Fished Out

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It's an unseasonably warm June day on the Alaskan island of Kodiak as skipper Dan Miller pulls the Anna D up to a quiet concrete pier beside a seafood wholesaler. The hold of his fishing boat is loaded with 9,000 pounds of freshly caught halibut, and the lanky former biologist is as happy as a seal soaking in the sun. Halibut is selling for almost $4 a pound, a record, and Miller's gross take will be nearly $33,000.

Some 4,000 miles to the southeast, Maine fisherman Craig Pendleton, 46, is spending much of the summer sitting in a dark office over Norm's TV in Saco, a former mill town south of Portland, pondering the fishing industry's future. Since early May, his boat, the 54-foot Susan & Caitlyn, has been sitting at a dock collecting barnacles because of federal rules that limit Pendleton to only 48 days at sea. He likely won't go out again until October to trawl for cod and haddock in the Gulf of Maine.

So why is Miller dancing on the docks while Pendleton is moaning in his beer? The short answer is ITQs.

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Miller doesn't have to worry that the high-priced halibut will be depleted by other fishermen. Only holders of permits known as "individual transferable quotas" are allowed to catch halibut in the Gulf of Alaska. The 52-year-old Miller holds ITQs giving him the right to catch 45,000 pounds of halibut. He can use those rights eight months of the year, sell them to others, bequeath them to heirs, or even elect to leave his halibut swimming in the sea. In effect, Miller "owns" those fish.

Today, Alaskan halibut. Tomorrow, Pacific Northwest salmon, Gulf of Mexico red snapper, Atlantic scallops? Surprising as it may be, this controversial free-market system for parceling out individual property rights to fish in the sea may be the future for the troubled U.S. commercial fishing industry. Beset by overfishing and falling catches and battered by imports from Asia, Europe, and Latin America, the old way of American fishing no longer seems sustainable. The result: growing support for congressional action to enforce widespread use of individual transferable quotas, a radical move that could help restore U.S. fisheries to health and make them more competitive in a global marketplace.

The size of the problem is enormous. Even in the face of ever-tighter rules, the list of overfished species that may not be commercially viable for decades has barely budged. Of 67 depleted fish stocks a decade ago, 64 remain scarce, despite a law Congress approved in 1996 mandating 10-year rebuilding plans. "Half of these species are still being overfished, even now," says Andrew Rosenberg, a University of New Hampshire professor who spent 10 years at the National Marine Fisheries Service, which oversees the industry. "All of the incentives are to get around the rules."

Georges Bank cod won't be back for at least 20 years, according to the Fisheries Service. Canary rockfish in the Pacific won't be at sustainable levels for 70 years, and red snapper for 16. Just this year, the Fisheries Service declared a disaster in Pacific Northwest salmon and an emergency in the New England groundfish that Pendleton chases, leading to dramatic reductions in permission to fish.

Of course not every fishery is doing poorly. New England's scallop industry is booming. A marketing campaign promoting wild Alaskan salmon has created demand for premium-priced fish from the Copper River. And if the new electronics on the commercial boats in Bass Harbor, Me., are any indication, lobstermen are enjoying a profitable season.

But as nets come up emptier and emptier, the irony for freedom-loving fishermen is that the regulatory system most have so far chosen to stick with tries to limit their every move, dictating where and when they can fish and the size of boats, nets, and gear. The rules of commercial fishing, which vary by locale and species, are set by eight regional councils made up of industry, state, and federal regulators, scientists, and environmentalists. The rules are cumbersome and convoluted, and many fishermen exploit loopholes. "Communism isn't dead," says University of Rhode Island professor Jon Sutinen. "Central planning is still thriving in our fisheries management."

It's a classic case of the tragedy of the commons, the economic textbook description of why farmers overgraze on public lands. Each farmer seeks to maximize the benefit of letting his cattle graze. So with no individual incentives to conserve, in the end, the grass on the commons is destroyed for all.

The same is true in fishing. Individual fishermen have an incentive to fish as quickly as possible because under the rules in place in most coastal areas, an entire fishery is closed when the total catch quota is reached. "Everyone is trying to maximize their catch," says Harvard professor Robert Stavins, a pioneer in the design of economic solutions to similar problems in air- pollution control. "There's no private-property right."

That results in lower-quality product and the ecologically harmful practice of discarding "bycatch," fish other than those being sought that are accidentally hauled in. A great many of those fish are either thrown back dead or don't survive. And in the fishing frenzy, boats collectively often exceed the quotas. In New England, long the poster child for limp enforcement, cod limits were set above scientific recommendations for years, and fisherman still blew past them. The haul in 2001, for example, was over 40 million pounds, almost three times the quota.

The diminishing catch has left America's fishing industry vulnerable to two gale-force economic storms. Better air transportation has allowed fish retailers to purchase fresh fish from almost anywhere on the planet. Darden Restaurants Inc. (DRI), owner of the Red Lobster chain, buys fish in 30 countries. Boston-based Legal Sea Foods Inc. has served Dover sole from the North Sea, cod from Iceland, and haddock from Norway. "Now we can have fish buyers all over the world who see catches come in and hand-pick select stuff at auction," says Roger Berkowitz, CEO of Legal, a restaurant chain started in 1950 that grew out of his grandfather's grocery.

The second storm is the spread of fish farming in Asia, Latin America, and Europe. Aquaculture has massively increased the supply of the most popular foods from the deep, such as salmon and shrimp. Over 80% of the seafood eaten in the U.S. was imported in 2004 (the most recent numbers available), much of it from shrimp farms in Thailand, Vietnam, and China and salmon farms in Norway and Chile. In 2005, America's $8 billion fish-trade deficit was the largest among natural-resource products after oil and natural gas. So even though Americans ate a record 12 pounds of fresh and frozen seafood per person in 2004, 20% more than a decade earlier, it's dogfish days for U.S. fishermen: The commercial catch has declined 1% by weight in the same period, or 33% by dollar value, adjusted for inflation; imports have doubled.

One bright side for the men in slickers: Demand has pushed prices up, keeping some in business even with depleted supplies and high costs. The wholesale price of cod rose 44% from 1998 to 2004, halibut 58%, tuna 38%, crab 57%, and bay scallops 220%. "The price is keeping the fleet afloat," says John Our Jr., whose boat, the Miss Fitz, fishes for cod out of Chatham, Mass. "If we had the same price as 10 years ago, we'd all be down the toilet."

Still, as dismal as the outlook seems, one big answer may be in the Anna D's hold. Under the system of individual transferable quotas, Alaska's Miller is allotted a 45,000-pound share of the overall halibut limit: 53 million pounds. So he can take his boat out virtually any time he wants, avoiding the mania and waste that fishing on designated days encourages. And the ITQs can be bought and sold as easily as old comic books on eBay. That encourages consolidation, improving catches for those who remain. The long-term rights also give fishermen an incentive to not to overfish. "We could have more sustainable fisheries with less risk," says Harvard's Stavins. "Ultimately, consumers would see a decrease in price and greater variety."


New Zealand in the 1980s faced a situation even more dire than that of New England today. But ITQs there have brought 80% of the fish stocks back to health, and profits are way up. The same is true in Iceland, parts of Canada, and Australia.

In the bad old days, Kodiak controlled halibut fishing in much the same way as fishing for most species is regulated in coastal areas of the Lower 48. Halibut fishermen could go out only a day or two a year. Before derby day, Miller recalls, harbors were filled with the sounds of saws as boats were rigged for halibut. Thousands of vessels were on the water at once, all racing to catch as many fish as possible before the quota limit was hit. In 1988, with his hold and decks overflowing, Miller tossed out mattresses and filled the bunks with fish. Practically limping back to port, he tied up with his back deck partially submerged.

Once time ran out, dozens of boats would line up at seafood processors' piers, halibut bursting from their holds and piled on deck. The processors couldn't handle the volume, so fish lay inside the plants in icy stacks 20 feet high. It took two weeks to process the backlog. Poorly handled and less than fresh, the halibut brought only about $1 a pound.

The unsafe conditions and waste pressured Alaska's North Pacific Fishery Management Council to search for a solution. In 1995 it introduced ITQs. The new system, adapted from the work of free-market economists, was controversial. Quota shares, handed out on the basis of previous years' catches, could be bought and sold. Those who hadn't fished during the qualifying years, and even members of halibut boat crews, got none.

Hard feelings still linger, but since then, the numbers have been startling. According to the most recent stats, Alaska fishermen caught 77 million pounds of halibut worth $169 million in 2004 vs. 58 million pounds worth $85 million just 10 years earlier. This year's catch could exceed $200 million.

When Alaska's program began in 1995, Miller got some of his share based on his historical catch. He then bought more ITQs for about $9 a pound. It has been a brilliant investment. Shares now go for up to $22 a pound. And the price of the high-quality fish he brings in has tripled as well.

Unlike other long-consolidated natural-resource industries such as oil, most fishing is still done by owner-operated boats. There is no ExxonMobil (XOM) of fishing, just lots of Dan Millers and Craig Pendletons. Tyson Foods Inc. (TSN) learned how elusive profits can be under the antiquated regs during a disastrous seven-year foray into fishing, resulting in write-offs of more than $200 million. Tyson had expected individual quotas would be introduced broadly back in 1992 but didn't count on the depth of resistance. "You're giving away a public resource," says unconverted Kodiak fisherman Shawn Dochtermann. "If our forefathers were still around, people would be hanged at the gallows for this."

New England fishermen like Pendleton remain opposed, too, fearing the rapid consolidation that could occur if big companies like Tyson can buy up quotas. Corporate operators would downsize the fleets, obliterate the towns that rely on them, and turn owner-operator fishermen into employees with little say, he says.

That may not be just idle speculation. In March, Pendleton went to New Zealand and came back unimpressed. A handful of companies own more than 70% of the fishing rights. "It's a purely economic model with no social considerations," he says. "I don't see how it can work for New England fishing communities."

But there are ways to address Pendleton's concerns. In Alaska, communities can buy ITQs and lease them to local fishermen, thus maintaining their culture. A congressional study of all such programs also recommended caps on the number of shares any one person or company can accumulate.

And more and more, doubters like Russell Underwood, who chases red snapper out of Panama City, Fla., are starting to come around. Underwood felt he had no choice but to head out in choppy and debris-filled seas last October, just days after Hurricane Rita hit. With the red snapper fishery in the Gulf of Mexico open only 10 days a month in 2005, Underwood says "Whether it's a hurricane or your wife's anniversary," you had to go. His boat broke down, and he was rescued by workers from an oil rig. Even Pendleton says: "Down on the docks, I'm hearing a lot of `Give me my quota and go away."'

By Aaron Pressman

The Good Business Issue
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