The Economics of Salmon Aquaculture BBjjoorrnnddaall__ffffiirrss..iinndddd ii 11//3311//22001111 33::2255::4444 PPMM For Tina Asche and Elizabeth Beravale BBjjoorrnnddaall__ffffiirrss..iinndddd iiii 11//3311//22001111 33::2255::4444 PPMM The Economics of Salmon Aquaculture Second Edition Frank Asche Professor, Department of Industrial Economics, University of Stavanger, Norway Trond Bjørndal Professor and Director, Centre for the Economics and Management of Aquatic Resources (CEMARE), University of Portsmouth, UK, and Professor II, Aalesund University College, Norway A John Wiley & Sons, Ltd., Publication BBjjoorrnnddaall__ffffiirrss..iinndddd iiiiii 11//3311//22001111 33::2255::4444 PPMM First edition published 1990 © 1990 by Trond Bjørndal This edition fi rst published 2011 © 2011 by Frank Asche and Trond Bjørndal Blackwell Publishing was acquired by John Wiley & Sons in February 2007. 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Library of Congress Cataloging-in-Publication Data Asche, Frank. The economics of salmon aquaculture / Frank Asche, Trond Bjørndal. – 2nd ed. p. cm. Includes bibliographical references and index. ISBN 978-0-85238-289-9 (hardcover : alk. paper) 1. Salmon farming–Economic aspects. 2. Salmon–Economic aspects. I. Bjørndal, Trond. II. Title. SH167.S17B57 2011 338.3’713756–dc22 2010041317 A catalogue record for this book is available from the British Library. This book is published in the following electronic formats: ePDF (9781119993360); Wiley Online Library (9781119993384); ePub (9781119993377) Set in 9.5/12.5pt Palatino by SPi Publisher Services, Pondicherry, India 1 2011 BBjjoorrnnddaall__ffffiirrss..iinndddd iivv 11//3311//22001111 33::2255::4444 PPMM Contents Preface ix 1 Introduction 1 2 The Production Process in Aquaculture 7 2.1 Salmon production 9 2.1.1 Biological system 9 2.1.2 The grow-out phase 12 2.1.3 The physical system 15 Bibliography 16 3 The Supply of Salmon 17 3.1 Farmed salmon production 17 3.1.1 Norway 18 3.1.2 Chile 23 3.1.3 United Kingdom 26 3.1.4 Canada 29 3.1.5 Other farmed salmon producers 30 3.2 Wild salmon production 31 3.3 Regulation of salmon aquaculture 34 3.3.1 Norway 34 3.3.2 Scotland 36 3.3.3 Chile 38 3.4 The growth of large multinational companies 39 Bibliography 41 4 Productivity Growth and Technological Change 43 4.1 Declining costs 43 4.2 Scale 45 4.3 Structure of production costs 48 4.4 Smolt production 51 4.5 Improved feed quality 52 4.6 Diseases and increased survival rates 53 4.7 Breeding 55 4.8 Cycles in profi tability 56 4.9 Catching up: regional differences 58 4.10 Productivity development in Norway relative to other producers 59 4.11 Cost reductions in the supply chain 62 Bibliography 63 BBjjoorrnnddaall__ffttoocc..iinndddd vv 11//2288//22001111 1122::0088::3322 AAMM vi Contents 5 Environmental Issues 65 5.1 The fi sh meal trap 65 5.1.1 Fisheries management 66 5.1.2 The markets for oil meals 69 5.1.3 Concluding remarks on the fi sh meal trap 72 5.2 Local issues 73 5.2.1 Organic waste 74 5.2.2 Antibiotics and chemicals 76 5.2.3 Salmon escapees and sea lice 78 5.2.4 Concluding remarks 80 Bibliography 80 6 Markets for Salmon 83 6.1 The European Union markets 84 6.1.1 France 85 6.1.2 Germany 88 6.1.3 United Kingdom 89 6.1.4 Spain 90 6.1.5 Italy 91 6.1.6 Denmark 92 6.1.7 Poland 93 6.2 The Japanese salmon market 94 6.2.1 Japanese salmon supply 97 6.2.2 Outlook for the Japanese salmon market 99 6.3 The United States salmon market 100 6.3.1 US seafood consumption 100 6.3.2 Imported fresh and frozen salmon 103 6.3.3 Market trends 105 6.4 The Russian market 105 6.5 Price development 107 6.5.1 Real versus nominal price 108 6.5.2 Exchange rates 109 6.5.3 Prices in different markets 110 6.5.4 Prices in different weight classes and for different product forms 113 Bibliography 116 7 Competitiveness and Market Structure 119 7.1 What is a market? 119 7.1.1 Market size 121 7.1.2 Market power 122 7.2 The salmon market 123 7.2.1 Pacifi c salmon 124 7.2.2 The early development of the Atlantic salmon market 125 BBjjoorrnnddaall__ffttoocc..iinndddd vvii 11//2288//22001111 1122::0088::3333 AAMM Contents vii 7.2.3 Early development of the farmed Pacifi c salmon and salmon trout market 126 7.2.4 Fresh versus frozen 126 7.2.5 Declining prices, new sales outlets and product forms 127 7.2.6 Salmon and supermarket chains: a marriage made in heaven 129 7.3 The size of the market 131 7.4 Salmon marketing 133 7.4.1 Health benefi ts, food scares and environmental concerns 134 7.5 Trade restrictions 136 7.5.1 Trade restrictions in the salmon market 139 Appendix: a market model 142 Testing for market interactions 147 Bibliography 148 8 Lessons for Other Farmed Species 151 8.1 Other farmed species 151 8.1.1 Shrimp 151 8.1.2 Sea bass and sea bream 153 8.1.3 Turbot 156 8.1.4 Tilapia 157 8.1.5 Other species 160 8.2 Lessons from other farmed species 160 Bibliography 162 9 Optimal Harvesting of Farmed Fish 163 9.1 A biological model 164 9.2 Bioeconomic analysis 165 9.2.1 Zero costs 166 9.2.2 Harvesting costs 168 9.2.3 Feed costs 168 9.3 The rotation problem 169 Appendix: optimal harvesting of farmed fi sh 171 A biological model 171 Bioeconomic analysis 172 Harvesting costs 175 Feed costs 177 Feed and harvesting costs 179 The rotation problem 179 Optimal harvesting: examples 182 Bibliography 184 10 Production Planning in a Salmon Farm 187 10.1 Cash fl ow analysis 188 10.2 Smolt release and biomass growth 190 BBjjoorrnnddaall__ffttoocc..iinndddd vviiii 11//2288//22001111 1122::0088::3333 AAMM viii Contents 10.3 Sales revenue 193 10.4 Feeding costs 195 10.5 Net present value 197 10.6 Selective harvesting 199 11 Investment in a Salmon Farm 201 11.1 A production plan 201 11.2 A liquidity budget 205 11.3 Cost of production 209 11.4 Investing in a new aquaculture company 211 11.5 Licence value 215 11.6 Buying a fi sh farming company 217 References 221 Index 231 BBjjoorrnnddaall__ffttoocc..iinndddd vviiiiii 11//2288//22001111 1122::0088::3333 AAMM Preface The salmon aquaculture industry originated in Norway in the 1970s, and became commercially viable in the early 1980s. As a consequence of its successful development, it later spread to a number of countries in Europe, the Americas, Asia and Australia. Farmed salmon production – Atlantic salmon, coho and salmon trout – has increased from a few thousand tonnes in 1980 to about 1.9 million tonnes in 2008, and today salmon is consumed in more than 100 countries all over the world. The Economics of Salmon Aquaculture, published in 1990, was one of the first, if not the first, book to systematically analyse the industry (and any aquaculture industry, for that matter) from a production and market perspective, at the firm as well as the industry level. With the tre- mendous development salmon aquaculture has experienced, the industry is today very different from what it was two or three decades ago. This book will bring the reader up to date on major issues pertaining to salmon aquaculture. The book’s purpose is as a textbook for senior undergraduate courses, but it should also be of use to those who work in the industry and others interested in salmon aquaculture as well as aquaculture in general. Certain parts of the book require some economic and mathematical background. However, most parts of the book are also accessible to those who lack such a background. To a large extent, the economic analyses are based on Norwegian data. There are two reasons for this. First, as Norway is the leading salmon pro- ducer in the world, analyses of economic conditions in this country are of interest to salmon producers worldwide. Second, as Norway is also the pioneer in this field, more data are available than for any other producing country. We would not have been able to write this book without the help and support of numerous people. Special thanks go to Sigbjørn Tveterås and Linda Nøstbakken, who have assisted with several book chapters. Christopher Martin has provided invaluable research assistance. We also thank a number of colleagues for their help, including Jim Anderson, Atle Guttormsen, Rene Cerda, Exequiel Gonzales, Kolbjørn Giskeødegård, Jan Harald Hauvik, Gunnar Knapp, Henry Kinnucan, Daði Kristofersson, Ole Gabriel Kverneland, Laurent Le Grel, Audun Lem, Knut Molaug, Øystein Myrland, Atle Øglend, Cathy Roheim, Kristin Roll, Jan Trollvik, Ragnar Tveterås, Ursula Tveterås, Terje Vassdal and Jimmy Young. Data have been provided by Kontali (Lars Liabø, Ragnar Nystøl), the BBjjoorrnnddaall__ffpprreeff..iinndddd iixx 11//2288//22001111 1122::0088::0088 AAMM x Preface Norwegian Seafood Export Council (Kristin Lien, Paul Aandahl, Egil Sundheim), the Norwegian Directorate of Fisheries (Merete Fauske, Per Sandberg), the Norwegian Seafood Federation (John Arne Grøttum) as well as the FAO. The quality of the book has been enhanced by our editor, Richard Yates, while Megan Bailey has produced all the figures. Trond Bjørndal Frank Asche BBjjoorrnnddaall__ffpprreeff..iinndddd xx 11//2288//22001111 1122::0088::0088 AAMM