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Decomposing the Drivers of Profitability in Two Key Commonwealth Prawn Fisheries

05 May 2013

This paper uses an index number profit decomposition approach to examine recent drivers of change in profitability in two key Commonwealth prawn fisheries, the Northern Prawn Fishery and the Torres Strait Prawn Fishery. The results reveal that a divergence in the economic performance of the two fisheries has been the result of differences in productivity trends.

Introduction

Over the past decade, there has been an increasing focus on effective management of Australia’s fishery resources. In 2005 the Australian Fisheries Management Authority (AFMA) led the way with a legislated objective to manage Commonwealth fisheries in a way that maximises the net economic returns to the Australian community within the context of ecological sustainability. Since then, two key policy actions that aim to address stock sustainability and improve profitability in Australia’s Commonwealth fisheries have been implemented:

  • The Commonwealth Fisheries Harvest Strategy Policy (2007) aims to prevent overfishing and move stocks to a biomass target consistent with maximum economic yield (MEY). MEY refers to the point in a commercial fishery where fishing effort, catch and fish stock biomass are at levels that, on average, maximise the net economic return to society from the commercial use of that fishery resource (Kompas & Gooday 2005). For some fisheries, this meant more restrictive management settings to reduce catches and rebuild fish stocks. For other fisheries, market-based fishing rights, such as individual transferrable quotas, were introduced to encourage greater autonomous adjustments.
  • Government funded fishery structural adjustment assistance, particularly the Securing our Fishing Future (SOFF) structural adjustment package which concluded in December 2006. The adjustment package reduced vessel numbers in key Commonwealth fisheries, such as the Northern Prawn Fishery, and is likely to have improved productivity in the targeted fisheries by removing the least efficient vessels from a fishery through a voluntary tender process and leaving fewer vessels competing for similar sized fish stocks (Vieira et al. 2010).

Although the Torres Strait Prawn Fishery (a jointly managed Commonwealth fishery) has not been subject to the Commonwealth Fisheries Harvest Strategy Policy (2007) or the SOFF adjustment package, it has been affected by a set of its own policies, including effort reductions in late 2005 and early 2006.

One way to evaluate whether these policies have improved profitability of Commonwealth fisheries is to look at how the factors driving fishery profitability have changed following policy changes. Many factors drive a fishery’s profitability; some are within the influence of management (such as productivity and stock biomass) and others lie outside management control (such as catch prices and input costs).

Index number profit decomposition is an approach that isolates relative contributions of different variables to changes in vessel-level profit. The method was first applied by Fox et al. (2003) to the British Columbia halibut fishery; it has since been applied to Canada’s Scotia–Fundy mobile gear fishery (Dupont et al. 2005), the Commonwealth Trawl Sector of the Southern and Eastern Scalefish and Shark Fishery (Fox et al. 2006; Grafton & Kompas 2007) and the Eastern Tuna and Billfish Fishery (Kompas et al. 2009).

The decomposition method uses index numbers to identify, evaluate and compare the importance of different drivers behind a fishery’s profit variability over time. It does this by quantifying changes in vessel-level profit according to the contributions from changes in key drivers, with each individual vessel’s performance being defined by an index relative to a selected reference vessel. The selected reference vessel sets a desirable and achievable level of performance against which vessels in a fishery can be benchmarked. Here, the reference vessel is defined as the average vessel in the most profitable year, which is calculated by averaging each variable component across all sampled vessels in the most profitable year.

Two key Commonwealth prawn fisheries are analysed in this paper: the Northern Prawn Fishery (NPF) and the Torres Strait Prawn Fishery (TSPF). These prawn fisheries make interesting index decomposition studies given that similar prawn species are caught in both and profitability trends are historically comparable. Since 2006–07, profitability in the fisheries has diverged; net economic returns improved in the NPF but remained negative in the TSPF.

Vessel-level catch and effort information used in this study were sourced from AFMA effort and logbook data. Cost, value and price information were obtained from ABARES fisheries economic surveys, agricultural commodities statistics and the Australian fishery statistics publications. For the NPF, the period of analysis extends from 1998–99 to 2009–10. Due to data limitations, the period of analysis for the TSPF extends from 1998–99 to 2007–08.

The results presented in this paper reveal that the contributions to profitability from key drivers have changed significantly for both fisheries over the past decade. For instance, in the early 2000s output prices contributed favourably to profitability, relative to the respective reference vessel in each fishery.

This relative contribution declined considerably from 2001–02 onwards. For the NPF, the contribution to profit from productivity increased substantially after 2005–06, offsetting the decline in contribution from output prices.

Overall, there was improved profitability in the fishery. The same was not true for the TSPF. Since 2002–03, the contribution to profit from fuel price in the TSPF became increasingly negative. Without sufficient improvement in productivity, falling output prices and rising fuel costs undermined profitability in the TSPF over the period of analysis.

As the selected reference vessel is different for each fishery, index results cannot be formally compared across the NPF and the TSPF. However, some general conclusions can be drawn from comparing the movements in factors driving profitability that are likely to have been affected by different policy approaches in each fishery.

Further Reading

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May 2013

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