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Managing Fish Portfolios

by James N. Sanchirico, Martin D. Smith, and Douglas Lipton.

Link to Article

This feature appeared in the Winter 2007 issue of Resources.

A printer-friendly PDF version is also available:

Managing Fish Portfolios

Many fish stocks throughout the world are below biological target levels that ensure a sustainable population. Most of our knowledge about protecting and re-building overharvested fish stocks is based on efforts to protect a single species, such as the Chesapeake Bay blue crab. A common strategy is to place a limit on fishing for the species of concern. However, recent scientific advances in understanding how various species function and interact are leading to a new management paradigm that focuses on understanding the ecosystem in which the species of concern exists.

Marine scientists and policymakers are encouraging ecosystem-based fishery management, but there is limited guidance on how to put the concept into practice. In recent work on Chesapeake Bay fisheries, we have developed a method that accounts for species interdependencies, fluctuations overtime, and sustainability constraints.

Our approach is loosely based on techniques employed in financial asset management. Investors used to focus on the risk (variance) and rewards (expected returns) of individual securities, similar to how fisheries are managed today. Portfolio theory shifted the perspective from choosing individual stocks to picking diversified portfolios, where taking into account the correlations across securities could reduce risks in order to yield the desired rate of return. Similarly, interdependencies between species, such as predator-prey or symbiotic interactions, mean that risks from harvesting each species can be correlated, making it possible to determine whether potential benefits could arise from jointly considering multiple fish stocks.

A portfolio approach to Chesapeake Bay fisheries management is a good fit for at least two reasons. First, Chesapeake Bay fishers are known locally as "watermen," reflecting their ability to earn a living off the water from a variety of activities. They are already manage their individual portfolios by harvesting a variety of species - including oysters, blue crabs,and striped bass - and employing different methods, such as tongs for oysters, various types of nets for finfish, and crab pots and dredges for crabs.

Second, Bay policymakers from Maryland, Virginia, Delaware, Pennsylvania, and the National Oceanic and Atmospheric Administration's Chesapeake Bay office have demonstrated interest in developing ecosystem-based fishery management plans. The latest update to the Chesapeake Bay Agreement includes a goal to develop such plans for target species, and the current Chesapeake Bay Fisheries Ecosystem Plan specifically calls for examining patterns of harvests as well as incorporating uncertainty into fisheries management decisions.

Link to Ecosystem-Based Fishery Management
An Approach to Ecosystem-Based Fishery Management
James Sanchirico, Martin D. Smith and Douglas W. Lipton 
DP-06-40 | September 2006

This article is based on a forthcoming article in Ecological Economics, "Ecosystem Frontiers: An Empirical Approach to Ecosystem-based Fishery Management," by Sanchirico, Smith, and Lipton, and an RFF Discussion Paper. The authors thank the National Oceanic and Atmospheric Administration Chesapeake Bay Program for financial support through NOAA Grant #na04nmf4570356.

Using readily available data on Chesapeake Bay fish catches and prices from 1962 - 2003, we derived an ecosystem frontier, a curve that plots the tradeoff between the variability of fishing revenues and the different levels of revenues (see figure below foran illustration of how this works). Minimizing this variability can be beneficial to fish processors, fishery-dependent communities, and individual fishermen, who may have boat and home mortgage payments but limited income outside of fishing. Furthermore, minimizing variability in fish populations, which is related to volatility, is an important ecological objective because less stable systems can lead to lower biodiversity.

Our sample included the top 22 revenue-generating species: oysters, crabs, clams, snails, and finfish such as menhaden, stripped bass, and blue fish. For low expected revenues, managers can diversify catches by completely curtailing total allowable catches for certain high-risk, low-return species. To reach a higher revenue target, however, managers must maximize the catch of more species. Each point on the frontier corresponds to a set of catch limits (see figure below).

How does this compare to a single-species approach? Analyzing both an ecosystem frontier and a species frontier (which does not take into account the species interactions and is akin to how fisheries are for the most part managed today), we find that there are gains to be had. For example, for the same revenue target, the ecosystem approach can have considerably less variance (compare point A to point B). The inset to the figure also shows how different the recommendations for catch limits can be between the two approaches, where the single species approach more often relies on larger catches and includes a greater number of species than the ecosystem approach.

Risk-Return Trade-Offs

We also compared the actual revenues for each species in the Bay, (working from a subset of the larger sample) to the implied allocations from the ecosystem frontier and found that managers could have reduced the variability in returns. Preliminary analysis also confirms the structural change to the Chesapeake Bay ecosystem, in terms of species interactions, that resulted from the devastating oyster disease in the early 1980s, which dramatically reduced the oyster population.

A variety of other modeling methods are being developed for ecosystem-based fisheries management. Our portfolio approach complements this emerging suite of tools by incorporating, in a practical way, knowledge of the interactions of species within an ecosystem.



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