PIT FALLS AND HONEY TRAPS IN AQUACULTURE-FARM

MANAGEMENT

Ganesh KumarMississippi State University

Aquaculture is rewarding, yet RISKY•There is bright future

•You believe there is money to be made

• Management is key to success: – Often highly demanding

– Requires preparation & planning

Research findings are often far too optimistic

• Have a look at some of the published budgets for new ventures

• Several will have very optimistic outlook for technologies/species

• Yet only a few will get adopted

Funding

Economic concepts are widely misused !!

Common misunderstandings, errors, &/ deliberate omissions

• Lack of grasping key production concepts

• Misuse of cost concepts

• Leaping to feasibility conclusions

Profit maximization????

Profit-maximizing level of OUTPUT

= price/lb

= ∑ additional input costs/output

Most farmers are price takers (MR = Price)

Quantity of fish produced

“Marginality concept”

This happens at a point where there is NO “additional” profit.

Maximizing yield will not result in maximum profit

•Marginal Revenue Product (MRP) = Price of input (Pinput) MRP = MP* Pfish = Pinput

Additional revenue from additional input usage should be greater than the price of the input.Marginal productivity (MP)~ Price Ratio

•Rationale: Economize the costlier inputs. (FEED > Fing > Labor > Energy)

Profit-Maximizing Level of Input Use?

MP = Pinput ÷ Pfish

What does this have to do with aquaculture farming strategy?

•As price of feed goes UP, the profit-maximizing level of output goes DOWN.$$$ Lower intensity

•As price of fish goes UP, the profit-maximizing level of output goes UP.$$$ Higher intensity

MP = Pi /Po

COST CONCEPTS

ENTERPRISE BUDGET ----- Most misused

Devotion & Optimism

• “Pro-innovation Bias”

• “Confirmation Bias”

Lack of understanding

End product: “Wishful Enterprise Budgets”.

Economic engineering

• Done basically when survey data are unavailable.

• EXTRAPOLATION of experimental data to commercial scales.

• Commercial production often falls short

• Should use “AVERAGE” YIELDS and PRICES to estimate costs/profit

• Should account for the inflation.

Statistical significance• Should NOT use the nominal treatment mean differences.

• Such use will lead to projection of a non-existent economic difference.

• In absence of significant difference among treatment means, economic effect is simple to calculate (go with the cheapest !!)

Ghost costs• Earth work/construction cost

• Pond renovation

• Repairs and maintenance costs

• Backup equipments

• Permits/insurance/legal fees

• Interest costs (operating, capital)

• Opportunity costs

13

Opportunity Cost

• The value of a product not produced because resources were used for alternate purpose.

• The income that could have been received if the investment had been used in its next best alternative use.

• “Cost of the next best alternative forgone”

• “Forgetting” opportunity costs will give you FALSE profit estimates.

Opportunity Costs

• Opportunity cost of capital: Its not 2% ~ 10%

• Opportunity cost of labor: What the farmer could earn for that labor in best alternative use

• Opportunity cost of management: Difficult to estimate

• Thumb rule: Sum of opportunity cost of labor and of management should be lesser than or equal to total expected salary in best alternative job.

Caution:

Profits should be calculated after accounting for all

opportunity costs.

Depreciation• Loss of value due to use, wear, and/ tear

• Equipments, buildings, vehicles, and PONDS

• Have a REAL depreciation schedule rather than an IRS D-schedule.

• Use a “PRACTICAL” years-of-usefulness

Correct accounting of costs

Time value of money• We will always prefer $1,000 right now rather than 5-yrs from now?• Which will be better? Business yielding 200K in 2yrs or 500k in 4 yrs?

• Pay back period• NPV• IRR• MIRR

Cash flow is key

• Operating capital is limited; bills will not wait!!!!!!!!

• Cash-flow is key for liquidity.

• Multiple-batch system, partial harvest, differed stocking, stocking

larger fingerlings, off-season stocking …... None are often optimal.

• Farming strategies often try to optimize business goal(s).

Advise farms to have sound business plan(s)• Prepare before start-up

• Require periodic updates

• Robust financial and marketing plan

• Should cash flow

Conclusions• Revenue and profit maximization

• Profit above risk (opportunity and non-cash costs)

• Watch out for those “glorified budgets”

• Future profits----properly discounted

• Update business plan periodically

• Role of extension agents

SWOT analysis

Thank You Reference: Carole R. Engle (2010). Aquaculture Economics and Financing.

Willy Blackwell, Ames, Iowa.