StateImpact
10:30 am
Mon December 12, 2011

How Defense Cuts Hurt New England Lobstermen–And Maybe Even Lowered Lobster Prices

Late last week, we posted a cool infographic, courtesy of the journalists at Stateline, taking a look at the percentage of each state’s GDP that’s made up by federal spending.  The group then subdivided federal spending into defense-related spending and everything else.

All told, about 5 percent of the Granite State’s GDP comes from the feds. And the graphic shows that most states, like New Hampshire, rely more heavily on defense spending– ranging from salaries to procurement–than other federal money.  (You can get a closer look at the infographic here.)

And “procurement,” definitely has a military ring to it.  It brings to mind various Pentagon officers going about purchasing tanks, helicopters, and guns from heavy-hitting government contractors, who then hire subcontractors to make the various computerized bits and pieces that make the equipment operational.

But, as Bob Sanders of The New Hampshire Business Review recently reported, some of that defense money flowing to New Hampshire actually came here by way of…lobsters.

The Department of Defense, via “the military’s prime contractor, Supreme Group B.V, a Dutch food supply company,” has been in the habit of procuring frozen lobster tails from a New Hampshire company.  That is, until recently.  Sanders writes:

    “Cancellation of a military contract to supply lobster to troops in Afghanistan caused havoc in the lobster industry in Maine and New Hampshire, claims a Portsmouth subcontractor that has filed a breach of contract suit in federal court.

    ‘The military blatantly disregarded how this would affect people,’ said Charles Anastasia, CEO of Orion Seafood International Inc. ‘It was like they just laughed at us. If they didn’t want the lobsters, they shouldn’t have ordered them.’

    For Orion Seafood, a supplier with $300 million in revenue, the sudden cancellation of a $15 million order for 750,000 pounds of lobster meant at least a $1.5 million loss, resulting in a substantial cut in the end-of-year bonuses for its 30 employees…

    To fulfill that order, Orion said it needed to gear up in advance of the Maine and New Hampshire lobster season (from June to July), building up its inventory in August and September 2011. To do that it had to incur ‘millions of dollars’ in expenses, relating to purchasing, packing, wearing, housing and insuring the lobster sale in order to supply lobster that meets certain military specifications…”

So now we know where at least a sliver of that federal defense money is (or, more accurately, was) flowing into New Hampshire.  Sanders’ article also illustrates the economic ripple effects of these military contracts–and when they’re cancelled.

    “The sudden stop of orders jammed up the cash flow all down the food chain, Anastasia said.

    Orion — which handles financing and distribution of the seafood — was able to absorb the loss, partly by reducing its planned bonus to its employees, Anastasia said.

    But Anastasia added that because of the glut in inventory, Orion stopped buying from a Maine processing facility, which temporarily had to stop operating, laying off about 100 employees.

    That in turn meant a major customer for about 5,000 local lobstermen had suddenly vanished, which is a ‘big part’ of why lobster prices have dropped about 50 cents a pound, he said.”

So the military, through one of its major food contractors, cancels a big order for lobster, which leads to smaller bonuses at Orion, 100 temporary layoffs in Maine, and results in a lower price for the commodity as a whole.

Ripple effect, indeed.

Sanders reports that while Orion isn’t suing the Defense Department, the company has filed a federal suit in Concord against Supreme and its subsidiaries.  According to the suit, Supreme has contracted with Orion for lobster tails over the past three years.

So why the sudden stop?

Apparently, it all boils down to spending cuts at DoD:

    “Anastasia said Supreme officials told them that the Defense Logistics Agency, which was feeding the troops surf-and-turf meals every Friday, had cut back the meals to once a month and began using a lobster substitute.

    ‘If the military cuts back, I understand. But don’t put an order for $15 million worth of production and just not fill it,’ Anastasia said.”

Sanders’ story is a real-life illustration of the Stateline infographic:  Federal spending–especially defense money–permeates state economies, sometimes in (seemingly) unlikely ways.