pit falls and honey traps in aquaculture-farm …
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PIT FALLS AND HONEY TRAPS IN AQUACULTURE-FARM
MANAGEMENT
Ganesh KumarMississippi State University
Aquaculture is rewarding, yet RISKY•There is bright future
•You believe there is money to be made
• Management is key to success: – Often highly demanding
– Requires preparation & planning
Research findings are often far too optimistic
• Have a look at some of the published budgets for new ventures
• Several will have very optimistic outlook for technologies/species
• Yet only a few will get adopted
Funding
Economic concepts are widely misused !!
Common misunderstandings, errors, &/ deliberate omissions
• Lack of grasping key production concepts
• Misuse of cost concepts
• Leaping to feasibility conclusions
Profit maximization????
Profit-maximizing level of OUTPUT
= price/lb
= ∑ additional input costs/output
Most farmers are price takers (MR = Price)
Quantity of fish produced
“Marginality concept”
This happens at a point where there is NO “additional” profit.
Maximizing yield will not result in maximum profit
•Marginal Revenue Product (MRP) = Price of input (Pinput) MRP = MP* Pfish = Pinput
Additional revenue from additional input usage should be greater than the price of the input.Marginal productivity (MP)~ Price Ratio
•Rationale: Economize the costlier inputs. (FEED > Fing > Labor > Energy)
Profit-Maximizing Level of Input Use?
MP = Pinput ÷ Pfish
What does this have to do with aquaculture farming strategy?
•As price of feed goes UP, the profit-maximizing level of output goes DOWN.$$$ Lower intensity
•As price of fish goes UP, the profit-maximizing level of output goes UP.$$$ Higher intensity
MP = Pi /Po
COST CONCEPTS
ENTERPRISE BUDGET ----- Most misused
Devotion & Optimism
• “Pro-innovation Bias”
• “Confirmation Bias”
Lack of understanding
End product: “Wishful Enterprise Budgets”.
Economic engineering
• Done basically when survey data are unavailable.
• EXTRAPOLATION of experimental data to commercial scales.
• Commercial production often falls short
• Should use “AVERAGE” YIELDS and PRICES to estimate costs/profit
• Should account for the inflation.
Statistical significance• Should NOT use the nominal treatment mean differences.
• Such use will lead to projection of a non-existent economic difference.
• In absence of significant difference among treatment means, economic effect is simple to calculate (go with the cheapest !!)
Ghost costs• Earth work/construction cost
• Pond renovation
• Repairs and maintenance costs
• Backup equipments
• Permits/insurance/legal fees
• Interest costs (operating, capital)
• Opportunity costs
13
Opportunity Cost
• The value of a product not produced because resources were used for alternate purpose.
• The income that could have been received if the investment had been used in its next best alternative use.
• “Cost of the next best alternative forgone”
• “Forgetting” opportunity costs will give you FALSE profit estimates.
Opportunity Costs
• Opportunity cost of capital: Its not 2% ~ 10%
• Opportunity cost of labor: What the farmer could earn for that labor in best alternative use
• Opportunity cost of management: Difficult to estimate
• Thumb rule: Sum of opportunity cost of labor and of management should be lesser than or equal to total expected salary in best alternative job.
Caution:
Profits should be calculated after accounting for all
opportunity costs.
Depreciation• Loss of value due to use, wear, and/ tear
• Equipments, buildings, vehicles, and PONDS
• Have a REAL depreciation schedule rather than an IRS D-schedule.
• Use a “PRACTICAL” years-of-usefulness
Correct accounting of costs
Time value of money• We will always prefer $1,000 right now rather than 5-yrs from now?• Which will be better? Business yielding 200K in 2yrs or 500k in 4 yrs?
• Pay back period• NPV• IRR• MIRR
Cash flow is key
• Operating capital is limited; bills will not wait!!!!!!!!
• Cash-flow is key for liquidity.
• Multiple-batch system, partial harvest, differed stocking, stocking
larger fingerlings, off-season stocking …... None are often optimal.
• Farming strategies often try to optimize business goal(s).
Advise farms to have sound business plan(s)• Prepare before start-up
• Require periodic updates
• Robust financial and marketing plan
• Should cash flow
Conclusions• Revenue and profit maximization
• Profit above risk (opportunity and non-cash costs)
• Watch out for those “glorified budgets”
• Future profits----properly discounted
• Update business plan periodically
• Role of extension agents
SWOT analysis
Thank You Reference: Carole R. Engle (2010). Aquaculture Economics and Financing.
Willy Blackwell, Ames, Iowa.