Fishery Management: Market Impacts of the American Fisheries Act on the Production of Pollock Fillets

Published by the Government Accountability Office on 1999-06-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to Congressional Committees
                  and Requesters

June 1999
                  Market Impacts of the
                  American Fisheries Act
                  on the Production of
                  Pollock Fillets

                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community, and
                   Economic Development Division


                   June 30, 1999

                   Congressional Committees and Requesters

                   The Alaska pollock fishery is the world’s largest, single-species
                   groundfish1 fishery, and nowhere are more pollock caught than in the
                   Bering Sea off the coasts of Russia and Alaska. As the supply of
                   better-known groundfish has dwindled, the demand for pollock, which is a
                   valued source of fillets, surimi,2 and other products, has increased. This
                   increased demand has led to a virtual “race for fish” in the U.S.-controlled
                   portion of the fishery. Each fishing season, vessels compete to catch as
                   many fish as possible before the overall catch limit is attained and the
                   season is closed. Vessels that catch the most fish before the catch limit is
                   reached make the most money. Over the years, as more and more vessels
                   joined this race, the pollock fishery became overcrowded with too many
                   vessels chasing a set amount of fish. To address this situation, in 1998, the
                   Congress passed the American Fisheries Act (P.L. 105-277, Division C,
                   Title II). The act eliminated certain vessels from the fishery, changed the
                   way the annual allowable pollock catch was distributed among the various
                   sectors of the fishing industry, and set up a structure for the formation of
                   fishing cooperatives.

                   During the debate on the act, concerns were raised that the banning of
                   certain vessels and the redistribution of the annual allowable pollock
                   catch would result in restaurants and seafood companies being unable to
                   obtain enough fillets to supply their markets. As a result, section 213(e) of
                   the act required us to report by June 1, 2000, on whether the act had
                   negatively affected the market for pollock fillets, including any reduction
                   in their supply. We are responding to that requirement with this interim
                   report, which will be followed with a final report by the required date. This
                   interim report provides information on the production of pollock fillets
                   and the actions that affected production for the first and largest of the
                   three 1999 pollock fishing seasons, which ran from January through late
                   March 1999. It also includes a historical perspective on the pollock fishery
                   and discusses some factors that could affect future production.

                   For the January to late March 1999 fishing season, the U.S. production of
Results in Brief   Bering Sea pollock fillets increased 13 percent, from 33.9 million pounds

                    A general term that refers to fish that live on or near the seafloor, including cod, haddock, pollock,
                   and ocean perch.
                    Surimi is a fish paste that is converted to imitation crab, lobster, and other products.

                   Page 1                                                    GAO/RCED-99-196 American Fisheries Act

             during the comparable 1998-fishing season to 38.2 million pounds in 1999.
             The increase is attributable to three main factors. First, demand for the
             fillets increased as worldwide groundfish supplies and Russian production
             of pollock fillets declined. Second, reflecting this increased demand,
             pollock fillet prices increased by as much as 74 percent in the past year,
             providing an incentive to produce more fillets. Finally, the formation of a
             fishing cooperative, provided for in the act, guaranteed the cooperative’s
             members a certain amount of fish and effectively ended their race for fish.
             With the end of the race for fish, cooperative members were able to shift
             production from surimi, which is faster to produce, to the slower but more
             profitable production of fillets. Although demand for pollock fillets
             continues to be high, several other factors, such as where pollock fishing
             will be allowed in the two remaining 1999 pollock fishing seasons, could
             affect future production and prices. Despite a recent decline in pollock,
             the fishery is considered to be healthy and in no immediate danger of
             being overfished.

             The worldwide catch of Bering Sea pollock was about 3 million metric
Background   tons3 in 1997 with over one-third of it caught in American-controlled
             waters. Alaska pollock remains the largest U.S. fishery by landed weight,
             about 1.1 million metric tons. Just two decades ago, however, the
             American fishing industry’s interest in pollock was slight. According to an
             industry official, pollock was considered a low-valued fish, and Americans
             preferred to fish for the higher-valued salmon, crab, herring, and halibut.
             However, increased market demand for Alaska pollock fillets as a
             substitute for declining supplies of traditional groundfish species caused a
             number of American fishermen to switch to pollock fishing.

             The growth of the American Bering Sea pollock fishery was made possible
             by the Fishery Conservation and Management Act of 1976,4 later amended
             and now known as the Magnuson-Stevens Fishery Conservation and
             Management Act. This act established a fishery conservation zone that
             extended federal jurisdiction for fishery resources in coastal waters
             beyond state boundaries to 200 miles from the U.S. coastline and gave
             priority to domestic enterprises to fish within this zone. The Secretary of
             Commerce has final authority to administer the Bering Sea pollock fishery.
             The Secretary manages the fishery through the National Marine Fisheries
             Service, an agency within the Department of Commerce’s National
             Oceanic and Atmospheric Administration, and through the North Pacific

              A metric ton equals 2,205 pounds.
              16 U.S.C. 1801 et seq.

             Page 2                                   GAO/RCED-99-196 American Fisheries Act

    Fishery Management Council (Council).5 The Council acts as an advisory
    board and recommends fishery management actions to the Secretary of

    Although at first content to catch and deliver pollock to foreign processing
    ships, Americans soon started investing in vessels capable of both
    catching and processing pollock at sea. After these catcher/processor
    vessels proved that pollock could be harvested profitably, companies
    (primarily Japanese) began constructing processing plants on land.
    However, by 1990, the catcher/processor vessels were catching an
    estimated 80 percent of the total allowable annual catch, and controversy
    developed over how the annual pollock catch should be distributed. To
    protect and expand their investment in processing plants built onshore,
    these companies and their U.S. trade association petitioned the Council to
    divide the allowable annual catch of Bering Sea pollock between the
    offshore segment of the industry and the “inshore” sector—those
    catching pollock and processing it either in shore-based plants or in
    processors near the shore. In 1991, the Council approved such an
    allocation formula. From the annual total allowable pollock catch, an
    amount was first set aside as a contingency reserve,6 half of which was
    allocated to western Alaskan native communities in what is termed a
    Community Development Quota. These communities do not, for the most
    part, actually catch or process pollock but instead sell their allocation to
    the highest bidder in either the offshore or inshore sector. After this initial
    deduction, the rest of the total allowable catch was distributed as follows:

•   65 percent to the offshore sector. This sector consists of three types of
    vessels: (1) catcher/processor vessels capable of both catching the pollock
    and processing it into fillets, surimi, and other products; (2) motherships
    that process pollock but do not catch it; and (3) catcher vessels that catch
    pollock and deliver them to the motherships and catcher/processors for
•   35 percent to the inshore sector. The inshore sector consists of plants
    located on or near the shore, along with catcher vessels that catch the
    pollock and deliver it to the processing plants.

    Although this allocation formula set limits on how much pollock each
    sector could harvest, it did not limit how much pollock individual vessels

     The Magnuson-Stevens Act established eight regional councils and required them to prepare fishery
    management plans for each fishery within their jurisdiction that they determined required active
    federal management and to review and revise these plans as necessary.
     This reserve was used to adjust for changed stock conditions and operational problems in the fishery.

    Page 3                                                  GAO/RCED-99-196 American Fisheries Act

within each sector could catch. While the two sectors no longer had to
race each other for fish, within each sector the race for fish remained.
Each fishing season, vessels raced to catch as many pollock as possible
until the allocation was reached and the season closed. Vessels that caught
the most fish made the most money. As more vessels joined this race, the
pollock fishery became more and more crowded.

The Council’s allocation formula also did not end the controversy over
how the annual allowable catch should be divided between the offshore
and inshore sectors. The formula had initially been approved by the
Secretary of Commerce as an interim measure until a more comprehensive
program for the fishery could be developed. In 1994, because the new
management program had not been completed, the Council decided to
extend the interim allocation formula into 1998. However, in 1997, a
coalition representing the inshore sector petitioned the Council to double
the inshore allocation to 70 percent.

To address issues such as the allocation between the offshore and inshore
sectors, overcrowding, foreign investment, and the race for fish, the
Congress enacted the American Fisheries Act in 1998. The act changed the
American Bering Sea pollock fishery in many ways. First, it eliminated
nine, predominantly foreign-owned, catcher/processor vessels from the
offshore sector. Second, it increased the allocation for the Community
Development Quota program and then divided the remainder equally
between the inshore and offshore sectors.7 The offshore sector’s
50 percent was further split with the catcher/processors and their catcher
vessels receiving 40 percent and the catcher vessels supplying the
motherships the remaining 10 percent.

The American Fisheries Act also provided the framework for the
formation of fishing cooperatives. These cooperatives were designed to
eliminate the race for fish by assigning a specific amount of fish to each
member of the cooperative. Members could then catch their fish allocation
at their own pace. Catcher/processors formed a cooperative before the
start of the 1999 season. The act does not allow the motherships or the
inshore sector to operate as cooperatives until January 1, 2000.

 An additional amount was subtracted from the total allowable catch to allow for the incidental taking
of pollock by vessels harvesting other groundfish species. This is called a bycatch allowance.

Page 4                                                  GAO/RCED-99-196 American Fisheries Act

                                          U.S. production of pollock fillets for the first fishing season in 1999
U.S. Fillet Production                    increased 13 percent over 1998 despite a number of factors that could have
Rose by 13 Percent                        resulted in a significant decline. This increase occurred in both the inshore
Despite Factors                           and offshore sectors (see table 1).

Indicating a Potential

Table 1: Total Fillet Production by
Sector, 1998 and 1999 First Season        Pounds in millions
                                                                 1998 first season               1999 first season           increase in
                                                                               Percent of                     Percent of        pounds,
                                          Sector                  Pounds            total        Pounds            total        1998-99
                                          processors                  24.0              71           26.5              69               10
                                          motherships                    0                               0
                                          producers                    9.9              29           11.7              31               18
                                          Total                       33.9             100           38.2             100               13
                                          Note: Production figures include the Community Development Quota, the majority of which was
                                          purchased by the offshore sector.

                                          Source: National Marine Fisheries Service.

                                          This 13 percent increase occurred despite several factors that signaled the
                                          potential for a substantial drop in fillet production. Some factors were part
                                          of the American Fisheries Act itself, while others were not. Specifically:

                                      •   The act reduced, from 65 percent to 50 percent, the allocation of pollock
                                          to the offshore sector, which historically accounted for most of the fillets
                                          produced, and increased the allocation to the inshore processors, a sector
                                          that had historically produced relatively few fillets. Furthermore, industry
                                          officials stated that the nine catcher/processors the act banned from the
                                          fishery had been the main producers of fillets for the offshore sector.
                                      •   One inshore fillet processor sustained major fire damage and was unable
                                          to produce fillets during the first season in 1999. Many of the remaining
                                          inshore processors had historically concentrated on surimi.

                                          Page 5                                              GAO/RCED-99-196 American Fisheries Act

                      •   To protect declining pollock stocks and the Steller sea lion,8 which eat
                          pollock, the Council reduced the total allowable pollock catch by almost
                          11 percent between 1998 and 1999. Furthermore, it reduced the percentage
                          of the harvest that could be taken during the first season. Taken together
                          with an increase in the Community Development Quota, the subtraction of
                          the bycatch allowance, and the change in the allocation formula, the total
                          allowable catch available to the catcher/processors of the offshore sector
                          during the first season dropped by almost 50 percent between 1998 and
                          1999. These same factors resulted in about a 4-percent increase in the
                          amount of pollock allocated to the inshore sector.

                          Even with an almost 50 percent decrease in the catcher/processor’s total
                          allowable catch, the vessels managed to increase their total fillet
                          production by 10 percent between the first seasons in 1998 and 1999.
                          Catcher/processors also managed to maintain their overall share of total
                          fillets, producing 71 percent of all fillets in the first season of 1998 and
                          69 percent of the fillets in the first season of 1999. During this same period,
                          the inshore sector managed an 18-percent increase in the production of
                          pollock fillets, although there was very little increase in allowable catch.

                          Pollock fillet production for the first 1999 season increased, despite the
Price Increase and        negative factors discussed above, for three main reasons. First, concerns
Fishing Cooperative       over falling Russian pollock fillet production and the declining worldwide
Spurred Production        supply of groundfish increased the demand for American pollock fillets.
                          Second, average prices for pollock fillets increased by as much as
Increase                  74 percent. Third, because the American Fisheries Act allowed the
                          catcher/processors of the offshore sector to form a cooperative and end
                          their race for fish, this sector was able to respond to increased demand
                          and rising fillet prices by increasing fillet production while decreasing
                          surimi production.

                          According to some industry officials, pollock fillet prices increased this
                          year principally because of the severe decline in the amount available from
                          Russia. Russia has historically produced a large portion of the total
                          pollock fillets available, but its production has dropped drastically
                          recently, with over-fishing cited as the reason for the decline. Although we
                          could not obtain actual figures, we were told that the Russian catch might
                          be down by as much as 50 percent.

                           The Steller sea lion is protected by the Endangered Species Act of 1973, as amended, 16 U.S.C. 1531 et

                          Page 6                                                  GAO/RCED-99-196 American Fisheries Act

                                       Many industry officials we talked to agreed that the severe decline in
                                       Russian production, coupled with an overall decline in worldwide
                                       groundfish stocks, increased the demand for American Bering Sea pollock
                                       and spurred an increase in prices for pollock fillets. From the first season
                                       in 1998 to the first season in 1999, average pollock fillet prices increased
                                       41 to 74 percent, depending on the type of fillet. Although most types of
                                       pollock fillets are similarly priced, deep-skin fillets are priced higher and
                                       are preferred by many Americans because the fat layer has been removed.
                                       Table 2 compares the average prices paid between 1998 and 1999 for
                                       deep-skin fillets and the other fillet types.

Table 2: Average Price Per Pound of
Pollock, 1998 and 1999 First Seasons                                                                                 Percent of
                                       Product                        1998 first season    1999 first season          increase
                                       Deep-skin fillets                         $1.28                 $1.81                 41
                                       Other fillets                              $.91                 $1.58                 74
                                       Source: Fisheries Market News Report.

                                       The American Fisheries Act allowed the catcher/processors to respond to
                                       the increased market demand and prices in a way that would have been
                                       difficult to do previously. The race for fish induced processors to
                                       emphasize surimi production because it is the fastest way to process large
                                       quantities of fish caught at one time. Because the act provided the
                                       framework for the formation of a cooperative by the catcher/processors of
                                       the offshore sector, this segment of the industry was able to end its race
                                       for fish and produce products with higher value. In addition, because the
                                       cooperative guaranteed each member a certain amount of fish, members
                                       could invest in machinery capable of producing the higher-valued fillets
                                       and could slow down by fishing only when their fillet-processing machines
                                       needed additional fish.

                                       We spoke to representatives for six of the nine members of the offshore
                                       catcher/processor cooperative, and they were universal in their praise of
                                       how well the cooperative has worked and how it has improved overall
                                       operations. They stated that the elimination of the fish race had other
                                       benefits as well. For example, they stated that their yield rates were up as
                                       much as 25 percent because, with the race for fish over, they could now
                                       afford the time to make less valuable products like oil and fishmeal and
                                       store them until they could be brought to shore. Previously, any part of the
                                       fish not used for fillets or surimi was often tossed overboard. Companies
                                       could not afford to waste storage space on low-valued products when the

                                       Page 7                                             GAO/RCED-99-196 American Fisheries Act

                        same space could be used to store fillets and surimi. They also could not
                        afford the time to travel to a port and unload low-valued products; they
                        had to stay in the race. We were also told that the cooperative has led to
                        savings in fuel consumption, increased safety because vessels no longer
                        have to fish during extreme weather conditions, and more time to search
                        for the size of fish most conducive to the products processors want to

                        Pollock fillet production increased during the first season in 1999 because
Various Factors Could   the factors discussed above acted together to encourage that result. If
Affect Future Seasons   these conditions change in the future, the results may differ. For example,
                        if the Russians increase fillet production and fillet prices fall, American
                        processors might return to emphasizing surimi production. This could
                        result in American restaurants and seafood companies having to find new
                        sources of supply. In the near term, however, industry officials do not
                        expect much change. Officials representing both the inshore and offshore
                        sectors expect the outlook for pollock fillet production to remain strong if
                        declines continue in the worldwide supply of Russian pollock and other
                        groundfish, such as cod, hake, and whiting. If the demand and price for
                        pollock fillets remain high, several processors in both sectors said that
                        they plan to invest in additional fillet production equipment and produce
                        more fillets in the two remaining 1999 seasons, which start in August and

                        Another factor that could affect supply is the closure of areas deemed
                        critical for the survival of the protected Steller sea lion. Some industry
                        officials expressed concern that even with additional equipment, fillet
                        production in the two remaining 1999 pollock seasons could be limited by
                        the long distances fishermen may have to travel to avoid fishing in closed
                        areas. Pollock caught in these more remote areas may be too small to be
                        used for fillets or may need to be processed into surimi because they
                        cannot be transported to inshore processors fast enough to be made into

                        Still another factor that could affect production is the formation of an
                        inshore cooperative. We talked to five of the seven inshore processors,
                        and four were in favor of a cooperative similar to the offshore one if it
                        would eliminate the race for fish. As with the offshore cooperative, such
                        an agreement could potentially provide the inshore sector the opportunity
                        to switch to producing more fillets.

                        Page 8                                   GAO/RCED-99-196 American Fisheries Act

                  We provided the Department of Commerce with a draft of this report for
Agency Comments   review and comment. While the Department did not indicate whether it
                  agreed with the overall message of our report, it did provide technical
                  comments that we incorporated as appropriate.

                  To obtain background data and make preliminary observations, we
Scope and         reviewed volume data on the production of pollock products, which we
Methodology       obtained from the National Marine Fisheries Service. We obtained and
                  reviewed price data from industry market reports, the processors, and
                  their customers. We did not perform reliability tests on either the volume
                  or price data. We also reviewed the act itself; its legislative history; and
                  various industry publications, market reports, and Federal Register
                  notices concerning the act. We also attended meetings of the North Pacific
                  Fishery Management Council to hear initial reactions to the act’s
                  implementation and discussions of regulations for the remaining 1999

                  To learn about the history of the pollock fishery, the development of the
                  American Fisheries Act, and the experiences during the initial fishing
                  season, we interviewed representatives for six of the nine members of the
                  offshore catcher/processor cooperative and five of the seven inshore
                  processors. We also talked to companies identified by both the offshore
                  and inshore sectors as their major customers. The processors and seafood
                  companies we contacted are listed in appendix I. Finally, we talked to
                  officials from the National Marine Fisheries Service and associations
                  representing the fishing industry.

                  We conducted our review from December 1998 through June 1999 in
                  accordance with generally accepted government auditing standards.

                  A copy of this report is being sent to the Honorable William M. Daley,
                  Secretary of Commerce; Dr. James Bake, Director, the National Oceanic
                  and Atmospheric Administration; Penny Dalton, Director, the National
                  Marine Fisheries Service; Richard Lauber, the Chairman of the North
                  Pacific Fishery Management Council; and other interested parties. We will
                  also make copies available to others upon request.

                  Page 9                                   GAO/RCED-99-196 American Fisheries Act

If you have any questions about this report, please contact me or Jill
Berman at (206) 287-4800. Other key contributors to this report were Jerry
Aiken and Bill Wolter.

James K. Meissner
Associate Director, Energy,
  Resources and Science Issues

Page 10                                 GAO/RCED-99-196 American Fisheries Act

List of Committees and Requesters

The Honorable Judd Gregg
The Honorable Ernest F. Hollings
Ranking Minority Member
Subcommittee on Commerce, Justice, State,
  the Judiciary, and Related Agencies
Committee on Appropriations
United States Senate

The Honorable Harold Rogers
The Honorable José Serrano
Ranking Minority Member
Subcommittee on Commerce, Justice, State,
  the Judiciary and Related Agencies
Committee on Appropriations
House of Representatives

The Honorable Slade Gorton
United States Senate

The Honorable Mitch McConnell
United States Senate

The Honorable Frank Murkowski
United States Senate

The Honorable Ted Stevens
United States Senate

The Honorable Patty Murray
United States Senate

Page 11                              GAO/RCED-99-196 American Fisheries Act
Appendix I

Companies and Associations Contacted

                     American Seafoods Company
                     Tyson Seafoods Group

                     Arctic Storm, Inc.

                     Glacier Fish Company

                     F/T Highland Light

                     F/T Starbound

                     Supreme Alaska Seafoods
                     Golden Alaska Seafoods, Inc.

                     Unisea Seafood Corporation
Inshore Processors
                     Tyson Seafood Group

                     Peter Pan Seafoods, Inc.

                     Trident Seafoods Corporation

                     Westward Seafoods, Inc.

                     Icicle Seafoods, Inc.
Seafood Companies
                     Gorton’s Inc.

                     L. D. Foods

                     Fish Products International

                     Cold Water Seafoods Corporation

                     Long John Silvers

                     Burger King

                     Page 12                           GAO/RCED-99-196 American Fisheries Act
                        Appendix I
                        Companies and Associations Contacted

                        At-Sea Processors Association
Industry Associations
                        Pacific Seafood Processors Association

(141268)                Page 13                                  GAO/RCED-99-196 American Fisheries Act
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