Aquaculture, 104 ( 1992) 193-2 15 Elsevier Science Publishers B.V., Amsterdam 193 A financial ysis e production: the case of Conrado M. Gempesaw II, Ferdinattd F. Wit-h III and James Richard Bacon University of Delaware, Newark,DE, USA (Accepted 2 September 1991) ABSTRACT Gempesaw II, C.M., Wirth III, F.F. and Bacon, J.R., 1992.A tinancial analysis of integration in aqua- culture production: the case of hybrid striped bass. Aquaculture,104: 193-2 15. The increasing market demand for hybrid striped bass has created an ideal opportunity for the industry to grow. Hybrid striped bass production can be categorized in a number of production sys- tems, i.e., ( 1) hatchery spawning, egg and fry production, (2) growth of fry to phase I fingerlings ( I - 2 inches), (3) production of phase II fingerlings (6-8 inches), (4) grow-out of phase II fingerlings to A .S-pound market size. A hybrid striped bass enterprise cdn specialize in one of the four stages of production or may integrate in any combination thereof. It is important to analyze the economic tradeoffs between specialization (individual staps) or integration (combination of individual stages) in pond culture production, as well as to evaluate the overall financial feasibtlity and associated risks of each respective production configuration. This study has found that the expected returns for the aquaculture producer were relatively substantial. However, the wide fluctuation in expected returns indicated that the aquaculture producer faces a significant amount of risk. Vertical integration ap- puared to minimize the large deviations of the expected returns. INTRODUCTION Hybrid striped bass has been identified as an ideal candidate for aquacul- ture production. The hybrid species, a cross of the anadromous striped bass female and the white bass male, is known for its superior initial growth, greater disease resistance, tolerance of a range of water salinities, and ability to with stand periods of cold weather (Hodson et al., 1987 ). Hybrid striped bass pro- duction is a four-stage process. The first stage is the hatchery spawning, egg and fry production. The second stage involves growth of fry to phase I finger- lings ( 1-2 inches’ ). The third stage is the growth of phase I fingerlings to phase II fingerlings (6-8 inches). The last stage is the grow-out of phase II Correspondence to: Dr. C.M. Gempesaw II, Department of Food and Resource Economics, College of Agricultural Sciences, University of Delaware, Newark, DE 197 17, USA. ’ 1 inch=2.54 cm. 0044-8486/92/$05.00 0 1992 Elsevier Science Publishers B.V_ All rights reserved.
Conrado M. Gempesaw II, Ferdinattd F. Wit-h III and James Richard Bacon University of Delaware, Newark, DE, USA
(Accepted 2 September 199 1)
ABSTRACT
Gempesaw II, C.M., Wirth III, F.F. and Bacon, J.R., 1992. A tinancial analysis of integration in aqua- culture production: the case of hybrid striped bass. Aquaculture, 104: 193-2 15.
The increasing market demand for hybrid striped bass has created an ideal opportunity for the industry to grow. Hybrid striped bass production can be categorized in a number of production sys- tems, i.e., ( 1) hatchery spawning, egg and fry production, (2) growth of fry to phase I fingerlings ( I - 2 inches), (3) production of phase II fingerlings (6-8 inches), (4) grow-out of phase II fingerlings to A .S-pound market size. A hybrid striped bass enterprise cdn specialize in one of the four stages of production or may integrate in any combination thereof. It is important to analyze the economic tradeoffs between specialization (individual staps) or integration (combination of individual stages) in pond culture production, as well as to evaluate the overall financial feasibtlity and associated risks of each respective production configuration. This study has found that the expected returns for the aquaculture producer were relatively substantial. However, the wide fluctuation in expected returns indicated that the aquaculture producer faces a significant amount of risk. Vertical integration ap- puared to minimize the large deviations of the expected returns.
INTRODUCTION
Hybrid striped bass has been identified as an ideal candidate for aquacul- ture production. The hybrid species, a cross of the anadromous striped bass female and the white bass male, is known for its superior initial growth, greater disease resistance, tolerance of a range of water salinities, and ability to with stand periods of cold weather (Hodson et al., 1987 ). Hybrid striped bass pro- duction is a four-stage process. The first stage is the hatchery spawning, egg and fry production. The second stage involves growth of fry to phase I finger- lings ( 1-2 inches’ ). The third stage is the growth of phase I fingerlings to phase II fingerlings (6-8 inches). The last stage is the grow-out of phase II
Correspondence to: Dr. C.M. Gempesaw II, Department of Food and Resource Economics, College of Agricultural Sciences, University of Delaware, Newark, DE 197 17, USA. ’ 1 inch=2.54 cm.
0044-8486/92/$05.00 0 1992 Elsevier Science Publishers B.V_ All rights reserved.
194 CM. GEMPESAW II ET AL.
fingerlings to 1.5.pour& market size fish. This study attempts to determine which production stages are most profitable and what levels of vertical inte- gration (combining several production stages) or specialization (individual production stages) will provide maximum returns and minimum risk to fish farmers.
Vertical integration is a strategy to integrate upstream (backward) and/or downstream (forward). Backward integration means that the enterprise pro- duces raw material inputs itself instead of purchasing the inputs from outside suppliers, Forward integration requires the wholesaling and retailing of prod- ucts to the retail and consumer market. Vertical integration is undertaken to reduce cost and to guarantee the availability of raw materials at every stage of the production process (Scherer, 198 1). For example, avaiiability of phase I fingerlings has been cited as one of the primary constraints in the successful development of the hybrid striped bass industry (Posadas and Homziak, 1991).
Past studies (Liao, 1985; Jensen and Tally, 1988; Strand and Lipton, 1989) dealing with the economic feasibility of hybrid striped bass have primarily focused on stage 3 and 4 production levels. No economic information is avail- able on the economics of hatchery spawning, egg, fry, and phase I fingerling production. These studies have also used traditional economic analysis with- out considering risk and uncertainty, time value of money, and the random determination of future output prices, variable costs, and survival rates per production stage. In addition, none of these studies has addressed the issue of integration versus specialization in aquaculture production. The objective of this study is to assess the economic effects of “upstream” integration, i.e., coordination of two or more stages in aquaculture production, as applied to hybrid striped bass pond culture technology.
MATERIALS AND METHODS
Simulation model
The objectives of this study will be accomplished through the use of AQUASIM, a comprehensive farm-level, stochastic, multiple year, capital budgeting compu?er simulation model. Using the accounting and tax subrou- tines from FLIPSIM V (Richardson and Nixon, 1986), additional subrou- tines were written to model the production and financial performance ofmul- tiple output, multiple input, vertically integrated aquaculture farms. FClPSIM V has been used in several farm policy and tax reform impact studies (see Richardson and Nixon for additional references ) . The model is programmed
’ 1 pound=0.45 kg.
ECONOMIC EFFECTS OF INTEGRATION APPLIED TO HYBRID STRIPED BASS 195
in Fortran code and consists of over 20 subroutines and 10 000 so statements.
There are several features available in AQUAS1 that allow the analy realistically simulate the economic and production performance of aqu
ture producers. One attractive feature of AQUASIM is that it can model simulation of enterprises that produce outputs to be used as inputs in the next stage of operation (e.g., a farm is producing fingerlings in one pond to use in another pond) a The model allows for the simulation of multiple output, mul- tiple input enterprises (e.g., joint production of poultry, fish and feed grains). AQUASIM has the capabiiity of simultaneously modelling products with dif- ferent time periods (e.g., fish may take 8 months with one discrete stocking per year while poultry may require 2 months of production time with six con- tinuous stockings annually). All control variables such as output prices and quantities, variable input costs, mortality rates, feed conversion rates per pro- duction stage can be specified randomly using several optional probability distributions.
The analyst is also given the option to select output and price relationships such that a randomly selected high output qaantity will be correlated with a low random output price and vice versa. Variable costs of production can be estimated using pre-, average, or post-mortality population. The estimation of the production costs can be controlled based on per head or per weight and the allocation of costs can be distributed over time. For example harvesting costs will only be rred during the last 2 months of an 1 l-month produc- tion cycle. AQUA also operates like an expert system such thi;t if there are excess (deficit ) fingerlings from one stage for transfer to the next stage, the model will automatically sell (buy) excess (deficit) fingerlings. When modelling integrated stages, the user is also given the option of specifying how much to transfer or sell (buy) from one stage to the next stage. The model provides additional options for controlling inventory of assets (e.g., value of growing fingerlings) and feed conversion per production stage and time period.
The model provides considerable detailed results regarding the economic and financial viability of the representative firm. The firm is simulated over a lo-year horizon with a maximum of 3000 iterations. At the end of each iteration, values for each of the key production and financial variables are calculated. If the firm experiences a negative cash flow during the planning horizon, deficits are automatically covered by the model by obtaining a loan secured by existing equity if available. If the firm availed of this option and still cannot cover the cash flow deficit, the firm is declared insolvent and the model stops and prints the results. The complete model results include a lo- year projection of the income statement, balance sheet, and cash flow state-
ment as well as descriptive statistical measures and cumulative probability distribution functions of the key output variables and probabilities of eco-
196 C.M.GEMPESAWIIET AL.
nomic success and survival. In addition, the model also prints stochastic an- nual output and prices, variable costs, mortality rates and other random vari- ables per production stage.
Data sources and assumptions
Using economic engineering techniques, data on twelve representative hy- brid striped bass farms with varying degree of specialization or integration for the four stages of hybrid striped bass production were collected for analy- sis. The four production stages were combined into four single-stage special- ized farms, three two-stage partially integrated farms, three three-stage par- tially integrated farms, and two four-stage fully integrated hybrid striped bass farms. Table 1 shows the production configurations for all twelve hybrid striped bass farms.
The designs and costs for the hybrid striped bass hatchery and the fry to phase I fingerling production (stages 1 and 2 ) were obtained from Delmarva Ecological Laboratory Inc. (DEL) (Posadas and Homziak, 199 1). DEL, which grows hybrid striped bass through phase II (6-8 inches) size, provided the data on fry and fingerling costs, stocking rates and mortality rates. Pond designs and production costs for stages 3 and 4, adjusted to reflect local con- ditions, were based upon past research by Easley ( 1987 ), Brown et al. ( 1988 ), Strand and Lipton ( 1989) and Brown ( 1989). Tables 2 and 3 show the farm capital asset investment requirements and initial average annual production costs, respectively.
Key assumptions in this simulation study were the assumed modal values for output quantity, prices, production costs, mortality rates and feed conver- sion rates along with the variability about each mode. Past studies on whole- farm simulation using FLIPSIM V have relied on empirical distributions of yield and output prices using historical data (Richardson and Nixon, 1986 ). One major obstacle in the economic evaluation of hybrid striped bass aqua-
TABLE I
Hybrid striped bass representative farm production stages and configurations
Production stages Farms
1 2 3 4 5 6 7 8 9 10 11 12
Farm configuration Hatchery included Yes No No No Yes N~I No Yes No No Yes Yes Total number of ponds 0 60 12 6 60 24 7 24 12 16 12 16 0.5-acre ponds - 60 - - 60 15 - 15 5 10 5 10 2.5-acre ponds - - 12 - - 9 2 9 3 2 3 2 5.0-acreponds ---6 --5 - 4 4 44
ECONOMIC EFFECTS OF INTEGRATION APPLIED TO HYBRID STRIPED BASS 197
culture is the absence of historical cost and return data. In the absence of historical data, the nonsymmetric triangular probability distribution was used to represent the randomness of the control variables. The triangular distri- bution is generally used as a first approximation of situations where there are very little or no available historical data (Taha, 1988 ). The modal values of the production costs were changed over time using annual inflation rates (3 to 5%) projected by FAPRI ( 1988, 1990). A description of each representa- tive farm is provided in the next section.
Single-stage specialized farms There are four single-stage specialized farms. Each of the four specialized
farms corresponds to one of the four hybrid striped bass production stages.
Farm 1. This hatchery, situated on 5 acres3 of land, represented the first stagn: of hybrid striped bass production and was assumed to have one hatcher? building serviced by one well. In early spring, the hatchery operator stripped 3 million eggs from each of twelve 30-pound wild female striped bass. Eggs were artificially fertilized with sperm collected from 400 white bass males. The fertilized eggs were then placed in heated, aerated circular tanks until the larvae hatched and reached 4 to 5 days of age. The fry were then harvestetl and sold. On average, only 25% (9 000 000) of the fertilized eggs reached the fry stage, with maximum survival of 30% and minimum possible survival af 0% ( 100% mortality ) .
Farm 2. This farm represented the second production stage - growth of fry to phase I fingerlings ( l-2 iri&tls). Hybrid striped bass fry were purchased and stocked in 60 previously fertiiized OS-acre ponds at the rate of 300 000 fry per water surface acre. The fry fed on the zooplankton population, supple- mented with artificial salmon starter feed. After 45 days, the fry reached 1 inch in length, known as phase I fingerlings. The 2 250 000 surviving phase I fingerlings were seined fro:n the ponds and sold. Survival rate at this stage averaged 25%, with minimum survival of 5% and maximum survival of 45%.
Farm 3. The third stage, production of phase 11 fingerlings (6-8 inches), is represented by farm 3. Phase I fingerlings were purchased and stocked in twelve 2.5-acre ponds at a density of 25 000 fingerlings per water surface acre. After 4-6 months of feeding, the fingerlings reached 6-8 inches in length and are known as phase II fingerlings. The phase II fingerlings were seined from the ponds in the fall and sold. Survival rate at this stage averaged 704/o, with minimum survival of 50% and maximum survival of 90%.
31 acre=0.40 ha.
198 C.M. GEMPESAW II ET AL.
Farm 4. This last specialized farm represented the grow-out of phase II fin- gerlings to 1.5pound market size. Phase I (6-g inches ) hybrid striped bass fingerlings were purchased and stocked once per year (late fall) in six 5.0- acre ponds at a density of 3500 fingerlings per water surface acre. After 11 months of growout, 1.5-pound market size fish were seined by a custom har- vesting service and sold. The assumed average fingerling survival rate was 90%, with a minimum of 50% to a maximum of 95%.
Two-stage partially integrated farms There are three two-stage partially integrated farms. These farms represent
the integration of two continuous stages of hybrid striped bass production.
Farm 5. The hatchery to phase I fingerling farm integrated stage 1 with stage 2 by combining farm 1 (specialized hatchery) with farm 2 (fry to phase I farm). A ?otal of 36 000 000 million eggs were stripped from the 12 striped bass females and fertilized with white bass sperm. When the 9 000 000 result- ing 4-5-day-old fv were removed from the hatchery, they were immediately stocked into 60 fertilized 0.5,acre ponds. Upon reaching the 1-2-inch phase I size, the approximately 2 250 000 surviving fingerlings were seined out and sold, Survival rates were assumed to be similar to farm 1 for the hatchery stage and farm 2 for the phase I fingerlings.
Farm 6. The fry to phase II fingerling farm integrated production stage 2 (fry to phase I fingerling) with stage 3 (phase I to phase II fingerling). Farm 6 combined fifteen 0,5-acre (farm 2 ) ponds and nine 2.5.acre (farm 3) ponds into a two-stage integrated operation. A total of 2 250 000 fry were purchased and stolcked in the fifteen O.5-acre ponds at a density of 150 000 per pond. Upon reaching phase I size, the 562 500 surviving fingerlings (based upon an average of 25% survival) were transferred into nine 2.5-acre ponds, where they remained until reaching phase II size. At that time, all phase II finger- lings were seined out and sold.
Farm 7. The phase I fingerling to 1.5-pound market size farm integrated stage 3 (phase I to phase II fingerling) with stage 4 (growout to market ). Farm 7 consisted of two 2.5.acre (farm 3) ponds and five 5.0-acre (farm 4) ponds. In June, a total of 125 000 phase I fingerlings were purchased and stocked in the two 2.5-acre ponds using a phase I stocking density of 25 000 per acre. An average of 70% of the phase I fingerlings survived to reach phase II size. Upon reaching phase II size (6-8 inches) in the fall, the 87 500 surviving phase II fingerlings were transferred into five 5.0,acre growout ponds, and remained there for about a year to attain the 1.5-pound market size. At that time, an average of 78 750 surviving market-size fish were custom harvested and sold.
ECONOMIC EFFECTS OF INTEGRATION APPLIED TO HYBRID STRIPED BASS 199
Three-stage partially integrated farms There are three three-stage partially integrated farms. These farms repre-
sent the integration of three continuous stages of hybrid striped bass production.
Farm 8. The hatchery to phase II fingerling farm combined production stogc 1 (hatchery to fry), stage 2 (fry to phase I fingerling) and stage 3 (phase I to phase II fingerling) into one enterl/rise. Farm 8 consisted of a direct combi- nation of Farms 1 to 6 into a three-stage hybrid striped bass production unit from the hatchery through the phase II fingerling stages. A total of 9 000 000 fry were produced in the hatchery from the 36 000 000 striped bass eggs, as- suming an average 25% survival rate. The hatchery produced more fry than the second production stage could stock. This permitted early cashflow through the sale of excess fry. From the 9 000 000 live fry, 2 250 000 were stocked into fifteen OS-acre ponds. An average of 6 750 000 surplus fry were sold. The fry stocked in the fifteen 0.5-acre ponds were grown to phase I size. A total of 562 500 fry (25% survival rate) survived to reach phase I size, and were transferred into nine 2.5.acre ponds, where they remained until they reached phase II size. The 393 750 surviving phase II fingerlings (average of 70% survival rate) were sold.
Farm 9. The fry to 1 .5-pound market size farm integrated production stage 2 (fry to phase I fingerling) with stage 3 (phase I to phase II fingerling) and stage 4 (phase II to market size). Farm 9 is a combination of five 0.5-acre (farm 2) ponds, three 2.5-acre (farm 3 ) ponds, and four 5.0-acre (farm 4) ponds. A total of 750 000 fry were stocked in the five 0.5-acre ponds for 45 days until they reached phase I. With 25% survival, 187 500 phase I fry sur- vived and were transferred into the three 2,5=acre stage 3 ponds. Seventy per- cent of the phase I fry ( 13 1 250) survived to reach phase II. Of the 13 1 250 phase II fingerlings, 61 250 surplus phase II fingerlings were sold. The re- maining 70 000 were transferred into four 5.0-acre stage 4 ponds for growout to 1.5-pound market size. A total of 63 000 phase II fingerlings (90%) sur- vived to reach market size and were custom harvested and sold.
Farm 10. The fry to 1.5-pound market size farm is similar to farm 9 in that farm 10 combined stage 2 (fry to phase I fingerling) with stage 3 (phase I to phase II fingerling) and stage 4 (phase II to market size). Farm 10 differed from farm 9 in pond configuration. Farm 10 had ten 0.5-acre (stage 2 ) ponds, two 2.5-acre (stage 3) ponds, and four 5.0-acre (stage 4) ponds. One of the 2.5-acre phase I to phase II ponds of farm 9 was converted into five 0.5-acre fry to phase I fingerling ponds. The result is excess phase I fmgerling produc- tion, which provides short-term positive cash flow for the farm. A total of 1 500 000 fry were stocked into ten 0.5-acre ponds for 45 days until they reached phase I. With 25% survival rate, an average of 375 000 phase I fin-
200 C.M. GEMPESAW II ET AL.
kerlings survived of which 250 000 were sold. The remaining 125 000 were transferred into 2.5-acre ponds. Seventy percent of the phase I fry (87 500) survived to reach phase II. Of the 87 500 phase II fingerlings, 17 500 surplus phase II fingerlings were sold. As in farm 9, the remaining 70 000 -were trans- ferred into four 5.0,acre ponds for growout to 1.5.pound market size. An av- erage of 63 000 phase II fingerlings (90%) survived to reach market size and were custom harvested and sold.
Four-stage fully integrated farms There are two four-stage fully integrated farms. These farms represent the
vertical integration of four continuous stages of hybrid striped bass production.
Farm II. This farm combined all four production stages into one fully inte- grated operation. Farm 11 follows farm 9 pond configuration with the addi- tion of the small hatchery from farm 1. Of the 9 000 000 fry produced in the hatchery, an average 8 250 000 was assumed sold, and 750 000 were retained for on-farm production as described previously for farm 9.
Farm 12. Like farm 11, farm 12 incorporated all four production stages into one fully integrated operation. Farm 12 was configured from farm 10, with the addition of the farm 1 hatchery. Of the 9 000 000 fry produced in the hatchery, an average of 7 500 000 were assumed sold and 1 500 000 were re- tained for on-farm production, as described previously for farm 10.
Farm financial characteristics
All the representative farms began their operations with $5000 in cash and were required to maintain $2500 in cash reserves. Except for the hatchery operations, each farm was assumed to own 45 acres of land valued at $1800 per acre along with a pick-up truck and a tractor va?ued at $49 000. Annual off-farm family income totalled $20 000, with annual family living expenses ranging between $800 and $12 000. The annual cost of debt capital and the after-tax discount rate were set at 10%. The property tax rate was assumed to be 0.18% of the total propefliy value for each farm. Each individual enterprise was allowed to borrow up to 90% of its required capital investments as needed. Labor reql’direments for the representative farms consisted of operations man- agement and hired labor. The farm owner was assumed to perform the duties of the operations manager. Depending on the specific farm situation, hired labor included both skilled. full time and/or unskilled temporary labor. The estimated cost for a skilled full time laborer was $15 000 per year. Part time laborers when needed were paid $6.00 per hour.
Hybrid striped bass farm costs can be divided into capital investment re- quirements (Table 2) and annual production costs (Table 3). The capital
ECONOMIC EFFECTS OF INTEGRATION APPLIED TO HYBRID STRIPED BASS 201
investment requirements for each of the twelve hybrid striped bass farms were divided into three sections. These are land, facilities (ponds, water sup&, buildings), and equipment. Table 2 summarizes the initial total investment costs associated with the twelve hybrid striped bass farms. The total invest- ment exceeded $300 000 for 11 of the 12 farms, and ranged from a low of
$98 100 for farm 1 to a high of almost $570 000 for farm 5. These substantial investment requirements illustrate the highly capital intensive nature of fa raised hybrid striped bass production.
The annual production costs can be subdivided into annual ownership costs and annual operating costs. Annual ownership costs include annual land cost, depreciation, interest on debt capital, insurance and taxes. Annual operating costs include costs for fingerlings, feed, electricity and fuel, maintenance and repairs, hired labor, custom harvesting had hauling services, other miscella- neous production cost- n u ,nd interest on operating capital. The sum of annual ownership costs and annual operating costs is the total initial annual cost of hybrid striped bass production as summarized for each representative farm in Tabie 3.
The initial modal prices received by farmers for fry ($0.0 1 (0.003) each: mode plus or minus the absoiute deviation), phase I fingerlings ($0.18 (0.05 ) each) and phase II fingerlings ($0.73 (0.17) each) were based upon prices provided by DEL. The initial average farm price for 1.5-pound market-size fish was based upon a review of past marketing studies. Carlberg and Van Olst ( 1987) indicated a price range of $3.00 to $3.50 per pound (per 0.45 kg). Liao and Smith ( 1987) reported that the average price received by farmers for fresh whole hybrid striped bass delivered to New York was $3.30 per pound (per 0.45 kg). In Philadelphia and Atlanta, hybrid striped bass were sold at a price of $1.99 per pound (per 0.45 kg). For this simulation study, the as- sumed price range received by farmers was initially set between $2.>0 and $3.50 per pound (per 0.45 kg). Annual changes in output prices for all pro- duction stages were assumed to increase at a decreasing rate for the first 5 years and decline at an increasing rate during the last 5 years. Modal output price ranges were allowed to increase between 2 and 5% annually during the first 5 years. By the sixth year of the planning horizon, modal prices were assumed to decline between 6 and 8% per year. The price movements were intended to capture the expected drop in output prices in anticipatf on of ac- tual production exceeding potential demand.
Evaluation criteria
The AQLJASIM simulation model provided considerable detailed results regarding the economic and financial viability of the representative farms at all levels of integration. The model generated necessary information to esti- mate risk and return parameters (probability distributions) for the key out-
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00.0
0 34
000
.00
15 0
00.0
0 15
000
.00
1 80
0.00
1
800.
00
17 6
50.0
0 18
800
.00
2 00
0.00
2
000.
00
1 50
0.00
1
500.
00
2 50
0.00
2
500.
00
34 0
00.0
0 34
000
.00
15 0
00.0
0 15
000
.00
1 80
0.00
1
800.
00
17 6
50.0
0 18
800
.00
17 0
00.0
0 17
000
.00
3 00
0.00
3
000.
00
2 50
0.00
2
500.
00
7 00
0.00
7
000.
00
1 80
0.00
1
800.
00
- -
5 00
0.00
5
000.
00
5 oo
o.og
5
000.
00
5 O
OO
.t?~
5 00
0.00
$3
37 6
75.2
5 $4
87 4
48.6
5 $3
59 9
08.7
5 $3
72
195.
00
$425
208
.75
$437
495
00
*Val
ue o
f la
nd a
ssum
ed
at $
2500
/acr
e fo
r th
e sp
ecia
lized
ha
tche
ry
farm
. V
alue
of
land
for
oth
er
farm
s w
as a
ssum
ed
at $
180O
/acr
e.
204 C.M. GEMPESAW II ET AL.
TABLE 3
Initial average annual production cost for hybrid striped bass representative farms, 1990 ($1
Cost item Farms
1 2
Annual ownership costs Land Depreciation Interest on
investment Insurance, taxes,
others Annual opc:ating costs Fingerlings Feed Electric &
put variables. The arithmetic averages of the key output variables were used to assess the economic viability of each representative farm. The complete results included a 1 O-year projection of various financial statements, a statis- tical analysis of various output variables, cumulative distribution functions for key output variables as well as probabilities of survival and economic success.
For purposes of this study, five output variables were selected to measure the economic and financial viability of the twelve hybrid striped bass farms. These variables are the after-tax net present value (NPV), the internal rate of return (IRR), the discounted annual average net cash farm income, the probability of economic success, and the probability of economic survival. The after-tax NPV is defined as the present value of the farm’s stream of net cash flows plus the present value of the change in net worth minus the present value of annual off-farm income. The internal rate of return is defined as the discount rate that equates the NPV equal to zero. The discounted annual av- erage net cash farm income is defined as total farm receipts minus all cash
ECONOMIC EFFECTS OF INTEGRATION APPLIED TO HYBRID STRIPED BASS 205
production expenses, interest pay after-tax discount rate.
iscounted by the
The change of economic success is defined as the probability that the farm will have a positive NW using a 10% after-tax discount rate. This statistic measures the probability of the representative farm earning at least a 10% rate of return. The chance of economic survival is defined as the probability that the farm will maintain the minimum financial ratios required for solvency over the planning horizon. This measure is an indicator of the enterprise re- maining solvent over the lo-year planning horizon. Another statistical mea- sure of risk is the coefficient of variation (CV). The CV is defined as the square root of the variance divided by its mean. This measure is used to corn- pare variability of returns from different representative farms, i.e., the higher the value the higher the risk associated with the returns for enterprise. Stochastic dominance with respect to a function (
was used to rank the twelve hybrid striped bass farms based on risk behavior and the NW probability distribution.
206 C.M. GEMPESAW II ET AL.
RESULTS
The stimulation results for the representative hybrid striped bass farms are presented in Table 4, which provides the after-tax net present value over the lo-year planning horizon, the internal rate of return, the discounted annual average net cash farm income, the chance of economic success, and the chance of economic survival for each farm at different levels of integration.
Farm 1. The after-tax NPV for the hatchery averaged $227 638. The after-tax NPV varied from a minimum of $114 199 to a maximum of $342 972. The CV for the hatchery NPV was 18.63. The IRR for the hatchery averaged 25.85%. The IRR varied from a minimum of 17.95% to a maximum of 33.53%. The hatchery generated a discounted annual average net cash farm income of $31 386. However, the net cash income went from a low of $3936 to a high of $69 029. This variation in cash income produced a CV of 14.99. Despite the relative risk associated with hatchery operation, the farm was able to maintain a positive after-tax NPV over the IO-year planning horizon. The hatchery farm had a 100% chance of remaining solvent and surviving for 10 years. However, operating a hatchery requires considerable technical skills and management knowhow, more than the other production stages. The sim- ulation results were based on this critical assumption and can drastically change given the degree of available management-technical skills.
Farm 2. The after-tax NPV for this farm averaged $268 580. Although this farm has a positive mean NPV, the NPV varied from a low of -$441 885 to a high of $1 655 573, The variability of this farm’s NPV produced a CV of 162.34, almost nine times that of the representative hatchery farm, illustrat- ing significantly higher risk. The IRR for this farm averaged 18.1%. The dis- counted annual net cash farm income averaged around $72 622. Although the annual average income seems to be very high, the farm enterprise could also face an annual net cash farm income deficit of - $125 083. These wide fluc- tuations in net cash income produced a CV of 320.34, indicating a substan- tially high degree of risk associated with this operation. With this income in- stability, the enterprise only has a 48% chance of economic success. Furthermore, the farm only had a slightly better chance of surviving (69.67%) for 10 years. This farm was declared insolvent in 30% of the 300 iterations.
Farm 3. The estimated after-tax mean NPV for this operation was - $102 300, the lc~=i’i”st of the twelve representative farms. This operatioli was able to generate a maximum positive after-tax NPV of $535 783. Most of the NPV’s were negative with the minimum NPV hitting a low of-$466 418. The average IRR was 9.89%. Farm 3 generated as discounted annual average net cash farm income of $25 529. The minimum net cash farm income was
ECONOMIC EFFECTS OF INTEGRATION APPLIED TO HYBRID STR:PED BASS 207
- $104 798 while the maximum was $179 438. The majority of the net cash farm incomes generated were negative. The risk was so high in operating this farm that it only had a 34% chance of economic success. The farm was only given a 42% chance of surviving during the lo-year planning horizon. This operation was declared insolvent in almost 60% of the 300 iterations.
Farm 4. The last specialized farm, growout of phase II fingerlings to 1.5-pound market size, represents the fourth and final stage in the production of hybrid striped bass. The estimated after-tax NPV averaged around $240 196. The NPVs for this farm varied between a minimum of -$233 074 and a maxi- mum of $857 765. The wide variati.on in the NPV resulted in a coefficient of variation of 163.73, indicating that this enterprise has similar risk character- istics as farm 2. The IRR averaged about 28.38%. The discounted annual av- erage net cash farm income was $73 122. The minimum net cash farm in- come was -$26 596 while the maximum was $195 802. The CV resulting from the net cash farm income variation was 456.75, the highest among the four specialized single-stage farms evaluated. The risks associated with the growout of phase II fingerlings to market size reduced the chance of economic success for this farm to less than 60%. This operation also had a similar prob- ability of surviving for 10 years. This farm was declared insolvent in almost 40% of the 300 iterations.
Farm 5. The hatchery to phase I fingerling farm (stages 1 and 2 combined) has an estimated average after-tax N V of $466 528. The after-tax N ied from a minimum of -$43 1 968 to a maximum of $1 624 766 and had a CV of 105.54. The hatchery addition to the fry to phase I operation made the combined operations less risky than the single-stage farm 2. The I
combined enterprise averaged 21.44%. The discounted annual average net cash farm income was $96 202. The minimum net cash farm income was -$lOO 119, an improvement of almost $25 000 over farm 2’s minimum net cash farm income. The maximum net cash farm income obtained was $396 274, an improvement of almost $30 000 over the maximum net cash farm income of farm 2. The CV for the net cash farm income was 164.9 1, half the CV value of the single-stage fry to phase I enterprise. This illustrates the reduction in risk gained by joining the two production stages. Conitiining the hatchery and the fry to phase I operation increased the chance of economic success for the integrated farm to 75%. This farm also had a 75% chance of surviving for 10 years. This farm was declared insolvent in less than 25% 01 the 300 iterations.
Farm 6. Farm 6 consisted of a combination of farm 2 and farm 3 into a two- stage integrated operation. The estimated after-tax NPV averaged around -$15 907. The after-tax NPV varied between -$413 43 1 and $438 562, with
TA
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210 CM. GEMPESAW II ET AL.
most NPVs being negative. The addition of farm 2 to farm 3 improved the NPV but not enough to produce a positive average NPV. The average IRR for this farm was 11.48%. The integration of production stages 2 and 3 pro- duced a discounted annual average net cash farm income of $24 698 which is similar to the net cash income of farm 3 producing phase II fingerlings. The minimum net cash farm income for this farm was -$94 836 and the maxi- mum was $17 1 736. The chance of economic success improved from 34% to 5 1% for this farm as compared to farm 3. This farm also had a higher chance of surviving (63%) during the 1 O-year planning horizon. This farm was de- clared insolvent in 37Oh of the 300 iterations.
Farm 7. Farm 7 consisted of two 2.5.acre ponds from farm 3 and five 5.8- acre ponds from farm 4. The estimated after-tax NPV averaged about $2 10 933, slightly less than the NPV attained by farm 4. The minimum after- tax NPV farm was -$239 169 with the maximum reaching $630 946. The NPV variability about its mean (CV of 119.72 j was less for this operation than for farm 4 alone. This shows that the integration of a small portion of production stage 3 to production stage 4 appeared to minimize some of the risks in the final growout operation. The IRR for this farm averaged 28.62%. The discounted annual average net cash farm income was $48 486, around $25 000 less than farm 4. The minimum net cash income ( -$3 1 908) was lower than farm 4 by almost $5 000. The maximum net cash farm income ($157 336) was approximately $38 000 lower than the maximum of the sin- gle-stage farm 4. However, combining production stages 2 and 4 into a single operation reduced the net cash farm income CV to 222.55, which is half the corresponding CV value for farm 4. Integrating the two production stages also increased the farm’s chances of economic success and survival to 76%. In comparison, farm 3 only had 42% chance of surviving while farm 4 only had a 59% chance of survival. Farm 7 was declared bankrupt in less than 23% of the 300 iterations and all insolvent iterations occurred within the first 2 years of the planning horizon.
Farm 8. This farm consisted of a direct combination of farms 1 ant 6 into a three-stage production unit handling production from the hatchery through the phase II fingerling stage. The estimated average after-tax NPV for this three-stage hybrid striped bass production farm was $2 13 8 12, a substantial improvement over the average after-tax NPV of farm 6, 1 he after-tax NPV varied between a minimum of -$35 1 167 and a maximum of $767 453. The CV of the after-tax NPV dropped to 124.35 compared to the value recorded by farm 6. The addition of the hatchery to farm 6 stabilized and improved the after-tax NPV. The average IRR received by this farm was 18.87%. The discounted annual average net cash farm income was $49 753, reflecting the added income generated by the addition of the hatchery operation. The min-
ECONOMIC EFFECTS OF INTEGRATION APPLIED TO HYBRID STRIPED BASS 211
imum net cash farm income was -$80 749 and the maximum went as high as $206 809. The CV for the net cash farm income was 168.27. This was sim- ilar to the risk measure for farm 5 and significantly lower than the value re- alized by farm 6. The chance of economic success for this farm was 78% per- cent, roughly the same as farm 5. The chance that this operation would survive for 10 years was 80%, also very close to that of farm 5. This farm was declared bankrupt in 20% of the 300 iterations.
Farm 9. This fry to 1 S-pound market size farm is a three-stage partially in- tegrated operation consisting of five 0.5-acre (farm 2) ponds, three 2.5-acre (farm 3) ponds, and four 5.0-acre (farm 4) ponds. The estimated after-tax. NPV averaged about $252 172. The minimum after-tax NPV went as low as -$262 736 and the maximum went as high as $660 898. The CV for the after- tax NPV was 80.45. This CV value indicates that the after-tax NPV for farm 9 was more stable than any of the single-stage farms (except the hatchery), th . . c two-stage farms (5,6 and 7) and the three-stage farm 8. The average IRR for this partially integrated hybrid striped bass farm was 28.91%. The dis- counted annual average net cash farm income was $46 491, around $2000 less than farm 7 (which is a combination of stage 3 and 4). The net cash farm income varied between a minimum of - $3 1 860 to a maximum of $150 2 11. The CV of the net cash :farm income was 117.88, a lower measure than the CV of farm 7 which shows the trade-off between income and risk. The change of economic success for this farm was 87.33%, slightly higher than that of farm 7. The chance that this operation would survive for 10 years was 87%, also higher than that of farm 7. This farm was declared insolvent in ‘? 3% of the 300 iterations. The results show that integrating stage 2 into farm 7 af- fected the expected risk and returns measures. Due to the supply assurance of stage 2 fingerlings, the financial performance of the three-stage partially in- tegrated farm 9 was slightly better than the two-stage partially integrated farm 7.
Farm 10. This farm, also a fry to 1.5-pound market size operation, differed from farm 9 in the configuration of production stages 2 and 3. Farm 10 had ten 0.5-acre (farm 2) ponds, two 2.5.acre (farm 3) ponds, and four 5.0-acre (farm 4) ponds. The estimated after-tax NPV averaged about $25 1 705. The minimum after-tax NPV went as low as -$266 456 and the maximum went as high as $575 105. The CV of the after-tax NPV was 86.35 which is similar to farm 9. The average IRR was 27.37%. The discounted annual average net cash farm income was $48 626, around $2000 more than farm 9. The net cash farm income varied between a minimum of -$35 524 to a maximum of $158 850. The CV of the net cash farm income was 135.80 which is slightly higher than that of farm 9. The chance of economic success and survival for this farm. was 859/o, which is similar to that of farm 9. This farm was declared
212 C.M. GEMPESAW II ET AL.
insolvent in 15% of the iterations. Comparing the two configurations of inte- grating stages 2 to 4, the results show no significant differences in economic and financial performance.
Farm Il. This operation is a fully integrated farm incorporating all four pro- duction stages from hatchery to market. This farm has the same pond config- uration as farm 9 except with the addition of the hatchery enterprise. The estimated after-tax NPV averaged around $542 367. The minimum after-tax NPV went as low as - $238 363 and the maximum went as high as $948 125. The CV of the after-tax NPV was 39.06, considerably less than that of farm 9. The addition of the hatchery lowered the risk measure. The average IRR was 33.80% which is almost 5 percentage points higher than the IRR of farm 9. The discounted annual average net cash farm income for this four-stage operation was $79 7 17, around $33 000 more than farm 9. The net cash farm income varied between a minimum of - $14 80 1 to a maximum of $19 1 199. The CV of the net cash farm income was 50.80, another indication that this farm was more stable than farm 9. The chances of economic success and sur- vival for this farm were 94.33%, a substantial improvement over farm 9. This farm was declared insolvent in only 5% of the 300 iterations. Except for the hatchery single-stage operation, farm 11 recorded the highest chance of eco- nomic success and survival. This result illustrates the benefits of full integra- tion not only in the assurance of continuous supply of fingerlings but also the added income generated by selling excess output in the various production stages.
F&m 12. This ?drrn is also a fully integrated operation, comprising all four production stages from hatchery to market. This farm is the same as farm 10 in terms of pond configuration with the addition of the hatchery. The esti- mated after-tax NPV averaged about $524 197. The minimum after-tax NPV was -$244 765 and the maximum was $877 450. The CV of the after-tax NPV was 46.37, considerably less than the CV of farm 10 but slightly higher than that of farm 11. As in farm 11) the addition of the hatchery lowered the risk associated with hybrid striped bass growout production., The average IRR was 3 1.96%. The discounted annual average net cash farm income for this four-stage operation was $80 457, about $32 000 more than farm 10. The net cash farm income varied between a minimum of - $14 229 to a maximum of $199 759. The CV of the net cash farm income was 62.16, another indication that this farm was ore stable than farm 10. The chance of economic success for this farm was around 91%, a substantial improvement over that of farm 10. The chance that this operation would survive for 10 years was also over 90%. This farm was declared insolvent in only 8% of the 300 iterations. The financial results for farm 11 and farm 12 reflect the advantages of full vertical integration in hybrid striped bass production.
ECONOMIC EFFECTS OF lPiTEGRATION APPLlED TO HYBRID STRIPED BASS 213
DISCUSSION
In recent years, the potential high market demand for hybrid striped bass has increased the attractiveness of hybrid striped bass production, The objec- tive of this study was to evaluate the economic impacts of vertical integration and/or specialization in hybrid striped bass production, AQUAS&I, a com- prehensive farm-level, multiple year, stochastic, capital budgeting computer simulation model, was used to analyze the financial performance of special- ized and integrated hybrid striped bass farms. The representative aquaculture farms were evaluated in terms of risk and returns.
The simulation results indicate that the fully integrated enterprises (farm 11 and farm 12 ) along with the hatchery operations were the most profitable with the least expected risk. However, the variations in the individual ex- pected returns of the twelve farms were relatively large so that a point esti- mate comparison using expected average returns or fluctuations in returns is not meaningful. A realistic investment ranking of the twelve representative farms was conducted through the use of a statistical technique known as sto- chastic dominance with respect to a function (Meyers, 1977). This is a tech- nique that predicts a decision maker’s choice between given pairs of risky alternatives without any knowledge of the decision maker’s preference except that he displays risk-aversion behavior. The stochastic dominance results in- dicate the following rankings. Farm 11 and farm 12 were the first two highest ranked farms. The group of second ranked farms included farms 1, 5,9 and 10. The group of third ranked farms included farms 2, 4, 7 and 8. The last group of farms included farm 6 and farm 3. A common factor among most of the higher ranked farms is that they include the hatchery operations (e.g., farms 11, 12, 1, and 5 ). However, the hatchery operations can only be prof- itable if the other farms are financially viable since the hatchery output needs to be sold to the other production stages.
The higher the level of risk and uncertainty, the hi er the compe payoff needs to be. This study has found that hybrid striped bass producers face a substantial amount of expected returns and risk. However, the risk var- ied among farms depending on the level of specialization, partial integration and full integration. This was illustrated by the higher chances of survival and economic success for the fully integrated farms along with lower variability in expected income, This suggests that full integration may minimize the risk associated with hybrid striped bass production. However, a major problem the integrated producer has to face is the long duration between production and harvest. Inasmuch as hybrid striped bass production is highly capital in- tensive, the representative producer may be subjected to tight cash flow con- ditions during the early years of the enterprise operation. As in any business proposition, an enterprise with severe cash flow problems is more vulnerable to drastic changes in the economy (e.g., recession, high interest rates and en-
214 CM. GEMPESAW II ET AL.
ergy costs) or unexpected technological problems in the farm (e.g., high mor- tality rates and disease problems).
Another problem confronting the integrated producer is the high level of specialized and technical skills needed to manage an integrated aquaculture operation, particularly at the earlier production stages. As underscored by Keyes ( 1989 ), it is important to consider physical and production issues such as water quality and availability, production inspection, disease control, stock quality, feed quality and minimization of predation as important factors in the development of an aquaculture enterprise. While vertical integration may reduce costs and guarantee raw input supplies, the chores of managing the different production stages may require the producer to concentrate on aqua- culture production alone. This in effect can limit the diversification strategy of the aquaculture producer, i.e., production of other farm products. Diver- sification among several farm commodities has been a traditional approach to risk management in agriculture. Finally, vertical integration can also lead to internalization of overhead costs over time. These costs could have been variable if raw material inputs (e.g., fingerlings) are supplied by external sup- pliers. Thus, the internalization of costs can affect the flexibility of the aqua- culture enterprise in facing wide fluctuations in general economic conditions.
REFERENCES
Brown, J., 1989. An Analysis of the Economic Potential of Hybrid Striped Bass Culture. Un- published Ph.D. Thesis, North Carolina State University, Raleigh, NC, 234 pp.
Brown, J., Easley, J. and Hodson, R., 1988. Investment and Production Costs for the Hybrid Striped Bassx White Bass in North Carolina, University of North Carolina Sea Grant Pro- gram (unpublished), 35 pp.
Carlberg, J. and Van Olst, J., 1987. Processing and marketing. In: Hybrid Striped Bass Culture: Status and Perspective. UNC Sea Grant College Publication 87-03, North Carolina State University, pp. 73-82: ’
Easley, J., 1987. Economic research: the hybrid striped bass-white bass hybrid. In: Hybrid Striped Bass Culture: Status and Perspective. UNC Sea Grant College Publication 87-03, North Car- olina State University, pp. 83-9 1.
FAPRI, 1988. U.S. and World Agricultural Outlook, Summary and Tables. Food and Agricul- tural Policy Institute, Iowa State University, Ames, IA and University of Missouri-Colum- bia, Columbia, MO.
FAPRI, 1990. U.S. Agricultural Outlook. Staff Report no. I-90. Food and Agricultural Policy Institute, Iowa State University, Ames, IA and University of Missouri-Columbia, Columbia, MO.
Hodson, R., Smith, T., McVey, J., Harrell, R. and Davis, N. (Editors), 1987. Hybrid Striped Bass Culture: Status and Perspective. UNC Sea Grant Publication UNC-SG-87-03.
Jensen, J. and Tally, W., 1988. Business Plan for South Jersey Aquafarms. Dept. of Fisheries and Allied Aquaculture, Auburn University (unpublished), 34 pp.
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ECONOMIC EFFECTS OF INTEGRATION APPLIED TO HYBRID STRIPED BASS 215
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