9 Future Trends in Aquaculture Production
281
A cost share of one factor, feed, at over 50% may seem high, but not when compared
to other comparable industries such as pork and poultry production. For example, the
cost share for feed for the most efficient poultry producers is over 80%. This suggests
that there is still a substantial efficiency potential for salmon, and production costs can
be further reduced if other factors are exploited even more efficiently.
That the composition of the input use varies over time suggests that the production technology has been changing over time, and this is certainly an important factor
in explaining the productivity growth. Tveterås and Heshmati (2002) found that
technical progress at the farm level explains only about one-third of the reduction in
production costs, with the remainder accounted for by reduced prices for input factors,
or technological innovations amongst the suppliers of input factors. Tveterås and
Heshmati (2002) also found that productivity growth was anything but smooth,
indicating that technological progress at the farm level and among the suppliers
comes in leaps and is unpredictable. With the long production time in salmon farming,
this can create cycles in profitability as production costs decline, since lower production
costs initially give higher profits, which induce farmers to expand production. The
expanded production then drives the prices down, reducing profits.
9.3.2.2 Cycles in Profitability
Cost and price do not move in complete synchronicity (see Fig. 9.5). In particular, the
margins between price and cost were narrow in 1986, 1991, 1997 and 2001, and especially wide in the intervening years. In other words, some years were much more profitable than others. This structure is commonly seen in biological industries and other
industries with a substantial time lag between the decision to increase production and
the entry of the increased production into the market. A high profit margin gives a signal
from the market to increase the supply, but due to the time lag in increasing the production, the signal can be quite persistent. This often leads to over-investment and excess
production with the result that prices may fall to production cost levels, or even lower,
for a period. The low margins will then be a signal to reduce production, which again
takes time, and production will often be reduced too much, giving rise to a new period
with very good margins. In a stable world, one would expect producers to work out the
production level that gives normal margins. Unfortunately, the world is anything but
stable and the production volume that gives a normal margin is a moving target, because
of productivity growth and other supply shocks as well as exchange rate movements,
demand shocks and market growth. The delay in responses from the producers will
therefore produce boom-and-bust cycles at irregular intervals and with different
strengths in industries like salmon production.
Cycles in profitability are not a problem in themselves, as one usually retains a
substantial portion of profits at the top of the cycle to cushion the bottom of the
cycle. However, many owners do not retain earnings, with the result that more firms
get into trouble at the bottom of every cycle than necessary – a feature the salmon
industry shares with other primary industries. The cycles also make salmon and
other aquaculture industries very susceptible to trade conflict, as a number of producers will lose money at the bottom of the cycles.
281
A cost share of one factor, feed, at over 50% may seem high, but not when compared
to other comparable industries such as pork and poultry production. For example, the
cost share for feed for the most efficient poultry producers is over 80%. This suggests
that there is still a substantial efficiency potential for salmon, and production costs can
be further reduced if other factors are exploited even more efficiently.
That the composition of the input use varies over time suggests that the production technology has been changing over time, and this is certainly an important factor
in explaining the productivity growth. Tveterås and Heshmati (2002) found that
technical progress at the farm level explains only about one-third of the reduction in
production costs, with the remainder accounted for by reduced prices for input factors,
or technological innovations amongst the suppliers of input factors. Tveterås and
Heshmati (2002) also found that productivity growth was anything but smooth,
indicating that technological progress at the farm level and among the suppliers
comes in leaps and is unpredictable. With the long production time in salmon farming,
this can create cycles in profitability as production costs decline, since lower production
costs initially give higher profits, which induce farmers to expand production. The
expanded production then drives the prices down, reducing profits.
9.3.2.2 Cycles in Profitability
Cost and price do not move in complete synchronicity (see Fig. 9.5). In particular, the
margins between price and cost were narrow in 1986, 1991, 1997 and 2001, and especially wide in the intervening years. In other words, some years were much more profitable than others. This structure is commonly seen in biological industries and other
industries with a substantial time lag between the decision to increase production and
the entry of the increased production into the market. A high profit margin gives a signal
from the market to increase the supply, but due to the time lag in increasing the production, the signal can be quite persistent. This often leads to over-investment and excess
production with the result that prices may fall to production cost levels, or even lower,
for a period. The low margins will then be a signal to reduce production, which again
takes time, and production will often be reduced too much, giving rise to a new period
with very good margins. In a stable world, one would expect producers to work out the
production level that gives normal margins. Unfortunately, the world is anything but
stable and the production volume that gives a normal margin is a moving target, because
of productivity growth and other supply shocks as well as exchange rate movements,
demand shocks and market growth. The delay in responses from the producers will
therefore produce boom-and-bust cycles at irregular intervals and with different
strengths in industries like salmon production.
Cycles in profitability are not a problem in themselves, as one usually retains a
substantial portion of profits at the top of the cycle to cushion the bottom of the
cycle. However, many owners do not retain earnings, with the result that more firms
get into trouble at the bottom of every cycle than necessary – a feature the salmon
industry shares with other primary industries. The cycles also make salmon and
other aquaculture industries very susceptible to trade conflict, as a number of producers will lose money at the bottom of the cycles.