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Are Some Production Systems More Profitable than Others?

Are Some Production Systems More Profitable than Others?

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By: Carole R. Engle, Ganesh Kumar, and Jonathan van Senten*

Finfish aquaculture is complex and diverse, including many species and strains of fish raised in a wide variety of production systems. Technologies used to raise fish also continue to evolve into increasingly sophisticated forms. One seemingly ever-present question is that of which production systems and species are the most profitable. While there likely will never be one simple answer to that question, a recently published paper sheds light on some of the key factors that affect profitability of different production systems.

In Engle et al. (2020), 58 different enterprise budgets were developed for nine species of finfish raised in earthen ponds, raceways, and recirculating aquaculture systems (RAS) at various scales of production. The budgets are available at: https://www.arec.vaes.vt.edu/arec/virginia-seafood/research/aquaculture_budgets.html.

Key values such as those for land, interest rates, wages and salaries were standardized across all budgets to allow for more direct comparison among production systems and species. For the pond scenarios, data used were from surveys conducted of these established segments of U.S. aquaculture (see van Senten et al. 2017; Engle et al. 2019; and Kumar et al. 2020).

Are Some Production Systems More Profitable than Others?

Of the budgets, 27 were for catfish because of the wide array of farming practices used in the catfish industry and the importance of catfish production in U.S. aquaculture. Additional details on catfish results are available in Kumar et al. (2020).

For the RAS budgets, recently published studies on the economics of RAS were used to select coefficients used in the budgets (Boulet et al. 2010; Liu et al. 2016; and Bjorndal and Tusvik 2017, 2019), given that there are too few commercial RAS farms operating in the U.S. to be able to report values without violating confidentiality.

Overall, the most profitable species and production systems were those of the two largest segments of U.S. aquaculture, catfish raised in earthen ponds and trout produced in raceways. These are both segments of U.S. aquaculture for which individual entrepreneurs have developed effective business models and markets over the years.

Economically viable businesses develop based on the multiple decisions made by farm owners and managers over time that lead to development of efficient production practices through experience.

Are Some Production Systems More Profitable than Others?

In contrast, the RAS scenarios modeled were not found to be profitable. It is important to note that the budgets developed included costs for all inputs and accounted for non-cash costs such as depreciation.

Lack of accounting for non-cash costs and fixed costs often lead to overly optimistic estimates of profitability of businesses that do not generate sufficient returns to be able to continue operating when the time comes to replace equipment and other capital assets.

In the case of RAS, accounting for all opportunity costs includes that of the return on the investment expected by investors at some point in the future.

All production systems evaluated in this study showed economies of scale. Thus, it is of no surprise that the average size of aquaculture farms has continued to increase, and that production has intensified over time.

Are Some Production Systems More Profitable than Others?

Greater levels of production with the same set of production facilities and equipment spreads those fixed costs over greater amounts of production that lead to reduced overall costs per pound of fish produced.

The greatest contributors to overall cost of production were capital, feed, labor, management, energy, and fingerlings (for some scales and species), although the order of importance of these production inputs varied among scenarios.

What is most important in terms of knowing which costs are the greatest is that, to be profitable, the greatest costs on the farm need to be used most efficiently for the business to be competitive

“Study results showed substantial differences in the efficiency of use of these key inputs. Feed was used most efficiently in RAS, likely due to the ability to control water temperature year-round.”

Of note were the results on the productivity of use of capital and labor. Capital was the single greatest cost in RAS production, while labor was the third greatest cost. Per dollar of capital, catfish production yielded twelve times greater volumes of product than did RAS farms; trout raised in raceways produced twice the volume of product per dollar of capital as RAS (Figure 1a).

Are Some Production Systems More Profitable than Others?

Labor productivity in RAS was also substantially lower than that in catfish and trout production (Figure 1b). Thus, while economies of scale are important in RAS, economies of scale alone may not be sufficient for RAS to be profitable.

Are Some Production Systems More Profitable than Others?

Greater attention needs to be paid to improving the efficiency of use of major production inputs such as that of capital and labor in RAS farming.

It must be noted that this generalized analysis does not mean that RAS cannot be profitable. There are several RAS farms in the U.S. that have operated profitably for more than 15 years. These farms are very well managed, pay close attention to cost controls and to the efficient use of key production inputs (in terms of maximizing production per unit
of each input).

All aquaculture producers must monitor co ts on an on-going basis. Attention paid to efficiency metrics can assist producers to improve financial performance on their farms.

NOTE: This work was supported by USDA NIFA grant no. 2016-70007-25757 accession no. 1010733 from the USDA National Institute of Food and Agriculture. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the view of the U.S. Department of Agriculture.

Ph.D. Carole R. Engle

References cited by the authors are available under previous request to our editorial team.
Ph.D. Carole R. Engle*, Engle-Stone Aquatic$ LLC Carole Engle holds a B.A. degree in Biology/Rural Development from Friends World College and M.S. and Ph.D. degrees from Auburn University where she specialized in aquaculture economics.
Dr. Engle is a past-President of the U.S. Aquaculture Society and the International Association of Aquaculture Economics and Management. She is currently a Principal in Engle-Stone Aquatic$ LLC, and can be reached at cengle8523@gmail.com

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