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October 2, 2013

Easy money in the lobster dealing biz

by Philip Conkling

It is dark now when the throaty diesels rumble back to life on their moorings and the slow progression of lobster boats begins rounding the outer edge of the harbor for the fall run.

Historically, October has been the biggest month of the year for lobstermen, not only because the catches are generally larger as lobsters begin migrating offshore, but because the percentage of hard-shelled lobsters in the catch increases and thus prices are higher. Hard-shelled lobsters are more valuable because they can travel farther to retail markets and restaurants beyond Maine and New England than vulnerable soft-shelled "shedders, which are prone to dying en route.

Lobstermen are still nervous after last year's market collapse that sent prices plummeting to as low as they had been for the past 30 years. Many dealers simply stopped buying lobsters last July because they could not even give them away.

Last year's market collapse was triggered by a freakish confluence of events that began when exceptionally high numbers of lobsters in the Gulf of Maine had shed their shells earlier than anyone can ever remember after an eerily warm winter. So many shedders were landed in May and June that Canadian processors, which handle so much of Maine's catch, could not handle the glut.

Canadian lobstermen, who were still fishing before their season closed for the summer and worried they would not be able to sell their lobsters, blockaded the entrance of the processing plants and brought the Maine lobster industry to its knees in short order. Feelings rose to such intensity that some famously independent Maine lobstermen took the unprecedented step of organizing a union with the hope of bargaining for higher prices.

To the uninitiated, the lobster business looks deceptively simple. You buy lobsters for between $2.50 and $3 a pound and the next thing you know, someone has paid $30 for a lobster dinner at a white table cloth restaurant. It is tempting to think that there's an easy way to make a fistful of money in this business.

If you want to go into the lobster selling business, the first thing you need to know is that lobstermen expect you to pay them at least once a week, if not every day. So, say you have managed to line up 25 boats that will sell you their lobsters. And let's say they bring in an average of seven crates of lobsters a day to your buying station—600 pounds worth. Let's also say you are paying them an average of $2.50 per pound—$1,500 a day for each lobsterman (times 25) for about $40,000 draining out of your checking account each day. If your lobstermen fish five days a week, you are light by about $200,000 at the end of your first week in business.

You are then probably selling these lobsters to a big regional wholesaler who pays on a 30-day account, so you will be financing a cash flow of between $800,000 and $1 million during your first month in business. If you ship 450,000 pounds of lobsters to Boston or New York during the month and have planned on a margin of 20-25 cents per pound, you will have between $90,000 and $100,000 of revenue in your account. Not bad for a month's work.

But then you have yet to figure out the amount of bait and fuel you have to finance and have on hand to get the 25 fishermen to sell to you in the first place. And, God forbid, you have to fix the wharf and float where you do business for the boats to come alongside or repair the equipment to load the crates onto trucks or the bubblers to keep the lobsters alive in the water before they are loaded.

And this is still before you pay the trucker maybe five cents a pound to get your lobsters to the wholesaler and before the wholesaler tells you how many of your lobsters have died en route and charges them against your account. Your margins are beginning to look thinner.

Let's also pretend the gods are kind and that Murphy never left Ireland. So during your first month in business, none of your 18-wheelers has broken down en route to market—which would quickly produce a loss of $100,000 worth of your lobsters, wiping you out. Let's further say that the airport you are delivering to has not been shut down for weather cancelling the flight on which your lobsters were supposed to be loaded. Let's also say that the check from new wholesaler who promised you a fat margin clears the bank.

You are still in business at the end of your first month. But you are probably a little older, if not wiser and you might have a hole burning in your stomach from the stress.

Remember what you said to yourself when you went into the lobster business—with the difference between the $2.50 per pound you pay a lobstermen and the $30 lobster dinner, there is plenty of opportunity to make money in the lobster business. It is enough to make some grown men and women cry—or at least groan.

Philip Conkling is the founder of The Island Institute. He now operates Conkling & Associates, a consulting firm.


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