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lobster retail

How is the Lobster Market Price Determined?

We have all seen the restaurant menu where it lists the fresh lobster entree’s at “Market Rate.”   Most consumers have never felt so un-empowered.  How on earth can any one know what the lobster market price should be?

We know lobster prices can fluctuate based on supply and demand.  Lobster prices tend to go down in summer when the lobster harvest is in full swing, and then rise again during the winter when few boats go out and most of the fresh lobster is imported from Canada.  Historically, lobster demand is greatest  during the holiday season.  Lobster from Maine,  lobster from Canada:   All this is nice to know, but still what is the  “market rate?”

It’s been said by experts that no one may ever fully understand how people price lobster.  We know that the lobster fishermen never think the boat price is high enough.  The boat price is what a dealer will pay for a pound of lobster off  loaded from the boat into a dealer’s facility.  While it is true that a dealer will try to buy live lobster at the lowest rate possible, the dealers don’t set the price either.  If that surprises you, it shouldn’t. Even though there are thousands of licensed dealers, there are probably only a handful of dealers large enough to buy an entire day’s catch from hundreds of boats and pay cash for the lobster.  So dealers range from the super large with piles of cash to the guy with a pickup truck buying lobster off the boat to sell to a hand full of local restaurants. Still, even the large dealer has little power to set the price, if any at all.

lobster boat at lobster wharf dealer
A boat offloads at a lobster wharf dealer

This is because there are several stages in the lobster pipeline and the price of lobster  can be affected at every one.  What makes the pipeline rather unruly is that along each stage every participant — buyer and seller — takes their “cut,”  or commission.   The “cut”  is what begins to affect the price because each buyer will have different operating expenses.  In  a perfect world, each buyer and seller would mark up the catch and the lobster price would be the final, marked up figure, after it went through the pipeline.

For example, the lobster fishermen may desire a boat price of $4 per pound to cover fuel, bait, boat mortgage, boat repair, traps, rope, gear, pickup truck and profit.  The wharf dealer may buy the lobster and mark it up 75 cents to cover the expense of a crate run.  A trucker then adds 75 cents to a pound to cover the cost of the driver, fuel, tolls, wear and tear and profit.  The trucker then delivers to a large wholesaler who may add 75 cents a pound for chix (one pound) and up to $1.50 per pound for the larger lobster.  These whole-sale commissions  are to cover the cost of grading and separating out culls and damaged lobster.  Also included are the energy costs of  storage and other overhead, including salaries and profit.  In this scenario, this brings the price of lobster to $7.00 a pound at the wholesale stage.  But we are not done.

The large wholesale operation will then  sell to smaller wholesalers.  The smaller operator may add $1 a pound to sell and deliver to local markets and restaurants.  So now at this stage, the price from the small wholesaler to the local fish market  is $8.00 a pound. The fish market will then add $1.50 per pound to sell to the consumer, leading to a consumer  price at the fish market of $9.50 a pound for selects.     The restaurant will mark up the price from the small wholeseller by $1 to arrive at the wholesale plate cost.  Then the restaurant marks up the final plate cost by 300% and you have the menu “market rate”  for lobster.  In this case, $34 for a 1.25 pound lobster served at the table — white tablecloth included.

But, and of course there is a but,  that is the perfect scenario for lobster pricing. The reality is often much different.

Prices are generally set on Monday when the large wholesaler determines who is buying lobster that week, and how much they are buying.  Buyers and sellers come together with electronic auctions that begin to show the demand for the week.   The wholesaler then contacts the wharf dealer and says this is what the buyer will pay.  Then the competition begins among dealers and commissions change at every stage of the sales pipeline.  The lobster price pipeline then is said to be actually working in reverse, with the wholesaler offering a price and then the truckers and dealers cutting nickels, dimes and quarters  from their commissions to be competitive.  This goes on until it gets all the way back to the boat price, which now suddenly may be $3.65 instead of $4.   Since the lobster fishermen’s fixed costs stay the same, the lower boat prices comes from their profit margin.  Of course if demand is high, the boat price could go up and the lobster fishermen will benefit. It good times lobster boat prices can be $5 to $6 a pound.  Bad times boat prices can be as low as $2.25 a pound.

full lobster crates at wharf dealer
Full crates await truckers at the lobster wharf dealer

So where does the buyer’s price come from?  The wholesale buyer doesn’t wake up in the morning and pull a price out of the air.  The price a wholesale buyer is willing to pay the dealer  is based on what large retailers are willing to pay.  A large chain for example, may think the whole sale price is too high, and not bid on anything that week.  Or the reverse may be true, and a large restaurant chain may have high demand and be willing to pay more to obtain the amount of lobster it needs.  Real-time electronic auctions or exchanges help provide direction to the wholesale pricing.

The frontier along the Lobster Coast of pricing can get a little wild west, as some dealers are also wholesalers, and some wholesalers are also truckers, and some wholesalers are truckers and dealers.  Wholesalers may also have retail markets and lobster online operations.   This is why prices can vary from town to town, state to state, restaurant to restaurant, store to store.

maine lobster pound
A Maine lobster pound with bubblers running

In the summer and fall New England has the power to influence lobster prices as the Canadian harvest is closed.  In the winter and spring, Canada is empowered to exert pricing pressures as their season is in full swing.  And the Canadian currency exchange also affects US wholesale prices. A weak dollar makes the cost of Canadian lobster very high and can create market turmoil.  A poor exchange rate raises the price of lobster in the United States and can actually reduce demand.   The size of the harvest itself can also reduce or drive up prices.  For example, if selects are scarce during the month, the price for selects can go up quickly.

To help prices stablize, large dealers will operate all year long lobster pounds in Maine and Canada capable of storing millions of pounds of live lobster in a natural ocean environment.   These pounds allow dealers to offer large amounts of  live, ocean fresh lobster year round while taking away some of the price swings caused by the change in the seasonal supply as well as swings in the auction price.

So the next time you see a lobster dinner at a restaurant priced at market rate,  you will know the how and why of where that price came from.

 

The Maine Lobster Supply Chain Moves Fast

refrigerated live maine lobster trucks being loaded There are more than 9,000   licensed lobster fishermen, according to the Department of  Maine Resources,  and the lobster harvest in 2010 broke records.  Typically  the lobster fishermen sell to the 3,500 dealers in the state, who then turn around sell to wholesalers or processors.  Live and processed lobsters are then sold to restaurants, retailers and the […] Continue reading →