Post-Smolt Investments - Worth the Cost?
Canadian salmon farm
I was reviewing information recently with a colleague on the costs to the Norwegian salmon industry of managing sea lice. The data we reviewed was from 2021 and showed a total cost of close to 5 NOK/kg ($0.47/kg US). On an industry production volume of 2.5m metric tons, that’s just under $1.2b US per year. If you follow the fish media, you’ll know that the problem has only gotten worse since then and the cost is likely significantly higher.
Related to this, one of the cost components identified in the data we were reviewing, was the cost of producing large smolts to reduce the time spent by salmon in seawater and thus, spare them some portion of sea lice treatments. In the 2021 numbers, the costs attributed to large smolts was 20% ($0.094 US/kg) - $235m US per year in total expenditure in Norway.
Dream with me for a moment
I’ve been getting quite a few calls lately about sea lice control technologies, investments in land-based technology and, of course, have been seeing some dire reports on sea lice levels. I asked myself the question, what happens to the economics of an investment in post-smolt production in a world where someone develops a truly effective method for controlling sea lice on salmon farms? Maybe this is a question that only appeals to me, but I thought it might make good blog content for a particular type of salmon farming nerd. Read on if you self-identify in that category.
My approach
As part of one of my consulting projects, I developed a salmon model to compare production scenarios in various regions with key input criteria such as feed, labour, vessels, operating costs and sea lice treatment methods. The idea was to create a tool to which provided a detailed but still high-level approximation of the merits of one system versus another. I was in nerd-heaven for a couple of weeks while I put it together.
Basic assumptions
For this exercise, I used a temperature profile for central Norway, a smolt cost based on the best evidence I could find and an assumed starting population of 1 million fish. For smolts less than 250g, the cost was $0.0074/g, from 251g to 500g, $0.0059/g, and over 500g at $0.0049/g. In the examples below, a 150g smolt was $1.11/fish, a 440g smolt was $3.26/fish and a 750g post-smolt was $5.55 per fish. I made a lot of other assumptions about feed, mortality, growth, operating costs etc, that are probably rife with errors but, the errors are shared equally across all scenarios, so the relative merits should hold.
First example – April entries
This example assumes an April entry-date for smolts, a target harvest weight of 5 kg, a 1-month harvest window and a minimum fallow period between crops of 3 months. I’ve used a base-line mortality assumption of 7% in this, currently fictitious, non-sea lice world. I’ve assumed a 10% depreciation charge which probably understates things. Costs shown are farm-gate and do not include harvesting, processing, packaging SG&A etc.
Key metrics and estimated production costs
The costs per kg end up being similar across the three input sizes shown. The 440g smolt ends up being the costliest, mainly due to the way I have modelled smolt and some operating costs. In the absence of sea lice pressure, post-smolt investments would not offer a distinct cost-of-production advantage.
Increased turnover
Where post-smolt investments do come into their own in this non-sea lice scenario are in total output from a farm over a 10-year period.
Estimated production volumes per cycle and over a 10-year period
Harvest volumes per cycle are slightly higher in the first scenario with the smallest smolts as the fish in this example spend more of their seawater life at higher temperatures – they have the benefit of a good portion of a second summer and have the opportunity for greater growth.
10-year results
A post-smolt facility will allow a farmer to produce 25% more fish on a farm if they stock very large post-smolt in each entry. This comes with two very important caveats:
Fallow regulations must allow for re-stocking following a 3-month fallow period. Currently in eastern Canada, farms are operated on a 3-year bay management rotation. Unless regulations change, shortening the seawater grow-out period would only serve to extend the fallow period by several months and a farmer would get no additional production from their investment.
Benthic conditions must be able to support increased production on the farm. A 25% increase implies 25% more feed and feces, and a farm must still pass regular examinations of benthic conditions. If the additional production begins to create unacceptable impacts, the farmer will likely be required to reduce production.
Second example – September entries
Aside from the different entry month, the inputs are identical.
Key metrics and estimated production costs
Production costs remain similar – within the margin of error between the 3 scenarios. From a cost-of-production perspective, there is no great advantage to post-smolt.
Estimated production volumes per cycle and over a 10-year period
Growth is lowest, in this example, in the first scenario as the fish spend relatively longer in the sea at low temperatures. In the first example, the smallest entries had the benefit of two summers and one winter, whereas in this example, the smallest fish are grown out through two winters and one summer.
10-year results
The relative merits over a 10-year period remain the same. A post-smolt facility, assuming fallow regulations and benthic conditions support it, should allow a producer to increase production by 25% from a farm. In a world where markets are desperate for more fish and new sites are hard to come by, this is an important production increase.
Conclusion
For those dedicated few who are still reading, I salute you. This is seriously geeky stuff.
The premise of this article seems like a distant dream. The idea of a world where sea lice are effectively managed seems remote given current conditions, but it could happen and its nice, from my perspective, to think that an investment in a post-smolt facility will still have value once that problem is solved.
I’m not sure the same can be said for the wellboat industry, but that’s a topic for another day. Feedback and comments welcomed - either via LinkedIn or by email at Info@AlanWCook.com.