Geoduck Aquaculture in British Columbia

Economic Implications

Prepared for:

Canada Fisheries & Oceans Vancouver, Canada

Prepared by:

GSGislason & Associates Ltd.

In Association with:

Archipelago Marine Research Ltd. Edna Lam Consulting

March 2012

Preface

The Canada Department of Fisheries & Oceans retained GSGislason & Associates Ltd. to conduct an analysis of the economic potential for geoduck aquaculture in British Columbia.

The consultants have benefited from discussions with industry and government. Notwithstanding this assistance, the consultant has final responsibility for the analyses and conclusions of the study.

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Summary

Introduction • analysis of the economic implications of geoduck culture is needed to inform fisheries policy and management for both wild and cultured geoduck • this report analyzes: 1) the economic potential of the geoduck culture industry, 2) potential impacts on the wild industry, 3) economic development impacts from culture and wild operations, and 4) tradeoffs

Approach & Results • the study adopts a scenario approach to investigate production potential & impacts - DFO provided various tenure/access area scenarios which were converted to production, price & revenue scenarios (see Exhibit on next page) • the culture industry, under the most optimistic scenario considered, has the potential to increase total BC geoduck production and wholesale value by more than half • however, the future expansion of the culture industry could hurt the existing wild industry in two ways: 1) a loss of wild harvest areas & volumes, and 2) a reduction in product prices due to the increased supply on world markets • the existing BC culture industry has not met technical benchmarks such as expected survival rates and has not met financial benchmarks such as target rate of return rates • there are a number of technical, regulatory and financial risks to geoduck culture:

- hatchery & nursery challenges e.g., hatchery failure, low survival during growout - predation (also a risk to the wild industry) - ocean acidification (also a risk to the wild industry) - tenure uncertainty related to terms of Licences of Occupation - shortage of expertise - uncertainty in obtaining intertidal tenures - the lack of a geoduck aquaculture policy - the long 7 plus year growout period before earning a revenue stream

• the wild industry is much more profitable than the culture industry whereas the culture industry is more labour and job intensive - jobs in the wild industry, on a person year basis, pay much more then do jobs in the culture industry

Conclusions • the future of the BC farmed geoduck industry will be shaped by technical, regulatory and access to capital issues and not by market demand issues • DFO needs to develop a management plan for both wild and culture industries that would provide future direction and greater certainty to each sector

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Exhibit: BC Geoduck Production Scenarios

BC Geoduck Production Scenarios

Base Case Scenario #1 Scenario #2 Scenario #3

Access Area ha1 Wild 16,842 16,842 16,781 16,512 Culture - Subtidal 315 315 472 741 - Intertidal 75 75 185 185

Annual Production tonnes2 Wild 1,450 1,450 1,445 1,422 Culture - Subtidal 100 200 362 667 - Intertidal 0 0 139 278 Total 1,550 1,650 1,946 2,367

Wholesale Price $ CDN per kg3 Wild $31.30 $31.20 $30.85 $30.40 Culture - Subtidal $34.45 $34.35 $33.95 $33.45 - Intertidal $34.45 $34.35 $33.95 $33.45

Annual Wholesale Value $ CDN Wild $45.39 million $45.24 million $44.58 million $43.23 million Culture - Subtidal $3.45 million $6.87 million $12.29 million $22.31 million - Intertidal 0 0 $4.72 million $9.30 million Total $45.84 million $52.11 million $61.59 million $74.84 million

1 Base Case - existing tenure/access area with no growth in culture activity i.e., 16,842 ha existing access area for wild fishery, 315 ha active of 411 ha of existing subtidal tenures for culture industry, 75 ha active of 185 ha of existing intertidal tenures for culture industry Scenario #1 - existing tenure/access area with some increased activity on existing active tenures in use Scenario #2 - decline in access to wild fishery of 61 ha with the 61 ha of ground transferred to subtidal operations, plus growth in culture activity to include the 206 ha of existing tenures that presently are not utilized (for geoduck) Scenario #3 - decline in access to wild fishery of 330 ha with the 330 ha of ground transferred to subtidal operations, plus growth in culture activity to include the 206 ha of existing tenures that presently are not utilized (for geoduck) 2 Wild Production – current production per ha of 0.0861 tonnes for all scenarios Subtidal culture production – 100 tonnes (0.32 tonnes per ha) under Base Case, 200 tonnes (0.64 tonnes per ha) under Scenario #1, 362 tonnes (0.77 tonnes per ha) under Scenario #2, 667 tonnes (0.90 tonnes per ha) under Scenario #3 Intertidal culture production – zero under Base Case & Scenario #1, 139 tonnes (0.75 tonnes per ha) under Scenario #2, 278 tonnes (1.50 tonnes per ha) under Scenario #3 3 Culture product gets a 10% price premium over wild product due to a better grade mix. Wholesale price includes $6.05 per kg wholesale margin (residual is returned to primary level wild harvester or farmer i.e., $25.25 landed price to commercial licence holders and $28.45 farm-gate price to farmers). A price flexibility coefficient of 0.2 is used i.e., a 10% increase in world supply above the 5,700 tonne base level supply results in a 2% decrease in price Source: Access Area Scenarios – DFO (all culture areas are in the Strait of Georgia) Production, Price, Value Scenarios – GSGislason estimates (Scenario #3 based on parameters in Appendix B)

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Acronyms

AMR - Archipelago Marine Research Ltd. BC - British Columbia DFO - Fisheries and Oceans Canada DNR - Washington State Dept. of Natural Resources GDP - Gross Domestic Product

ha - hectare (10,000 m2) IFMP - Integrated Fisheries Management Plan IQ - Individual Quota ITQ - Individual Transferable Quota kg - kilogram LI - Labour Income m - metre

m2 - square meter MAE - Multiple Account Evaluation NMFS - US National Marine Fisheries Service PSP - Paralytic Shellfish Poisoning PY - person-year of employment SOG - Strait of Georgia SWOT - Strengths-Weaknesses-Opportunities-Threats TAC - Total Allowable Catch UHA - Underwater Harvesters Association WA - Washington State

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Table of Contents

Preface...... i Summary...... ii Acronyms ...... iv

1.0 Introduction ...... 1 1.1 Study Objectives...... 1 1.2 Information Sources...... 1

2.0 Production Potential...... 2 2.1 Industry Activities ...... 2 2.2 Geoduck Supply – Projection in Year 2022...... 2 2.3 Production Potential...... 3 2.3.1 Tenure Scenarios...... 3 2.3.2 Production Scenarios...... 5 2.3.3 Viability...... 6 2.3.4 Price & Revenue Impacts from Increased Production ...... 6 2.4 Technical & Regulatory Risks to Culture ...... 7 2.5 Infrastructure Needs with Growth in Culture Industry...... 8 2.6 Positioning Culture Product from BC in the Market...... 9 2.7 SWOT Analysis ...... 9

3.0 Tradeoff Analysis...... 11 3.1 Economic Development Impacts – Wild vs Culture...... 11 3.2 MAE Tradeoff Analysis...... 12

4.0 Conclusions ...... 14 References...... 15 Appendix A ...... 16 Appendix B...... 19

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1.0 Introduction

The geoduck Panopea generosa are large bivalue shellfish and filter feeders that rely on phytoplankton from surrounding waters for nutrition and growth.

Interest in the culture or farming of the geoduck in British Columbia has grown in response to strong product prices. However, to date government has issued only a limited number of aquaculture licences, and no applications for new tenures have been approved since the 2006 offering process.

An issue surrounding the expansion of geoduck culture is the impact of such expansion on the existing wild geoduck industry and the economy. Canada Department of Fisheries and Oceans (DFO) is developing an Integrated Fisheries Management Plan (IFMP) for geoduck that addresses both wild and cultured geoduck. DFO needs additional information and research as input to fisheries policy and the IFMP process.

This study of the economic potential of the geoduck culture industry is the second of a two-part initiative addressing the implications of growth in geoduck culture. The first study, the “Market Study”, investigated the market for geoduck – wild and cultured – and the market implications of increased supply (GSGislason 2012).

The geoduck market appears to be underserved presently and capable of accepting modest increases in supply with limited downward pressure on price. However, large increases in supply could have a significant impact on price.

1.1 Study Objectives

This second study and investigations of geoduck culture have several important objectives: • to analyze production potential and to develop a SWOT (Strengths-Weaknesses- Opportunities-Threats) analysis of both culture and wild geoduck production • to investigate potential impacts on the wild industry from growth in the culture industry • to estimate economic development impacts – Gross Domestic Product, Labour Income or Wages, Employment – arising from culture and wild operations • to synthesize the tradeoff analysis in a Multiple Account Evaluation (MAE) framework

The intent, as indicated above, is to inform DFO policy as to the management of both wild and culture production of geoduck in British Columbia.

1.2 Information Sources

The research program included both primary (interviews) and secondary (literature review) research. We interviewed 10 plus individuals from industry and government in British Columbia and Washington State.

We also used the existing literature and reports, including analysis of the financial feasibility of geoduck culture from a variety of sources (Davis 2004, BC Agriculture & Lands 2005, Canadian Aquaculture Systems 2012).

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2.0 Production Potential

There is potential for the geoduck culture industry of BC to grow. Such growth could affect the wild fishery. This section investigates the growth potential and interrelationships between the two sectors.

2.1 Industry Activities

The wild and culture geoduck industries are very different in terms of linkages or activities between the aquatic environment and the final consumer.

Wild Industry Activities. The 55 commercial industry licence holders harvest wild geoduck in subtidal areas using divers. The total fleet has a Total Allowable Catch (TAC) with each licence holder entitled to fish 1.818% or 1/55 of the TAC.

The live geoduck is transported to Vancouver-area processing plants where the product is graded and packed with the vast majority being flown to markets in Asia.

Culture Industry Activities. Geoduck culture involves human intervention over the full life cycle from spawning to the rearing to a market-sized product. • hatchery phase – geoduck are spawned, grown and fed up to the larval stage in a hatchery until the seed settle at the bottom, typically at a size of around 5 to 7 mm. • nursery phase – sometimes the seed are introduced into a nursery tray encompassing recirculating sea water and a food supply, typically spending 6 months or more to a size exceeding 10 mm • growout phase – the seed from either the hatchery or nursery are planted in the ocean substrate. Juvenile geoducks are protected with predator netting for two or more years; the full growout phase can take 7 or more years

The harvesting, processing and marketing phases for cultured geoduck are similar to those for wild product.

Culture operations can occur in subtidal areas where the ground is covered by the ocean all the time, or in intertidal areas where at low tide the ground is above water but is underwater at high tide.

2.2 Geoduck Supply – Projection in Year 2022

For the purposes of this study, we use the following projection of the North American geoduck supply in about 10 years hence, i.e., in year 2022, without any growth in access or activity by the culture industry (see world production history in Appendix A). This is the “Base Case”.

Annual Production tonnes Wild Culture Total British Columbia 1,450 100 1,550 Other 3,450 700 4,150 4,900 800 5,700

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Our “Market Study” indicated that wild production is projected to decline from current levels due to sea otter predation in British Columbia and Alaska. No substantial growth in culture (farmed) production was envisaged – see GSGislason (2012).

The two Exhibits in Appendix A present the history of North America supply of geoduck and a profile of the BC commercial wild geoduck industry.

2.3 Production Potential

The analysis of future production potential from geoduck operations involves several steps: • designating tenure areas available to culture operations (separately for subtidal and intertidal culture), • assessing the potential production from these tenure areas, • assessing whether this potential production results in financially viable operations, and • identifying constraints and risks to attaining the potential production.

The analysis addresses areas, harvests, prices and revenues to both the culture and wild industry sectors.

2.3.1 Tenure Scenarios

The current area available for wild geoduck production is 16,842 ha of geoduck beds. The current tenured area to the geoduck culture industry is 411 ha of subtidal area (of which 315 ha has some geoduck activity), and 185 ha of intertidal area (of which 75 ha have some geoduck activity) – see Exhibit 1.

A significant portion of existing aquaculture tenures that permit geoduck farming do not have geoduck activity on them. It is extremely difficult to amend an existing tenure so that proponents will include a variety of potential species on their initial application even if the likelihood of growing all the species is low.

DFO identified three culture tenure scenarios for analysis - all tenures would be located in the Strait of Georgia: • Tenure Scenario #1 – the Base Case situation with some increased activity on current tenures with geoduck activity • Tenure Scenario #2 – a 61 ha decline in area accessible to the commercial industry and a 267 ha increase in areas available to the culture industry, the 61 ha of new tenure area and bringing into production 206 ha of existing tenure area that currently has no geoduck activity • Tenure Scenario #3 – a larger 330 ha decline in area available to the commercial industry and a larger 536 ha increase in area under culture operations, through 330 ha of new tenure area and bringing into production 206 ha of existing tenure area that currently has no geoduck activity

Note that the cultured subtidal and intertidal areas are approximations as some tenures may include both but were assigned to a single type.

The intent of the above tenure scenarios and following analysis is to frame production and benefits for discussion purposes – the scenarios do not represent a projection of how much additional ground may be made available to the culture industry nor do they represent DFO policy.

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Exhibit 1: BC Geoduck Production Scenarios

BC Geoduck Production Scenarios

Base Case Scenario #1 Scenario #2 Scenario #3

Access Area ha1 Wild 16,842 16,842 16,781 16,512 Culture - Subtidal 315 315 472 741 - Intertidal 75 75 185 185

Annual Production tonnes2 Wild 1,450 1,450 1,445 1,422 Culture - Subtidal 100 200 362 667 - Intertidal 0 0 139 278 Total 1,550 1,650 1,946 2,367

Wholesale Price $ CDN per kg3 Wild $31.30 $31.20 $30.85 $30.40 Culture - Subtidal $34.45 $34.35 $33.95 $33.45 - Intertidal $34.45 $34.35 $33.95 $33.45

Source: Access Area Scenarios – DFO (all culture areas are in the Strait of Georgia) Production, Price, Value Scenarios – GSGislason estimates (Scenario #3 based on parameters in Appendix B)

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2.3.2 Production Scenarios

Potential production from culture areas are a function of several factors or variables – the portion of the area that is actually seeded, the seed rate per m2, the survival rate to harvest, and the weight at harvest.

We note that the existing culture industry in BC generally has had a production level of less than 100 tonnes annually (see Exhibit A.1) from the 390 ha under tenure that has had some geoduck activity, or less than 0.25 tonnes per ha – a significant portion of existing tenure area is not under cultivation and the area that is under cultivation is not meeting production targets (Fred Lochmatter of Fan Seafoods pers. comm.).

Our understanding is that existing culture efforts by private industry and enhancement efforts by the Underwater Harvesters Association generally have been uneconomic, largely because of low average survival rates at 15% or under (Michelle James of UHA pers. comm. and Fred Lochmatter of Fan Seafoods pers. comm.).

UHA Experience with Geoduck Enhancement

The Underwater Harvesters Association (UHA) representing the commercial geoduck industry has been undertaking geoduck enhancement for over 15 years. Geoduck seed has been planted on 13 map reserves covering 104.6 ha in total area – the product has been harvested by the commercial fleet approximately 10 years after seeding at an average weight of about 0.85 kg. Only about one third of the 104.6 ha total area has actually been seeded. The total seed volume has been 6.35 million seed, or about 20 seed per m2 utilized (not all the area is seeded because work space is needed to operate, because a portion of the ground is not suitable for culture, and because the UHA has not planted all suitable ground). The seed is planted at approximately 6 mm in size. The survival rate on individual plots has varied greatly from 0% to 37% with an average of about 15-16%. The effective survival rate has been closer to 12% as only 80% of the standing crop is harvestable i.e., .80 times 15%. Harvest to date has been at most 9 tonnes in any one year but the UHA expects harvests to increase to 25 to 30 tonnes in the near future. Source: Michelle James & Bruce Clapp of the UHA, pers. comm.

Finally we note that a 2004 study projected that Washington State geoduck culture production by the year 2010 would be at least 2,100 tonnes annually (Northern Economics 2004). However, actual farmed production from Washington State has been only 1/3 of this or 700 tonnes recently – see Exhibit A.1, Appendix A.

The strong conclusion is that there are still significant vagaries and uncertainties to the geoduck culture technology and that forecasts of future production and profitability have consistently overestimated actual performance.

Nevertheless, in Exhibit 1 we do provide projections of production from geoduck culture under the given tenure scenarios:

• Production Scenario #1 – based on a simple doubling of production from the existing tenure areas

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• Production Scenario #2 – based on a midpoint in farmed production per ha between Scenario #1 and Scenario #3 • Production Scenario #3 – based on farmed production per ha closer to expected performance (see Appendix B for details on assumptions)

We emphasize that the production success embodied in Production Scenario #3 is much greater than any culturist in BC has achieved to date. We also note that the intertidal production scenarios are more speculative than the subtidal production scenarios since BC has had almost no experience with intertidal geoduck operations.

Production Scenarios #2 and #3 result in a decline in harvest areas and hence harvest by the commercial industry (based on a simple proration of access area with harvest per ha constant).

2.3.3 Viability

For the production scenarios to be realizable, even if the technical challenges are met, the culture industry must meet financial criteria for investment and performance – otherwise the tenure holders will not invest in the industry.

To investigate this in a preliminary manner, we used a simple financial model. Results indicate that, under the assumptions utilized, both subtidal and intertidal operations realize a positive rate of return, but a Rate of Return under 10% - see Exhibit B.1, Appendix B for assumptions.

One would expect a high risk venture in which the first revenue dollar does not appear until the 8th year or later would require a Rate of Return in excess of 15%, i.e., a high rate with a large risk premium.

Nevertheless, for the purpose of this exploratory study, we assume that the culture industry would go ahead and produce the production levels postulated.

2.3.4 Price & Revenue Impacts from Increased Production

Exhibit 1 also gives the revenue impacts from expansion of geoduck aquaculture. The revenue increases in percentage terms are slightly less than the production increases in percentage terms due to decreases in prices from the increase in world supply.

The Market for Geoduck

Current world supply of geoduck is 5,500-6,000 tonnes annually almost all of which is sold live into Hong Kong and Mainland China markets. Culture production comprise 600-700 tonnes of this total with the vast majority coming from wild fisheries in British Columbia, the US (Washington State and Alaska), and Mexico. Culture production from BC receives a 10% price premium over wild BC production due to a better grade mix. The current market in Hong Kong and China is short or under-supplied with geoduck, especially during the peak winter demand period. With the strong market, a small increase in supply would depress the price only a little. However, a large increase in supply such as doubling wild supply, would have a significant impact on price. A 10% increase in world production is projected to result in a 1-2% decrease in wholesale price levels. The actual price impacts would depend critically on not only the size of the supply increase, but also on the timing of supply within the year, the strategic behaviour of industry and how orderly the new supply was introduced.

Source: GSGislason (2012)

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2.4 Technical & Regulatory Risks to Culture

There are a number of technical and regulatory risks to geoduck culture.

Hatchery and Nursery Challenges. The BC industry has not achieved anticipated survival rates for seed planted. Moreover, hatchery operators have experienced episodic hatchery failures. In addition, the cost of feeding juvenile geoduck in the late hatchery or nursery stages can be exorbitant.

In short, seed access has been uncertain, growout survival has been low, the costs of rearing geoduck have been high, and the results at all stages of the rearing cycle have been highly variable and disappointing to date.

The Washington State culture industry has experienced highly variable hatchery success as well. However, their survival rates during growout appear to be much higher than those in British Columbia.

The reason may be that they have moved to including a nursery stage in which seed is grown and fed to 10 mm in size or greater before planting – the BC industry still plants seed at the smaller 6 mm size and typically does not have a nursery stage (but some BC proponents are considering nursing their seed to a larger size).

Predation. Predation on geoducks from crabs, starfish, seabirds such as scoters, and sea otters can be significant. Predation on newly outplanted juvenile geoducks can be reduced by placing predator nets over the planted areas. However, predation from sea otters occur right through to the adult stage.

Since their reintroduction to Checleset Bay on the upper West Coast of Vancouver Island (WCVI), sea otters have expanded in range southward to Tofino and northward around the tip of Vancouver Island to Hope Island in Queen Charlotte Sound. Sea otter predation has rendered many of the geoduck beds on the West Coast of Vancouver Island and the BC Central Coast uneconomical to harvest commercially. Most of the decrease in wild geoduck harvest quota on the WCVI is attributed directly or indirectly to otter predation.

The expanding range of sea otters in BC will likely continue to impact (reduce) commercial harvest quotas for geoduck. Sea otters do not occur presently in the Strait of Georgia but the risk exists that they could expand their range to this area in the future.

Ocean Acidification. Recently there is growing awareness that the coastal waters of the Pacific Northwest are becoming increasingly acidic particularly at times of deeper water upwelling events.

Bivalve larvae and juveniles, including those of geoducks, are especially sensitive to increased acidification, i.e., decreased pH, related to the development of calcium carbonate shells (Langston 2011). In both Washington State and British Columbia hatcheries, large scale mortalities of bivalve larvae of oysters, scallops and geoduck have been attributed to low pH water (R. Saunders, Island Scallops Ltd. pers. comm.).

Ocean acidification is a risk to both geoduck culture and the wild fishery especially at the sensitive larval and juvenile stages. Hatcheries can mitigate but not eliminate the risk by adjusting the depth of intake water as pH decreases with increasing depth.

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Tenure Uncertainty. Culture operators need a 20-year Licence of Occupation or 30-year Lease from BC Crown Lands to gain tenure or access to culture sites – most existing geoduck operations are on 20-year Licences of Occupation. Operators also need an Aquaculture Licence from DFO, currently of 12 to 18 months duration, to operate on the site (prior to December 2010 the Province of British Columbia issued the Aquaculture Licence).

However, the total planting, growout and harvest period for a single crop rotation of a geoduck culture operation can be more than 15 years, approaching the term of a Licence of Occupation e.g., an operator may seed 1 ha of an 8 ha site for each of 8 consecutive years and harvest the crop at years 9 through 16 after a growout period of 8 years.

That is, there is a disconnect between the tenure period and the business planning period. This creates difficulty in financing and adds to the uncertainty of the enterprise.

Shortage of Expertise in BC. There are a limited number of individuals with experience or expertise in geoduck culture. This narrow talent pool could create a constraint to industry expansion unless the BC industry partners with, for example, the Washington State industry.

Additional Uncertainty in Obtaining Intertidal Tenure. Intertidal farming operations may occur on the beaches in front of upland landowners who often do not want industry operations in their viewscapes (some opposition, but generally to a lesser extent, can also occur for subtidal operations). There likely would be less opposition to new intertidal tenure if they were located in remote areas.

A new tenure requires an environmental survey, public notification/consultation and perhaps a public meeting, with all costs paid by the proponent. The requirements for an intertidal tenure may be more extensive or onerous than for a subtidal tenure.

Lack of Geoduck Aquaculture Policy. Geoduck aquaculture development in the Province has stalled since no applications for new geoduck tenures have been approved since the 2006 offering process.

Moreover, the transfer of aquaculture responsibilities from the Province of British Columbia to the federal government in December 2010 created some uncertainty. This study is intended to provide input to a new geoduck Integrated Fisheries Management Plan (IFMP) for both wild and culture geoduck.

2.5 Infrastructure Needs with Growth in Culture Industry

Given the long lead times to bring product to market and the present lack of a geoduck aquaculture policy allowing new geoduck operations, it likely would be a decade or more before there is an increase in geoduck world supply from BC aquaculture.

This allows sufficient time for any needed changes in infrastructure, distribution and marketing to occur. For example, air transportation and cold chain requirements for increased market volumes to Asia would have time to be addressed.

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2.6 Positioning Culture Product from BC in the Market

Our “Market Report” indicated that geoduck from BC currently is not differentiated as wild or culture product in the market. The analysis also indicated that the culture industry can produce a more consistently sized, smaller product than can the wild industry – this confers a benefit in particular market segments.

However, in the near future we do not see benefits from marketing or differentiating BC culture product as: • the major current supplier of culture product in BC has experienced sharply reduced production in recent years due to technical issues, and • it would be 10 plus years before any new BC supply source of substantial size could be realized

It is unwise to market a product which you do not have or you can not easily acquire. It appears prudent to link marketing efforts for culture product to supply capability.

2.7 SWOT Analysis

Exhibit 2 presents a SWOT (Strengths-Weaknesses-Opportunities-Threats) analysis of geoduck production from British Columbia, both wild and culture.

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Exhibit 2: SWOT Analysis of BC Geoduck Production

Strengths Opportunities

• very strong market in Asia, high value product • expand market • good air connections to Asia - inland & northern China • naturalness of bivalue shellfish inc. geoduck - North America & Europe • sustainable (“SeaWatch” accreditation for wild) - sushi market segment • strong industry leadership (wild) • partner with other/Washington State growers • add nursery phase to culture operations/plant seed at larger size • diversity/increase number of hatcheries to mitigate risk

Weaknesses Threats

• episodic hatchery failures (culture) • China as culture producer • poor survival for planted geoduck (culture) • ocean acidification • high cost, access to capital, long payback • 3rd party interests (culture) period (culture) • PSP closures could shut down whole Strait of • a little understood industry Georgia (culture) • lack of extensive intertidal sand flats that Puget • sea otter predation Sound WA has (culture) • only 20 year Licence of Occupation (culture) • little formal certainty under “G” licences (wild) • moratorium on new aquaculture tenures/licences (culture)

* unless indicated in parenthesis, comment applies to both wild and culture

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3.0 Tradeoff Analysis

The expansion of geoduck aquaculture in British Columbia, as discussed previously, could affect the wild geoduck industry in two main ways: 1) a decline in harvest areas and hence harvest levels available to the wild industry, and 2) a decrease in market price from the increase in world supply.

This section first assesses the economic development impacts from wild and culture geoduck operations before synthesizing the results of the study in a Multiple Account Evaluation (MAE) framework.

3.1 Economic Development Impacts – Wild vs Culture

We focus on the primary level – commercial licence holders for wild and culture tenure holders for culture – in assessing economic development impacts as the upstream value chain activities of processing, distribution and marketing are similar for both.

We address three economic indicators for each sector: • Gross Domestic Product – the gross return to capital & labour i.e., revenues less purchases of intermediate goods & services • Labour Income – wages plus benefits paid, a part of GDP • Employment – measured in person-year (PY) equivalents

Wild Culture Subtidal Intertidal Revenues 100% 100% 100%

Labour Income 20% 30% 25% Purchases Goods & Services 15% 40% 35% Residual Return to Capital 65% 30% 40%

The above revenue distribution for each type of operation are estimates based on updated and adjusted financial profiles of each sector – GSGislason (2008) and Nelson Bros (2011) for wild and Davis (2004) BC Agriculture & Lands (2005), and Canadian Aquaculture Systems (2012) for culture. The revenue distribution does not capture the timing of expenditures and returns - significant expenditures on Labour Income i.e., wages and Purchases of Goods & Services are incurred by culture operators well before a revenue base occurs to provide a Return on Capital.

Direct Impacts. The resulting direct impacts ratios per $1 million of primary sector revenue then are:

Wild Culture Per $1 million Revenue Subtidal Intertidal GDP $850,000 $600,000 $650,000 Labour Income $200,000 $300,000 $250,000 Employment PYs 1.67 6.00 5.00

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The wild industry is much more profitable than the culture industry whereas the culture industry is more labour and job intensive. The average job in the wild industry, on a person year basis, pays much more than the average job in the culture industry since the principal wild industry job is the highly paid diver position (culture operations, including intertidal operations in Washington State, use divers but they also use other, less skilled workers as well).

The pay scale for jobs in both sectors would be above the provincial average annual wage due to the use of skilled divers.

Multiplier Impacts. In addition to direct impacts, spinoff economic effects on downstream industries occur through linkages to the suppliers of goods and services and through the respending of wage incomes.

Typically the “multiplier” impacts are restricted to these two areas, and do not include impacts from the respending of business return or surplus (interest payments, depreciation reserve, before-tax profits). As a result, the multiplier impacts of culture operations typically would be greater than the multiplier impacts of wild harvesting operations.

However, in practice business returns are spent and recirculated in the economy. For example, governments spend the taxes that businesses remit.

3.2 MAE Tradeoff Analysis

Multiple Account Evaluation is a method for systematically displaying a broad spectrum of impacts associated with development projects or policy initiatives. An MAE framework organizes project information and anticipated impacts under different objectives or “accounts”.

Common accounts are: private net returns, regional development (jobs and income), social, and environmental. Information in accounts may be qualitative or quantitative. Formal indicators are usually identified for each account.

Often key findings are presented in a summary matrix with the evaluation accounts forming rows and project alternatives as columns. The matrix facilitates comparison of the advantages and disadvantages, both monetary and non-monetary, of competing initiatives.

MAE is most useful in cases where: • there is a significant public issues or spillover effects on parties other than the culture proponent e.g., upland interests regarding intertidal geoduck farms • the project uses a public resource which has value in alternative uses e.g., culturists having access to area traditionally allocated to wild harvesters • government has competing public policy objectives (this is almost always the case)

Exhibit 3 summarizes pros and cons of wild geoduck and culture geoduck industries.

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Exhibit 3: Wild vs Culture Geoduck MAE Framework

Wild Culture

Environmental • sustainable • some concerns re PVC tubing debris • high level of monitoring on beaches for intertidal • Seafood Watch sustainability • moderate level of monitoring endorsement • footprint of subtidal operations similar to that for wild industry • no Seafood Watch endorsement

Financial • high net returns/highly profitable • marginal returns (based on • proven industry experience to date) • unproven industry/significant technology challenges • high risk

Economic Development • very high GDP reflecting industry • moderate GDP profit share • moderate employment • low employment • wage rate closer to provincial • high wage rate average • pays royalty to federal crown • no royalty system but culturists pay • lower indirect supplier & induced tenure fees to BC Crown Lands consumer respending multiplier • higher indirect supplier & induced impacts consumer respending multiplier impacts

Social • romanticism about wild seafood • upland concerns re viewscapes harvesting • lack of public awareness concerning • licence holders & crew mainly aquaculture in general from mid Vancouver Island • culture operations likely to be based • narrower distribution of returns to in mid Vancouver Island capital & labour interests • broader distribution of returns to capital & labour interests

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4.0 Conclusions

The market demand for geoduck, both wild and culture, is strong. Farmed geoduck from British Columbia can meet this growing demand as the BC culture industry has the capability to expand. The wild geoduck industry, in contrast, is constrained by the natural productivity of the environment and in fact is likely to decline due to predation by sea otters.

The future of the farmed geoduck industry in the Province will be shaped by technical, regulatory and access to capital issues and not by market demand issues. Significant technical and regulatory bottlenecks exist. And the long growout period of 7 or more years means that patient capital investment is needed. Returns to existing industry participants over the past decade, in spite of high prices, have been disappointing.

The culture industry, if it could reach its potential, could add significantly to economic activity in terms of GDP, wages and employment in the Province. The culture (farmed) industry could expand without access to new ground as there appears to be ample opportunity to expand production from existing tenures if the technical hurdles could be overcome.

The future expansion of the culture industry in the Strait of Georgia could hurt the existing wild industry in two main ways: 1) a loss of harvest areas and volumes (if ground is reallocated from wild harvest to culture interests), and 2) a reduction in product price (from the increase in supply).

Given the tradeoffs that exist, DFO needs to develop a management plan for both wild and culture industries that outlines the conditions under which the culture industry can operate and grow while at the same time providing security of access to the wild industry.

The Province in turn could review the terms and conditions of aquaculture Licences of Occupation and Leases to ensure that they are suitable for geoduck culture operations and their long business planning time horizons.

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References

BC Ministry of Agriculture and Lands, “Geoduck Aquaculture: Estimated Costs and Returns for Sub-tidal Culture in B.C.”, Aquaculture Factsheet No. 05-01, June 2005.

Bureau, D., C.M. Hand and W. Hajas, “Stock Assessment Framework for the British Columbia Geoduck Fishery 2008”, Canada Fisheries & Oceans CSAS Research Document 2011/121, 2011

Canadian Aquaculture Systems Inc., “Financial Feasibility of Geoduck Aquaculture in British Columbia”, Prepared for Canada Fisheries & Oceans, Ottawa, February 2012.

Davis, Jonathan P., “Geoduck Culture on Intertidal Beaches: Procedures, Expenses and Anticipated Income for an Intermediate-Size Farm”, WDNR Geoduck Aquaculture Pilot Series, 2004

GSGislason & Associates Ltd., “British Columbia Seafood Sector and Tidal Water Recreational Fishing SWOT Assessment”, Prepared for BC Ministry of Agriculture Food & Fisheries, February 2004.

GSGislason & Associates Ltd., “Employment Impacts of ITQ Fisheries in Pacific Canada”, Prepared for Canada Fisheries & Oceans, Ottawa, March 2008. Available from DFO Library at: http://www.dfo- mpo.gc.ca/Library/336921.pdf.

GSGislason & Associates Ltd., “The Market for Geoduck”, Prepared for Canada Fisheries & Oceans, Vancouver, January 2012.

James, Michelle, “Industry Perception on the Effect of Fisheries Management on Seafood Markets: The BC Geoduck Example”, IIFET 2000 Proceedings, 4 pages in: Microbehavior and Macroresults: Proceedings of the Tenth Biennial Conference of the International Institute of Fisheries Economics and Trade, July 10-14, 2000, Corvallis, Oregon, USA. Edited by Richard S. Johnston and compiled by Ann L. Shriver. International Institute of Fisheries Economics and Trade (IIFET), Corvallis, OR, 2001. CD ROM. ISBN: 0-9763432-2-3.

James, Michelle, “Co-operative Management of the Geoduck and Horse-Clam Fishery in British Columbia” in R Townsend et al. Case Studies in Fisheries Self Governance FAO Technical Paper 504, 2008 pp. 397-406.

Langston, Jennifer, “Northwest Ocean Acidification – the Hidden Costs of Fossil Fuel Acidification”, Prepared by Sightline Institute, November 2011.

Nelson, Stu, “Pacific Commercial Fishing Fleet – Financial Profile for 2009”, Prepared for Canada Fisheries & Oceans, June 2011.

Northern Economics, “The World Geoduck Market and the Potential for Geoduck in Washington State Lands”, Prepared for Washington Dept. of Natural Resources, September 2004.

Seafood Watch, “Mirugai Pacific Geoduck”, Monterey Bay Aquarium, October 2008. Available at: http://www.montereybayaquarium.org/cr/cr_seafoodwatch/content/media/MBA_SeafoodWatch_WildGe oduckReport.pdf. Accessed on: 15 December 2011.

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Appendix A

Geoduck Production History

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Exhibit A.1: North American Production of Geoduck

Wild Production (tonnes) Farmed Production (tonnes) Total Year Production BC Alaska Washington Mexico Subtotal BC** Washington Subtotal 1980 2,806 0 1,774 0 4,580 0 0 0 4,660 81 2,704 0 1,946 0 4,650 0 0 0 4,650 82 3,135 0 2,405 0 5,540 0 0 0 5,540 83 2,635 0 1,598 0 4,233 0 0 0 4,233 84 3,484 0 2,005 0 5,489 0 0 0 5,489 85 5,370 65 1,864 0 7,299 0 0 0 7,299 86 5,005 13 1,295 0 6,313 0 0 0 6,313 87 5,735 84 2,023 0 7,842 0 0 0 7,842 88 4,567 65 2,091 0 6,723 0 0 0 6,723 89 3,904 94 1,483 0 5,481 0 0 0 5,481 1990 3,958 86 1,566 0 5,610 0 0 0 5,610 91 3,234 88 1,523 0 4,845 0 0 0 4,845 92 2,852 86 787 0 3,725 0 0 0 3,725 93 2,422 95 946 0 3,463 0 0 0 3,463 94 2,227 89 895 0 3,211 0 0 0 3,211 95 2,085 104 563 0 2,752 0 0 0 2,752 96 1,842 92 1,251 0 3,185 0 0 0 3,185 97 1,796 82 1,487 0 3,365 0 0 0 3,365 98 1,797 50 1,614 0 3,461 0 0 0 3,461 99 1,797 92 1,921 0 3,810 0 0 0 3,810 2000 1,797 199 1,564 0 3,560 0 9 9 3,569 01 1,821 129 1,847 0 3,797 0 123 123 3,920 02 1,822 178 2,006 50 4,056 7 235 242 4,298 03 1,724 171 1,931 40 3,866 19 220 239 4,105 04 1,797 243 2,045 260 4,345 27 354 381 4,726 05 1,560 198 2,110 690 4,558 55 436 491 5,049 06 1,560 330 2,002 1,270 5,162 77 393 470 5,632 07 1,560 277 1,959 1,200 4,996 110 451 561 5,557 08 1,559 422 2,321 1,220 5,522 76 598 674 6,196 09 1,560 312 2,329 713 4,914 69 701 770 5,684 2010 1,610* 382 1,963 1,241 5,196 45 613 658 5,854

* Includes 50 tonnes of preseed harvest ** Fan Seafoods Ltd. production only (about 90% of BC total) Source: GSGislason (2012)

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Exhibit A.2: Profile of BC Commercial Geoduck Fishery

Regulations* Activity Vessel Landings Live Product

Year TAC Active Diver $ millions tonnes Licences Vessels Divers Hours Tonnes Value $ per kg* % Sales $ per kg (1) (2) (3) (4) (5) (6) (7) (8)=(7)/(6) (9) (10) 1983 2,948 54 53 2,635 1.8 .68 9% 1.65 84 2,994 54 44 3,484 2.9 .84 11% 1.70 85 2,971 55 52 5,370 4.7 .88 11% 1.70 86 3,980 55 55 5,005 4.3 .86 18% 2.05 87 4,239 55 55 5,735 6.2 1.08 15% 3.60 88 3,890 55 55 4,567 9.8 2.14 18% 4.10 89 3,992 55 47 176 18,070 3,904 12.3 3.15 26% 4.30 1990 3,992 55 44 145 19,500 3,958 10.6 2.67 29% 4.10 91 3,368 55 44 133 17,210 3,234 9.2 2.84 47% 5.15 92 2,863 55 41 135 14,750 2,852 16.1 5.65 53% 7.85 93 2,432 55 44 112 13,050 2,422 26.7 11.00 76% 15.20 94 2,245 55 44 110 12,400 2,227 33.7 15.11 80% 26.50 95 2,096 55 42 108 11,330 2,085 43.0 20.64 83% 27.15 96 1,841 55 44 94 10,640 1,842 36.0 19.56 88% 24.45 97 1,796 55 42 91 11,820 1,796 33.2 18.51 92% 21.75 98 1,796 55 42 88 10,700 1,797 29.3 16.29 93% 18.80 99 1,796 55 41 93 10,790 1,797 32.9 18.30 96% 23.90 2000 1,796 55 42 92 10,860 1,797 40.7 22.67 95% 27.45 01 1,821 55 40 91 10,610 1,821 43.5 23.87 96% 25.90 02 1,821 55 40 96 10,780 1,822 38.5 21.13 96% 25.65 03 1,721 55 41 93 10,050 1,724 32.8 19.03 97% 24.50 04 1,796 55 40 95 10,070 1,797 34.4 19.13 98% 22.35 05 1,559 55 40 83 8,260 1,560 31.7 20.30 98% 23.65 06 1,559 55 39 85 8,960 1,560 32.2 20.61 99% 24.30 07 1,559 55 40 85 8,578 1,560 30.6 19.62 96% 24.75 08 1,559 55 39 76 8,273 1,559 25.2 16.16 99% 21.45 09 1,559 55 39 77 8,639 1,560 31.2 20.02 99% 27.50 2010 1,559 55 40 76 8,540 1,560 39.3 25.22 99% 34.05

* Fisheries Management Regimes - limited entry pre 1989, ITQs 1989 onwards Source: GSGislason (2012)

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Appendix B

Geoduck Culture – Financial Parameters

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Exhibit B.1: The Culture of Geoduck in British Columbia – Financial Parameters

Subtidal Intertidal

Site Parameters Plot Size ha 10 10

Operations Parameters % Utilized/Seeded 40% 40% Size of Seed ~6 mm ~6 mm Seeding Rate no. per m2 20 20 Years with Covering - Nets 2 4 - Tubes 0 2 Years to Harvest 8 8 Weight at Harvest kg .75 .75 Survival Rate* 12% 20%

Revenue/Cost Parameters Price $ per kg** 28.45 28.45 Seed Cost inc. planting $ per seed 0.90 0.90 Net Cost inc. maintenance $ per ha of seed while protected 15,000 3,000 Tube Cost inc. maintenance $ per seed while protected 0 0.33 Harvest Cost inc. monitoring $ per kg 3.85 3.85 Other Direct Costs $ per year 20,000 20,000 Indirect Costs $ per ha plot size per year 400 400 Capital Cost $ 160,000 220,000

Financial Returns over 20 Years Internal Rate of Return ~4% ~7%

* accounts for pure survival plus ability to harvest the surviving stock ** average price over all grades

Source: GSGislason illustrative analysis with parameters adjusted from those in Davis (2004), BC Agriculture & Lands (2005), and Canadian Aquaculture Systems (2012)

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