Aquaculture Site Licenses - An artificial value?

Salmon farmers have a complicated relationship with aquaculture site licenses. On the one hand, the processes of securing and maintaining an aquaculture license are onerous, expensive and slow. On the other hand, once a license is secured, it becomes an extremely valuable and useful asset and acts as an important barrier to competitors entering the industry. It hasn’t always been the case, but the global situation around site licenses has put a cap on growth and allowed salmon farmers to enjoy more than a decade increasing prices and tremendous profitability. In my last blog post, I looked at the impact on pricing of a short period of oversupply. What would the impact be on salmon farming companies if this barrier to entry disappears or is seriously diminished?

Global supply of site licenses

As a reminder to regular readers (both of you), the purpose of this blog is to explain key aquaculture concepts to a non-aquaculture audience. I’m going to run through my perspectives on the availability of licenses and potential for growth in key regions. My comments may be overly simplistic, inarticulate or factually incorrect. I welcome your feedback.

Norway – Norway conducts an annual auction for a relatively small number of new licenses every year and routinely issues developmental licenses for groups prepared to invest significant sums in technology development. Norway is miles ahead of most other regions in the clarity of their regulatory framework and support for growth of the industry. In the most recent auction, purchasing the equivalent of 4,000 metric tons of production capacity (just the license to produce) would have cost approximately $120m USD. Despite the enormous price, the auction was over-subscribed.

Scotland – very few new permits issued and generally permit decisions take many years and involve an agonizing level of bureaucracy. Very high regulatory burden and lots of vocal opposition.

Faroe Islands – a great place to farm fish but limited ability to secure new licenses using conventional technology. It is a well-managed and well-regulated region.

Iceland – one of the few growth regions in the salmon world but also a growing opposition and increasing regulation. A protest in Reykjavik earlier this year saw 1% of the population attend an anti-salmon farming protest.

Ireland – a small salmon farming industry occupying, for the most part, sites licenses issued many years ago with few, if any, new licenses issued in recent memory.

Eastern Canada – 3 provinces – New Brunswick, Nova Scotia and Newfoundland are home to net pen farms. The situation is quite different in each. New Brunswick – generally supportive of the industry but the regions suitable for conventional net pen technology are fully utilized. Nova Scotia – the province dithered for many years on its views of aquaculture and remains highly bureaucratic and reluctant to issue new licenses. Cooke has enjoyed some success in the province but only after herculean effort. Newfoundland – the process is politically fraught but generally the province is prepared to issue new site licenses. The challenges in Newfoundland are brutal logistics, vast distances and harsh winters.

Western Canada – what can I say? It’s a crap show in British Columbia. Canada’s federal government seems prepared to throw the industry and thousands of jobs under a bus to cling to a few parliamentary seats in the lower mainland of the province. Very few new licenses have been issued in recent memory and the government has refused to renew ~40% of existing licenses.

West Coast USA – like what’s happening in BC, certain WA government actors are determined to eliminate and industry that has operated sustainably for more than 30 years. I was involved in attempting to permit a new farm in the state (I described my experience in this article) and found that no new licenses had been issued in 25 years and that no one working in government had a clue as to how to do it.

East Coast USA – Maine has a progressive aquaculture policy but the potential for new salmon licenses is quite limited. Between user conflicts with lobster fishers and waterfront owners, it is difficult to imagine any growth happening in the state.

Chile – when I worked in Chile from 2007 – 2010, there were more than 1,000 approved licenses in existence with just over 320 actual operating farms. Many of the idle licenses, at that time, were in the hands of speculators who were trying to make a living from applying for licenses and then selling them to farming companies. The situation has changed rather a lot, licenses are much harder to obtain, and regulations are quite strict. The barrier to growth should be more fairly assigned to challenging logistics rather than the ability to secure licenses.

Australia – very hard to secure new site licenses and substantial pressure to move out of areas with challenging characteristics. While not naming names, the worst farming site I have ever visited in decades of visiting salmon farms all over the world was a farm in Australia. Unless they can breed a warm-water tolerant breed of Atlantic salmon, the potential for growth, using conventional technology is very limited.

New Zealand – getting new net pens issued in NZ is almost as bad as BC. One of my former employers, NZ King Salmon, spent years and millions of dollars to secure new site licenses. The conditions attached to the consent, the ongoing scientific scrutiny, and the public consultations were taken to an absurd extreme. I am led to believe that a recent change in government shows promise in terms of more reasonable regulation, but I believe that is still to be proven. Don’t expect a lot of growth regardless.

Russia – I have no idea what’s going on in Russia.

The truly frustrating thing when considering the lack of global availability and costs of salmon farming licenses is that the scarcity is entirely artificial. I haven’t done the exercise in a while, but if you added up all the surface area occupied by salmon farms globally, they would occupy a vanishingly small percentage of the surface area available. If Canada and the USA chose to make coastal employment, food security and carbon footprint national priorities, all the demand for farmed salmon in the USA and Canada could be met with domestically produced salmon. Doing so would occupy a small fraction of 1% of the surface area of coastal waters.

Site licenses as assets

Given the state of play in most regions, site licenses are extremely valuable and occupy a large chunk of the asset value of a salmon farming company. Here is some information about a few companies from 2023 annual reports.

Figures taken from 2023 Annual Reports

You can see there is quite a range of values, perhaps reflective of the geographic distribution of sites in a company’s portfolio. Salmar production is highly concentrated in Norway whereas much of Grieg’s production is in Canada – the west coast sites would likely have very low values given the political uncertainty and the Newfoundland sites would have had a relatively low acquisition cost and are yet to produce a profit. I could be wrong; those are just guesses.

So, what are the benefits of having these artificially scarce assets on the balance sheet?

1)        They increase the asset value of the business on the balance sheet and improve the creditworthiness of the company to investors and creditors.

2)        They provide security against loans and improve access to operating funds. With a higher asset to debt ratio, they are likely instrumental in negotiating more attractive lending terms.

3)        Unlike most other asset classes, they have little downside risk (assuming the status quo is maintained) and do not trigger depreciation charges which would negatively impact earnings.

What’s the impact if the situation changes?

Given the situation described in salmon farming regions, a dramatic change which would trigger a massive drop in the value of licenses is unlikely. As mentioned in my previous blog post, the industry is massively profitable, and the market fundamentals suggest it will continue to be so provided consumers continue to buy farmed salmon. Operationally, the profitability of the industry is rooted in the efficient conversion of salmon feed into edible salmon.

What if growth was possible?

If someone were to crack the code on offshore salmon farming to open the vast potential of the high seas and do so in a cost-effective manner, the attractiveness of paying absurd sums in the Norwegian site auction would disappear, wouldn’t it? It wouldn’t change the fact that existing sites are producing excellent fish at profitable cost levels, but it could significantly impact on the balance sheets of many companies. Those impacts could include:

1)        Significant write-downs or impairments on license values. Those write-downs would be expensed to the income statement and negatively impact profitability in the short-term. Share price would take a hit – the stock market hates bad news. (Shares in Grieg Seafood dropped 10.8% in value following a negative earnings report)

2)        If they were used as loan security, banking covenants would be impacted, and loan interest could get more expensive, loan amounts could be reduced

3)        If the fall in value of licenses is driven by increased availability of producing regions and, presumably, an increase in production, the advantage of operating in a chronically under-supplied market could disappear and the high prices farmers have enjoyed for a long time could be eroded

Keen observers of the salmon market have noted that, in recent years, the enormous barrier to new entrants has resulted in a situation where the worse things get in terms of costs and production results, the more the prices increase to offset the cost. A doubling in production costs over the past 10 years has been offset by a larger increase in pricing. The prevalence of downgraded harvest fish (as much as 50% per some reports) in the winter of 2023/24, presumably sold at a discount, was more than offset by stratospheric pricing for a diminished volume of premium fish.

Final words

These asset and market advantages go away if growth in the industry returns to a level which matches or exceeds the growth in demand. In my last blog post, I looked at the impact of a short-term surplus. If that kind of growth were to become the norm, the impact would be profound. The kind of pricing we have seen in recent years – which forgives a lot of grave sins – could force a lot of farmers into the red. If this is a topic that interests you, it might be worth giving this article a read - it details the impact on NY City taxi medallions (the license to operate a yellow cab in the city) of the arrival of ride-share programs like Uber and Lyft. In that example, the value of a taxi medallion dropped from $1m USD to just a few thousand in the span of a handful of years. Holders of medallions purchased at peak prices (when banks were more than happy to loan funds for the purchase) were on the hook for huge payments that were effectively worthless. Obviously, a very different situation for salmon farmers but worth thinking about.

If you are still reading, bless you.

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