The Business Case for Long-term Contracts

© Antonio Busiello / WWF-US
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Long-term contracts and seafood markets 

In the seafood industry, large-scale buyers tend to utilize short-term buying strategies (less than one year) that oftentimes combine spot market purchases or fixed-price agreements for periods as short as a few weeks. These short-term buying decisions are often thought of by the buyers as a way to “beat the market,” or to hedge the expected rise or fall of the commodity. However, the negative impacts of this shorter-term buying cycle can be significant for buyers, suppliers and the environment.

Long-term contracts (LTCs) can play a useful role in mitigating some of these negative impacts and are a key component to a successful procurement strategy. For the producer, LTCs offer stability and credibility. Producers often lack access to financing for investments that would enable them to improve sustainability practices. LTCs offer an excellent opportunity to shift this paradigm; they act as a form of collateral for investors, increasing the availability of capital to fishers and enabling investments in sustainability, such as improvements in gear type or the introduction of catch seasons, that are only possible when a secure market and financing are established.

For the buyer, LTCs offer a way to incentivize producers to maintain or improve quality and consistency. For species that have volatile pricing patterns or frequent supply shortages, such as those seen in Southeast Asian blue swimming crab, LTCs can stabilize a portion of the buyers’ supply and provide an advantage over the competition in sourcing additional products from suppliers known to maintain consistent quality.

LTCs, when structured properly, also allow for enough pricing flexibility for both the buyer and seller to benefit from market forces while removing the risk of extreme loss. Parties that shy away from LTCs for fear of missing opportunities to take advantage of market swings overlook using LTCs as part of a holistic procurement strategy. LTCs need not make up the entirety of a buyer’s supply, but rather serve to stabilize a portion of supply while still leaving room for flexible purchasing to take advantage of the market.

In successful LTCs, the benefits can stack over time, making relationships increasingly stronger, more productive and longer lasting. Given strained natural resources, fierce competition, and growing demand for responsibly sourced seafood, LTCs are not only a strong strategy for sustainability, they are good business.

© Antonio Busiello / WWF-US

A case study for long-term contracts

Southeast Asia is a critical region for tuna production and processing globally and a key supplier of the US import market. Tuna is a highly demanded product in markets around the world, and so, as a species and a product, is at risk of over-exploitation if sustainability measures are not quickly put in place. End markets are also increasingly aware of the need to ensure social and environmental credentials for seafood products on their shelves and, in many cases, have made commitments to source from Fishery Improvement Projects or certified fisheries. For tuna produced and processed in Southeast Asian countries, there is a big gap between the current limited supply of high quality, sustainable (or certified) product and current and future demand. This is particularly true for tuna fisheries supplying the fresh and frozen market where high quality is critical for market access. For tuna – and other seafood – sourcing companies who want to maintain access to lucrative high quality markets now and into the future, there is a clear business case for using longer-term contracts to increase security of supply, reduce costs, improve long-term forecasting and incentivize the best practices that facilitate the transition to sustainability.

The creation of long-term financing mechanisms can help incentivize and maintain environmental and social operational improvements in fisheries.

Many tuna fisheries in key producing countries such as Vietnam, Philippines or Indonesia that supply the fresh/frozen market in countries such as the US are small in scale, and fishers often lack access to basic infrastructure that can help them improve quality and, therefore, pricing and incomes. They also often lack access to the funds needed to invest in the transition to sustainability. Long-term contracts (LTCs) enable financing mechanisms to be put in place that can help tackle both environmental and socio-economic issues, as well as ensure an increased supply of market-ready tuna.

To explore examples of opportunities for these innovative financing mechanisms in tuna fisheries in Southeast Asia, WWF worked with Marine Change, a specialist advisory firm focused on investments in the Asian seafood sector. Analysis showed that in one small-scale tuna fishery in Indonesia, the difference in income between fishers selling high quality tuna compared to those selling lower quality was tenfold. In the same fishery, 37% of product was being rejected due to quality concerns, a loss in value of over $8,600. In this example, long-term contracts between the buyers, processors and fishers could help the fishing communities access the funds necessary to improve quality and sustainability criteria, increasing price per ton of tuna landed, reducing waste and increasing environmental performance.

In the Vietnamese Yellowfin handline fishery, it was found that a new long-term funding mechanism was required to achieve and maintain Marine Stewardship Council (MSC) certification. Analysis showed that through LTCs with buyers, a small percentage of the cost of the tuna could be re-invested to create an additional revenue stream. These funds can in turn be leveraged to pay for the costs of certification assessment, continual fishery improvements and re-assessments over time. Without a long-term continuous revenue stream supporting them, fisheries will sometimes drop out of certification. Approximately 20% of certified fisheries currently drop out of MSC’s certification program if they no longer have donor funds to maintain the reassessment fees. In a competitive market for high quality and sustainable tuna, a drop in supply only drives prices higher and puts more pressure on fisheries.

There are clear benefits to be had from adopting longer term and closer relationships with tuna suppliers, particularly for buyers committed to sourcing high quality, sustainable fish. As demand begins to outpace supply for these premium products, buyers should adopt innovative tools such as long-term contracts in order to hedge supply risk and proactively invest in the future viability of their supply chains.

To learn more, please refer to the following report on The Business Case for Long-term Contracting that explores long-term contracting as a tool for catalyzing the transition to sustainable and resilient tuna fisheries in the Western Central Pacific Ocean (WCPO).