A key reason why land-based projects are winning the investment race.

OK – regular readers of this blog will know that I am firmly of the opinion that significant growth in the salmon industry will need to come from offshore farms – our oceans are vast, shoreline habitats are precious, and the costs of scaling land-based farms are too great to be successful in more than a few special places. Here’s a look at the costs of a few – per investor presentations and media reports:

Quick overview of capital costs for land-based projects

If estimates are held, it will take investments totaling $600m US to increase salmon supply by a total of 25,000 tons. The salmon market is assumed to grow at ~150,000 tons per year – a 5% CAGR – if we are to meet the global demand for salmon, an investment of $3.6b US per year will be required to meet growth. (That’s a bit of an exaggeration as expansion investments will be cheaper but it’s a big number any way you slice it.)

I won’t go into the nightmarish legal and regulatory experiences of some companies attempting to establish production in regions where they should be a slam dunk. Those stories get lots of coverage and seem to make the depressing point that people have no idea where food comes from or how it is produced.

Now that I’ve got those points out of my system, I can get to the actual point of this blog.

The clear advantage of land-based projects.

There is one area where land-based projects have a clear advantage over the development of offshore farms and net pen operations generally – logistics and marine support.

When I first got into salmon farming, the accepted wisdom was that solid biological performance could make up for inefficiencies in feed transport, mortality removal, harvesting and processing etc. Salmon farming wasn’t necessarily easy then, but farms and cages were smaller, typically in sheltered locations with reasonable access to wharves, nets were kept clean with antifoulant paint, sea lice were treated with effective in-feed treatments and challenges like amoebic gill disease and stinging jellyfish were pretty much unheard of.

Once you get past the long development timeframes and construction costs of land-based projects, and assuming their technology works as promised, you would be left with an operation with a very long lifespan and a relatively simple, reliable support infrastructure. Pretty much everything would arrive by land – power, feed, people, technical support. Key maintenance activities would not normally be impacted by weather – cleaning of tanks and ponds, removal of mortality, feeding, harvesting, health and welfare visits etc. Presumably, an operator would be spared many of the uncertainties facing net pen operators – plankton, sea lice, low dissolved oxygen, storms, extremes of temperature. I’m not suggesting these operations will be easy to run but they should be more predictable.

I’ve been involved in a few projects recently that have really had me questioning the mantra that good biological performance was the holy grail of salmon farming. It is a major pillar but, with the way things have evolved in salmon farming, it might be a close tie with marine logistics for being a key success factor. A few things have driven this development.

Temperatures in regions where growth is occurring.

Regional temperature profiles

Generally, growth over the past 20 years has been pushed further north in the northern hemisphere and further south in the southern hemisphere. From a stock-management perspective, it becomes very risky to handle fish at temperatures below 6 degrees C – particularly, if temperatures are likely to fall – in eastern Canada, for example, it can be dangerous to handle fish in December if there is potential the fish will experience very low temperatures in January before they have had opportunity to rebuild scale and mucous layers.

Globally, growth is tending to occur in areas where growth cycles are long, and temperatures are low for a substantial portion of the year. In western Iceland, temperatures are below 6 degrees for six months of the year, 5 months of the year in northern Norway, and Newfoundland. While these regions can and do produce excellent biological performance, the long months of low temperatures lead to a concentration of activity in summer months and several months where little stock management is possible. If you are operating in remote areas where marine infrastructure is limited, your operation may need to pay for 12 months of service that you can only use for six or seven months of the year. To squeeze a year’s worth of work into the 6 or 7 months when work is possible, you need a lot more capacity than you would if the work could be spread over 12 months.

Mooring systems

Historically, mooring a farm could be accomplished with primitive equipment – in my early days, I worked on farm moorings with my pal, John Vincent, on a small tug, the Black Prince, with a mooring barge that measured 3mx3m. Total operating costs for the vessel, barge, John and I would have been less than $200,000 CAD. Today, mooring grids are typically required to meet global engineering standards, employ a much heavier spec on anchors, lines and other components, and must meet exacting standards on placement of anchors and rock pins. Charter fees for vessels capable of this work are likely to be in the range of $3m - $5m CAD. If you have sufficient work to keep the vessel employed on high value tasks, they can make sense financially but, in my experience, they were often employed performing tasks a much cheaper vessel could manage.

Nets and net cleaning

Cages and nets were smaller and antifoulant paints were the norm. A vessel with a crane or roller would be required to install the net, perhaps do a mid-cycle change and then remove the net post-harvest for shipment to the net washing station. Currently, nets are typically much larger, are made of much heavier materials to prevent escapes and withstand the wear and tear of net washing machines and require high-capacity vessels for removal and installation. An escalation in costs like what I described in the previous paragraph has occurred in this area – vessels that would have had operating costs measured in hundreds of thousands, would now be measured in millions. In those days, we all pissed and moaned about the costs of copper-based antifoulants. In situ net washing was promised to be a more cost-effective, environmentally sustainable solution. In my opinion, the reality has proven far worse than had been predicted - net washers and support vessels are exceedingly expensive and when the explosion in gill health issues is considered, the result has been a shocking degradation in animal welfare and production efficiency.

High energy/exposed sites

These kinds of farm have become the norm for any growth in salmon farming with obvious implications for the types of vessels required to operate safely in these environments. They can produce excellent fish but, in addition to the temperature effect described above, wind and wave conditions can further limit opportunities to safely conduct any activity involving stock management. This further compresses the time available to conduct critical activities and creates the need for a higher standard of farm vessel with even more capacity. Again, this problem is more acute if the farm is in a region with limited logistical support.

If you want further detail on my complaints about aquaculture vessels, you can read my blog post from a few months ago on the topic.

The need for a new offshore paradigm

Coming back to the main topic of this post, offshore farming zealots like me can complain about the cost of land-based projects and their limited scalability in most markets but, unless we can find a way to change the paradigm in our approach to offshore farming, the land-based projects will win every time. As long as plans for offshore farming remain rooted in designs which are essentially moving a very highly engineered net pen structure further offshore, the operating risks and costs of supporting infrastructure will scare away most investors. They would certainly offer more scalability and, potentially, better costs if biological results are good, but no one wants to be the pioneer learning all the very hard lessons.

If you’ve read this far, I salute you. Feedback, comments can be delivered via info@alanwcook.com, LinkedIn, or in the comments section of this post.