vessel landing the fish and this covered seven nations; Belgium, Denmark, Germany, Ireland, Netherlands, Norway, and the United Kingdom.

The responsiveness of price to changes in the own-supply of each of the species is greater than unity in all cases; 1.04 for lemon sole, 2.18 for dover sole, and 1.43 for plaice. These suggest that revenue would be maximised by spreading supplies evenly across any given time period. This result was confirmed by the simulations.

The model was run to estimate what it predicted would have been the revenue in the period that the tie up scheme was in force against an alternative scenario of the scheme not being in force. (The model's predictions of revenue rather than the actual revenue are used in order to minimise error introduced by the model, that is, to compare like with like).

The alternative scenario assumed that the landings of each four week segment of the tie-up scheme were allocated to the first three weeks, leaving a blank week when only the landings from vessels of countries other than Britain and the Netherlands were available. This is quite a severe assumption as such a complete stop would not have happened, owing to extraneous factors such as the weather, vessel break-downs etc., but serves to offer a limiting case as to what could have happened.

The aggregate gains in earnings arising from the tie-up scheme, with the effect of other factors that might have affected prices removed, are calculated to have been

Estimated Gains in Revenue from Operating the Tie-Up Scheme

	CPO	NSFO
2002	16%	15%
2004	12%	18%

It must be emphasised that these are the maximum that the improvement in revenue is likely to have been and that it does not necessarily follow that these gains meant that revenue was higher than previous years. It simply suggests that revenue was somewhere above zero, but below these percentages higher, than it would otherwise have been had the tie-up scheme not been in place. In other words, this is evidence that the tie-up scheme had the intended effect.

The second purpose of this study has been to try to identify from costs and earnings accounts of a sample of vessels whether there is statistical evidence that the profitability, revenue and crew share improved in 2002 and whether costs were lower, compared to years when there was no tie-up scheme in place.

Costs and earnings data were obtained for a sample of nine vessels for the years 1999 to 2003, the latest available. Eight vessels were members of CPO and the ninth a member of NSFO, all fishing from Urk by beam trawling for flatfish in the North Sea. For various reasons some observations had to be discarded but in the period 1999 to 2001 and 2003 there was a total sample of 35 observations and in 2002, the year when the tie-up scheme was in place, a sample of 8 observations. This was adequate to enable testing but not generous.

For revenue, crew share and costs, the statistical tests suggested that there was no difference between those of 2002 and the other years.

Revenue in 2002 could have been reduced by the impact of bad weather and compensated for by the tie-up scheme but the evidence is not strong. Although costs were 12% lower than average in 2002 the statistical tests could not confirm that they were below normal.

However, profits are a sharper test as they represent the difference between the revenue and costs and are thus more sensitive in the face of commercial pressures. The statistical tests on profits confirmed that the level of profit in 2002 was higher than in other years. The evidence is quite robust with a likelihood of only about 1 in 30 of being incorrect.

While individually the evidence of the econometrics and statistical tests is not absolutely conclusive (and indeed that of the statistical tests need not necessarily be attributable to the tie-up scheme), combined, the two pieces of evidence do suggest that the tie-up scheme did result in higher revenues and profits.

It is the conclusion of this study that the collective behaviour of the two fleets of beam trawlers belonging to CPO and NSFO members did achieve the objective of making gains from more stable markets, and that the processors, caterers, retailers and consumers of flatfish will have benefited accordingly.

This collective behaviour of the beam trawl fleets is unusual in fisheries and has wider implications. Beam trawler owners have often been accused of being among the least responsible of fishing enterprises. This study suggests that if a good case can be made to them they are capable of leading the way if necessary towards responsible fishing.

There is a further inference that can be drawn. In many fish markets, fleets could improve their own incomes by collective behaviour to stabilise markets through providing as steady a supply as possible rather than by racing to fish and back to the auction.

While in many industries such collusive behaviour would be detrimental, in the particular circumstances in which fisheries are to be found operating, it appears to offer benefits to the fleets, processors, caterers, retailers, consumers, and possibly fish stocks alike, with no-one losing.

The success of industry-led measures such as this appears to be in marked contrast to the increasingly restrictive measures imposed in a ‘top down’ approach on the fishing industry. There is a serious danger that blanket measures imposed on the industry will stifle any attempts by the industry to take collective responsibility for their own stocks and markets.

BENEFITS OF RESPONSIBLE FISHING: THE IMPACT OF AN INNOVATIVE TRIAL OF VOLUNTARY RESTRAINT

Section 1 Introduction

Early in 2002, members of the North Sea Fishermen’s Organisation (NSFO), in the United Kingdom, and of the Cooperative Producentenorganisatie Oost Nederland UA (CPO), in the Netherlands, realised that quotas of plaice and sole on their North Sea fishing grounds were insufficient to ensure a fishery until the end of the quota period and would be quickly exhausted.

In response to this realisation, NSFO members agreed voluntarily to tie up their vessels for one week in four during the first three months of the year. Similarly, members of CPO limited their fishing to 40 days at sea during the first quarter, with at least 3 weeks without any fishing activity at all.

The intention of this action was several-fold. First, it would ensure a more steady supply of plaice and sole to processors and consumers. Secondly, it could have been expected slightly to raise the price received at auction while the tie-ups were in place, but to have prevented a sharp rise in prices when the quota was exhausted early as had happened in 2001.

There may also have been benefits to the fleet in slightly increased catches arising from fishing more-abundant (less fished) stocks later in the year, as well as a reduction in costs, due to fewer days being spent at sea.

The temptation to fish illegally is also reduced owing to the consequent benefits of stock conservation and future earnings.

As such there appears to have been the chance of gains to all participants in the supply chain right through to consumers, and also to the crew share of sales, from this socially responsible approach.

Normally, these would be impossible to achieve without appropriate government intervention; intervention which has been successful hardly anywhere in the world. It represents in a sense the ideal of fishery managers – fishing enterprises acting collectively to constrain their action for their own and others' benefit.

The action was repeated under the same principle but slightly different terms in 2004 and 2005 but not in 2003.

This project responds to Criteria 1(3) of the Call for Proposals in that if it can be demonstrated empirically that this innovative socially responsible behaviour and good practice in the fisheries sector can result in gains for the participants then there may be an incentive for others to follow, with the consequent positive impact on illegal fishing, stock conservation and future earnings.

This is particularly pertinent given the continued apparent failure of measures, imposed on the fishing industry as part of the Common Fisheries Policy (CFP), to reduce fishing effort in Northern Europe, whilst maintaining fleet viability.

The results will be of general interest in fisheries management, serve to improve the image of fishing, and have wider benefits for the community, preserving a steady flow of raw material to processors and stable prices for consumers.

The objective of this study has therefore been to identify whether, following the voluntary restraint on fishing imposed by the NSFO and CPO during the early part of 2002, 2004 and 2005 the expected improved price stability for plaice and sole on the Urk auction market was achieved, and to estimate the amount of the improvement in revenues, crew share, profits and cost-savings for the fleet.

Section 2 Background

The membership of CPO is made up of beam trawlers fishing for flatfish in the North Sea. They land almost exclusively to the markets at Urk and Harlingen. CPO membership in 2004 consisted of more than 100 vessels of widely varying sizes. The annual turnover of CPO members is approximately €115 million.

The NSFO is a Producer Organisation (PO) with a membership of some 25 active vessels representing mainly British and Anglo-Dutch beam trawlers, most of which originate in the Dutch port of Urk. They constitute the majority of the UK’s beam trawlers fishing in the North Sea. The beam trawlers in the NSFO average 35m in length; only four of the beam trawlers in membership are the smaller class of ‘Eurocutter’ which work mainly from ports in the south-west of England. Total income of the 23 North Sea beam trawlers in the NSFO, in 2004 was approximately €30 million.

A further 7 Urk beam trawlers with similar fishing patterns work within other UK Producer Organisations.

The Anglo-Dutch vessels also land mostly into the fish auction at Urk, or Harlingen, also in the Netherlands and the next most important market.

Urk vessels also work under the flags of Belgium, Denmark and Germany, representing a significant fleet tonnage in both Belgium where they comprise approximately 25% of the beam trawl fleet and Germany, 80%.

The Dutch vessels operate under an Individual Transferable Quota (ITQ) management system where each fishing company originally had a quota given according to previous fishing practice and which could subsequently be traded. Under the UK’s Fixed Quota Allocation (FQA) system each vessel has been allocated a share of the UK fish quotas also based on track record. The vessel quotas are allocated to a vessel’s PO and administered by the PO. It is effectively very similar to an ITQ system since quota may be, and is, traded, both between PO members and between POs.

The mainstay of both Urk fishermen and the Urk fish auction has historically been flatfish, in particular plaice and sole, and it is changes to the availability of plaice quota that appears to have driven the move by fishermen from a single port to be so adventurous in flagging vessels elsewhere, combined with the financial strength induced by the Individual Transferable Quota (ITQ) regime under which they work.

Figures 2.1 and 2.2 trace the changes in plaice and sole landings and quota since 1987. Much of the behaviour of Urk fishermen can be seen as a response to these declines, in particular to the dramatic cut in the Total Allowable Catch (TAC) in 1995 and again in 1996. Flagging out tonnage to other Member States has allowed total plaice quota available to Urk fishermen to remain relatively stable during a period of significant overall decline in the TAC.

Figure 2.1: Landings of North Sea Plaice and the Total Allowable Catch 1987 to 2003

Source: ICES

Figure 2.2: Landings of North Sea Sole and the Total Allowable Catch 1987 to 2003

Source: ICES

Fleet ownership remains remarkably similar to the patterns seen in Urk 20 years ago, with the majority of vessels in single ownership, often with more than one family member on board, and others associated with the shore side aspects of running the vessel.

A trend towards rationalisation is discernable, but family-owned vessels remain the mainstay of the Urk fleet. Technological changes within the beam trawl fleet in the Netherlands have been well documented by the European Commission.

Whilst the flagging out of the Urk fleet has continued since the first tentative approaches to the UK around the time of the Factortame case in the 1990s, numbers of vessels and quota available have not increased. The changes in ownership, with the associated costs of operating away from Urk, have been in effect moves to maintain the status quo within the port.

Under the system of Relative Stability within the CFP, the United Kingdom has 27% of the North Sea plaice TAC and Netherlands 38%, a combined holding of two-thirds the stock available to be fished.

Quota prices in the United Kingdom have historically been well below those of the Netherlands, and the quota market developed several years later than in the Netherlands, allowing the first Dutch operators to flag into the United Kingdom to gain access to quota at much cheaper rates than were available on their own flag.

Vessels operating in Belgium, Germany and Denmark are allocated quotas centrally, usually on a monthly basis.

The average British North Sea beam trawler has access to significantly more annual plaice quota than average Dutch flagged vessels (approximately 400 tonnes compared to 175), and significantly less sole quota (15 tonnes compared to 50), leading to different fishing patterns evolving between what are physically very similar vessels.

Dutch vessels are likely to fish in areas where sole are found, typically the muddy grounds in the southern North Sea, close to the Plaice Box, an area off the coasts of Belgium, Denmark, and the Netherlands where plaice fishing is restricted.

Vessels flying the United Kingdom flag spend longer on grounds further north, where sole are less abundant.

Virtually the entire Urk-based fleet leaves for the fishing grounds early on a Monday morning, returning to land at the end of the week. The reason for this is mainly cultural, but there has been an increasing trend for British-flagged vessels, fishing further afield, to fish longer trips, though many still choose not to fish on a Sunday. The preference for fishing patterns of this type leads to very large auctions on a Friday and Monday, with much smaller volumes of fish available for sale midweek. Urk processors appear to be well adapted to these peaks and troughs.

The fish action at Urk is the leading fish auction in the Netherlands, taking a third of all Dutch sales, with a throughput of 35,500 tonnes in 2004. The majority of this is flatfish, with 20,000 tonnes of plaice, 3,800 tonnes of sole and 2,750 tonnes of dabs.

United Kingdom vessels consigned 9,000 tonnes of fish to Urk for auction in 2004, the bulk being from vessels owned and operated from Urk itself.

Urk vessels flagged out to Belgium, Denmark and Germany consigned a further 5,000 tonnes to the auction. 94% of the plaice sold on the market is purchased by local processors. A third of this is sold as fresh fish, mainly within the Netherlands, the remainder being processed for freezing and subsequent export.

Section 3 A Literature Review of Demand and Inverse Demand Functions in the Quayside Market for Fish

Introduction

The large number of studies that have been made of the landings market for fish have confirmed the responsiveness of the price of fish to the quantity landed for sale as economic theory predicts.

Not surprisingly, the development of understanding of demand and inverse demand functions in general has been considerably enhanced by the emergence of information technology and the refinement of econometric techniques that powerful desk-top computers have made possible. These have made it possible to test the theory empirically.

The purpose of this literature review is:

to appraise the economic theory relating to the relationship between the auction price of fish and the quantity landed and offered for sale,

to consider the results of empirical analysis undertaken, and

to discuss how other economists have dealt with the myriad of theoretical and practical problems that empirical investigation of fish auction markets presents.

This will serve to give a sound theoretical foundation to the work to be reported later in this study.

The Inverse Relationship between Quantity and Price

It has already been obvious for many years that the demand for fish and the price it obtains are responsive to supply, especially on a daily basis. For example, during the heyday of the seasonal East Anglian Herring Fishery in the early 1930s the fleet would land its catch each morning before bunkering and returning to sea.

The fish processing companies in Great Yarmouth would accept all the fish for which they had capacity. When they were full the international code flag “N” would be hoisted on the fishwharf and vessels too late to land to the market would turn and dump their catch at sea. Even now the trade press carries occasional stories of perfectly good fish being withdrawn and sent for reduction because of excess supply on a particular day.

These anecdotes suggest that there are limitations to the amount of fish the market can absorb on a daily basis governed perhaps by processors throughput and chilling capacity.

In the famous case of the pacific halibut in the USA an attempt was made to control output by limiting fishing effort. Instead, the year-round fishery of the early 1920s became one of only 48 hours and less in the 1990s. The economic distortion of investment on-shore resulting from the failure of the policy was the development of vast chilled storage capacity to provide steady supplies for the downstream consumer market.

Adam Smith (1776) demonstrated that the price of goods will vary according to the amount becoming available for the market. In developing his rudimentary theory he was particularly influenced in his thinking by the markets for agricultural produce. He noted that a glut was accompanied by a fall in price, whereas a poor harvest would lead to high prices for the produce. This Classical view of the inverse relationship between the market-clearing price and quantity sold suggested that the determination of price was driven by supply.

The Keynesians suggested that the direction of causality might be in the opposite direction. They felt that the price set by the market determined what producers could supply (Keynes 1936).

This difference in view, however, is in large part due to the fact that the Keynesians were writing in a time when industrial production was in the ascendancy in the world economy. Industrialists have much greater control over the level of output than crop-growers. They are generally not subject to the responsiveness of production-in-hand to the natural factors that cause gluts and shortages in crops. An industrialist can plan to use given amounts of the factors of production and expect a certain level of output, within the variability caused only by reasons such as breakdowns and human error. This means that industry can adjust its output to the going price.

The relationship between the market-clearing price of fish and the quantity sold is closer to the Classical view of markets than that of the Keynesians, because fishing enterprises do not have the tight control of output that is available to industrialists.

The supply of fish is governed by the same kind of variability faced by agricultural output. Environmental factors may play a considerable part in deciding the amount of fish that is available to a market. Annual recruitment of juvenile fish to a fishery is highly variable, with the maximum being 7 times the minimum for plaice and 45 times the minimum for sole since stock assessments began in 1957 (ICES 2003).

The existence of TACs has served only to cap the amount of fish that may be landed in any one year, allowing for misreported and illegal landings. However, this has not removed the natural variability of landings on a daily basis.

There are several reasons for this variability. First, stock estimates may be inaccurate, and the TAC set incorrectly or in the face of a stock assessment for political reasons. Sometimes, in spite of the availability and use of fish-finders, the fish are just not about. So, whatever the stock level, there are days when fish landings are scarce or abundant. Bad weather may prevent a fleet from fishing or force it to move to a second-best fishing ground. This variability of supply to the market may be expected to drive the price.

Early work in estimating the relationship between the quantity of fish supplied and the price achieved at fish auctions concentrated on the market for fish in the USA, where Bell (1968), Nash and Bell (1969), and Waugh and Norton (1969) established the empirical linkage between the price obtained for fish and the quantity landed.

Gates (1974) confirmed the relationship and showed the importance of including the size of fish as an explanatory variable in the inverse demand function.

This relationship between changes in the quantity supplied and variations in the market price is called the price-elasticity of demand but is determined in a function where the quantity supplied is the dependent variable. The price-elasticity of demand gives the percentage change in quantity-sold brought about by a 1% change in the price.

When the price is the dependent variable the relationship is called a flexibility. The price-flexibility of demand is the percentage change in price brought about by 1% change in quantity sold. The price flexibility is the inverse of the price elasticity.

Other elasticities and flexibilities may reflect the responsiveness of demand or price to changes in another variable such as landings of another species.

In a case study of the yellow-tail flounder Gates found a price flexibility of demand of -0.63, equivalent to an elasticity of -1.59. The price flexibility of the mean size of fish landed was 0.43.

Previous Estimates of the Price Elasticity of Demand and of the Price Flexibility of Demand for Sole and Plaice in the Northern European Arena

In Europe, Ioannidis and Whitmarsh (1987) estimated the demand relationship for plaice in the United Kingdom and found the market to be highly competitive. Their models offered high explanatory power for the effect of landings on the price level.

Lagged effects explained the price achieved by landings quite sharply but the impact disappeared after a month or two. An important finding was the cross-price effect, where the price obtained for plaice was influenced by landings of other species, notably haddock.

Rodgers (1987) also estimated the demand relationship for plaice in the United Kingdom, concluding that the long-run price elasticity of demand using monthly observations over the period from January 1981 to December 1986 was -3.05. The short-run elasticity was more volatile at -6.72, reaffirming the belief that the market reacts sharply to short-term over-supply.

Jorgensen et al (1989) suggested that the responsiveness of price to changes in supply of sole in the Dutch market was very sluggish, taking longer than a month to adjust perhaps as a result of frictions faced by processors in adjusting capacity.

They found a short-run flexibility of -0.19 which rose in the long-run to -0.57, but both were sensitive to the degree of change of supply. The mean-size flexibility was 0.12 in the short-run and 0.36 in the long-run.

In the Danish market the own-price flexibility of plaice was found to be -0.074, implying that a 10% change in the volume of landings will bring about a 0.74% change in price.

Table 3.1a Price Elasticities of Demand for Sole in the North European Arena

Study	Market	Short Run Elasticity	Long-Run Elasticity
Jorgensen et al (1989)	Netherlands	-5.26	-1.75
Jaffry et al (1997)	United Kingdom	-	-5.00
MOR (2001)	United Kingdom	-	∞

Table 3.1b Price Flexibilities of Demand for Sole in the North European Arena

Study

Market