The great lobster crash

Friday, January 23, 2009 08:43 AM ET

by Kevin Yarr

CBCNews.ca

One of the scary things about recessions is how they have a tendency to spiral downward. For an illustration of this, consider P.E.I.'s lobster industry.

Lobster are worth $250 million a year to the P.E.I. economy, by far the biggest part of the fishery, which is one of the big four industries on the Island: fisheries, agriculture (potatoes), tourism (Anne of Green Gables) and aerospace (yes, aerospace).

While people tend to think of sticking live crustaceans in boiling water when they think of lobster, a huge part of the industry is processing and freezing it. In peak season, 7,500 people work in the Island's lobster industry on the water and in processing plants.

Like many businesses, lobster processors have a cash flow issue, in their case made worse by the seasonal nature of the business. They have to put up a big load of cash at the beginning of the season to buy the lobster from the fishermen, and then to run the plants. Money comes back in dribs and drabs as throughout the year as they sell the frozen lobster.

But this year those dribs and drabs turned into a trickle. As the markets crashed and consumer confidence went with it, luxury products are taking a big hit. A delicacy like lobster definitely qualifies as a luxury product.

So lobster processors on P.E.I. are now finding themselves sitting on $25 million worth of frozen lobster as the spring lobster fishery approaches. If you're a banker, carefully doling out funds in a market where credit is tight, opening up a line of credit for a business already chock full of a product nobody seems to want so it can buy more is not looking like a good option.

The processor's trouble is the fisherman's trouble. Prices for lobster on the wharf have dropped so low many fishermen are wondering whether they can break even if they drop traps this year.

So people stop buying because they are worried about their jobs and financial future, threatening the jobs and financial future of thousands. Multiply this same formula over an untold number of industries.