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Fukui's Monthly News Letter

Inputs, outputs, profitability

Over the past four years, as we have developed and supplied systems that enhance the husbandry methods of aquaculture sites, I have worked with growers who do not know the cost of operating and thus the resulting profitability of their business.

The emphasis seems to be more on whether you can grow "it" and the going market price as a commodity, without sufficient regard for the overall picture. But a business cannot prosper or even survive without "real" profit - earned capital.

Any business should have a plan that has both short term (one-year) and long-term (three-years) forecasts.

Planning is made up of two components:

1. What it is you are actually going to do (The Goal) and how you are going to do it (The Plan).

2. A financial proforma statement showing total projected total production; the cost of doing business, which is broken down by expenditures; and the balance, which is the business profit or loss.

Depending on the grow out cycle of the species being raised, you could have a loss for up to three to four years while first crop production is about to come on line. However, new husbandry methods and equipment that are becoming available that can significantly reduce growout time as well as labour costs.

Some Northern West Coast oyster growers have experienced that kind of benefit. Those operations had a three-year negative cash flow cycle on startup and a return on invested capital that averaged six years. Now they can have cash flow in six months and 100% return on invested capital in less than three years.

Cost

Inputs are the costs of doing business. Outputs are farmgate prices. The goal is to have inputs and outputs as far apart as possible, with inputs the smaller number.

You have to know this information in order to calculate whether you operation is profitable and to make business decisions that maximize profitability with respect to your return on invested capital schedule.

For example, within the salmon sector the costs of doing business are carefully monitored. It is the one area in which they can exercise direct control.

What they receive for their fish is regulated by the market as a commodity, as a result they have little control over this area

I called an associate of one of the larger salmon farming operations to find out how well defined the input costs are. Upon posing the question, he was immediate with his response and able to tell me the cost per pound of flesh produced, and further went to break down the cost as shown in the accompanying chart. Since it seemed very few individuals in the shellfish sector in general could supply the same information, set upon to survey the industry.

Salmon Production

Cost/lb

Feed

$1.08

Smolts

0.36

labour

0.18

Day-to-Day supplies

0.20

Insurance

0.07

Amortized capital equipment cost & depreciation

0.12

Total Cost

$2.01

Note: Capital investment for salmon farms - CA $775,000 to produce 120,000 fish per year.

We sent out to almost 50 individuals and organizations, a "fill-in-the-blank" chart so as to establish some benchmarks to assist shellfish growers in planning their business. We also asked for current farmgate pricing to establish market conditions for different geographical sectors.

After two months we received only one reply. Maybe that means shellfish growers are too busy to respond to surveys. I hope it does not confirm that in general there are a lot of shellfish growers that seem to be in the "let's try this to see if it works mode" instead of the "this is business, how do I make money mode."

Profitability

To understand how to focus on inputs for profitability you must look at all expenses and their contributions to overall profitability.

The shellfish sector is still going through an incubation period with regards to husbandry methods. There is a lot of experimenting going on with equipment style and design. In most cases, the focus is on the upfront capital cost of equipment and not the costs like labour and efficiency.

For example, when we introduced our new mussel socking, we showed growers they had to look beyond its price off the shelf to decide if it was a good purchase. The real enemy to growers' inputs are high labour and seed conversion cost.

Our socking increased yields due to more efficient seed conversion ratios and reduced labour. So, on average, the socking cost works out to less than 2 cents per pound of mussels produced.

The following is another example of why shellfish growers must make business decisions based on the whole profitability picture. A new grow out tray for oysters that was developed by an oyster grower on the West Coast had what first seemed to be a high front-end cost compared to other methods. When you take the time to analyze inputs and outputs, however, the picture changes significantly.

Odyssey High Output Oyster Trays are normally stacked seven high and hang below rafts or from long lines. Their design allows for quick side loading without having to stack each tray individually. They are quick to dismantle and easy to clean. Because the are so deep they hold between 120 to 150 oyster at full growout, almost double what other trays hold.

Assume $16 cost per tray with a life span of 10 years or $1.60 amortized cost per year. One tray can produce 120 4 1/2" oysters per year from a 3/4" seed. At 21 cents per oyster, output will be approximately $25 per year.

To analyze input vs. output, apply the assumptions as follows:

1 year output

@ $0.21 x 120 oysters = $25.20 $25.20

1 year input

-Amortized tray cost $1.60

-Seed Cost (140 @ $0.044) $6.16

-Cost of loading trays (2.5min) $0.42

-First Grading (8.5min) $1.44

-Second Grading (10min) $1.70

-Harvest (15min) $2.55

-Tray Cleaning $0.55

Total inputs $14.38 -$14.38

Gross Profit Margin per tray per cycle $10.82

Labour is based on $10 per hour. Amortized costs of rafts or longlines and other related equipment have to be factored in. Once you have figured these out, you can now work your plan.

One final example to show the value of analyzing inputs and outputs.

We recently introduced an oyster growout adjustable longline system from Australia that has Mother Nature doing 85% of the labour. It allows the use of intertidal areas that have been far too labour demanding to really be profitable.

The system was developed in South Australia by three oyster farmers and has proven itself extremely well.

It is meant for areas of low tide from 3' to 5' and takes in factors of shell hardening, pruning, and bio-fouling management.

It takes up a space of 100 meters (m) c 1.8m, and 20 cents per oyster will produce $9,000 in oysters in one year starting with 3/4" seed.

The initial capital cost including installation is approximately $3,800. If you amortize the equipment over 10 years, that works out to $380 per year.

The following assumption applies:

1 year output

Output 45,000 @ $0.20 = $9,000 $9,000

Inputs

-Amortized Equipment $380

 -Seed cost $2,244

-Labour $1,500

Total $4,124 -$4,124

Gross Profit Margin per cycle $4,876

The system will provide great cash flow margins to growers. It has greatly reduced labour costs because of the way it works with the natural elements and it uses an area that on a lease was normally underdeveloped.

By understanding how to configure inputs and outputs within the specifics of their sites and geographical markets, growers can get beyond the mundane work and run their growout operations in a profitable business fashion.


Contact Don Bishop at:
Fukui North America
PO Box 669
110-B Bonnechere St.W.
Eganville, Ontario K0J 1T0
CANADA
**NEW**Tel: 613-559-0075 or 613-628-5266
**NEW**Fax: 613-432-9494
Email: kate@fukuina.com or don@bishopaquatic.com

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