Economic Modelling
of Aquaculture
Bill Johnston
Principal Agricultural Economist
Department of Primary Industries &
Fisheries
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What are Economic
Decision Tools?
Economic decision tools aim to assist
farmers and potential investors
understand the economic requirements,
costs and benefits,, and risks involved in
production.
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What do they do?
• Theyy can assess impacts
p
such as disease, climate
and market prices (known as externalities) that may
influence profitability
• They can also assess changes in profitability caused
by changes in the cost of feed, labour, electricity,
packaging and transport
• They can evaluate the economic effects of
improvements in yield, future development plans, or
a change in production efficiency
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By providing an economic analysis tool for
g
farmers we aim to ggive them the knowledge
and information necessary so they are fully
prepared and understand the capital required,
operating costs involved, the labour input and
the profit margins they might expect to
receive ggiven an identified level of risk ((such
as the likelihood of crop damage by cyclones,
or fluctuations in market price)
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Economics v. Finance:
What’s the Difference?
Financial analysis, including cash
budgets, tax, loans and overdrafts, is all
about MONEY!
Economics is all about CHOICES!!
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Cost-Benefit Analysis (CBA)
• CBA a method for organising information to aid
decisions about the allocation of resources.
• CBA can be used for the following:
–
–
–
–
deciding if a project should be undertaken
deciding wether an existing project should continue
choosing between alternative projects
selecting scale and timing of project
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Key Steps in CBA
What are the alternatives?
p
Seaweed or Tilapia
What are the constraints?
Eg. Climatic limitations
Identify costs and benefits
Quantify
Q
y costs and benefits
Calculate Net Present Value
Assess Risk
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What is NPV ?
• The NPV is the difference between the
present value of cash inflows and the
present value of cash outflows over
the life of the project.
• If the NPV is positive the project is
likely to be profitable.
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How do we get to the
NPV?
•
Discounted cash flow analysis is used to determine the
annual cost structure and the likely profitability for each of
the commodities.
•
Discounting reduces future costs or benefits to an
equivalent amount in today’s dollars - People generally
prefer to receive a given amount of money now rather than
to receive the same amount in the future, because money
has an opportunity cost.
cost
•
The single amount calculated using the discounting
method is known as the net present value (PV) of the future
stream of costs and benefits. The rate used to calculate
present value is known as the discount rate (opportunity
cost of funds).
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Some Parameters
• 20 year term for our projects
• Discount rate of 8%
• Always aim for maximum
production
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Equivalent Annual Return
• When the NPV is converted to a yearly
figure it becomes annualised.
• It is a measure of annual profit after
deducting capital, operating and labour
costs generated over the life of the
project expressed in today’s dollars.
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Internal Rate of Return
• The discount rate at which the project
has an NPV of zero is called the
internal rate of return.
• The IRR represents the maximum rate
of interest that could be paid on all
capital invested in the project.
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Payback
• The year in which the cash flow rises above
zero is considered the payback period.
• Payback period is a measure of the
attractiveness of a project from the
viewpoint of financial risk.
• Other things being equal, the project with
the shortest payback period would be
preferred.
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Biology and Economics
Biological
Bi
l i l Parameters
P
t
• Feed Conversion
(FCR)
• Growout Period
• Stocking Density
• Mortalities
• Fingerling/Hatchery
Economic
E
i Parameters
P
t
• Selling Price
• Input Costs
• Capital Requirements
M k t andd F
Freight
i ht
• Markets
• Labour
• Operating Expenses
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An Example of Model
Inputs: Stocking A Farm
Target Biomass of Farm:
50 tonnes
Target Size of Fish:
500 grams
Number of fish at harvest:
100,000 (50,000/0.5)
Compensation for estimated mortality of fish:
100,000 x (1/(1- mortality %))
100,000 x (1/(1 - 0.3))
100,000 x 1.42
Fingerlings required for optimal stocking = 142,000
If fingerlings cost $0.30 our cost is $42,600
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Risk
• Decision making under certainty is
straightforward
t i htf
d andd lleads
d tto th
the optimal
ti l
solution (maximum profit)
• Decision making under risk requires more
information.
• Risk and uncertainty are features of most
business and government activities and needs
to be understood to ensure rational
investment decisions.
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We need to first specify the likelihood
of various
ario s risk factors affecting
production (or yield)
– What are the risks (cyclones, floods,
disease, theft, price changes etc.)?
– How often do they occur?
– Consider both price risk and production
risk.
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Issues to Consider
• Should owners pay themselves – not including labour
di t t results
distorts
lt as a bbusiness
i
should
h ld provide
id an iincome on
which to live. There is a basic requirement to supply food and
shelter (subsistence).
• Customary Obligations - Customary obligations are seen as
an additional cost to the business which could manifest in
either, or both of two ways - firstly money might be taken out of
the business as cash, and secondly, machinery, equipment or
facilities owned by the business might be borrowed for use by
others, and thus be unavailable for the business, or suffer
accelerated wear and tear.
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