Aquaculture Economics and Financing

Management and Analysis

Aquaculture Economics and Financing: Management and Analysis Carole R. Engle 2010 Carole R. Engle. ISBN: 978-0-813-81301-1

Aquaculture Economics and Financing

Management and Analysis

Carole R. Engle
Aquaculture/Fisheries Center University of Arkansas at Pine Bluff

A John Wiley & Sons, Ltd., Publication

Edition rst published 2010 C 2010 Carole R. Engle Blackwell Publishing was acquired by John Wiley & Sons in February 2007. Blackwells publishing program has been merged with Wileys global Scientic, Technical, and Medical business to form Wiley-Blackwell. Editorial Ofce 2121 State Avenue, Ames, Iowa 500148300, USA For details of our global editorial ofces, for customer services, and for information about how to apply for permission to reuse the copyright material in this book, please see our Website at www.wiley.com/wiley-blackwell. Authorization to photocopy items for internal or personal use, or the internal or personal use of specic clients, is granted by Blackwell Publishing, provided that the base fee is paid directly to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923. For those organizations that have been granted a photocopy license by CCC, a separate system of payments has been arranged. The fee code for users of the Transactional Reporting Service is ISBN-13: 9780-81381301-1/2010. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. Library of Congress Cataloging-in-Publication Data Engle, Carole Ruth, 1952 Aquaculture economics and nancing : management and analysis / Carole R. Engle. 1st ed. p. cm. Includes bibliographical references and index. ISBN 978-0-8138-1301-1 (pbk. : alk. paper) 1. Aquaculture industry. 2. AquacultureEconomic aspects. 3. AquacultureFinance. I. Title. HD9450.5.E53 2010 338.3dc22 2010013917 A catalog record for this book is available from the U.S. Library of Congress. Set in 9.5/11.5 pt Times by Aptara R Inc., New Delhi, India Printed in Singapore 1 2010

This book is dedicated to my parents, Mildred Evelyn Orris Engle Wambold, Glenn Wambold, and Morris Engle, Jr.; my husband, Nathan Stone; our children Reina, Eric, and Cody; and to the sh farmers of Arkansas.

Contents

Preface Acknowledgments I 1 2 3 4 5 6 7 8 9 II 10 11 12 13 14 Managing Aquaculture Businesses Starting an Aquaculture Business Marketing Aquaculture Products Developing a Business Plan for Aquaculture Monitoring Economic and Financial Performance of Aquaculture Businesses Financing an Aquaculture Business Managing Cash Flow Managing Capital Assets in Aquaculture Businesses Managing Risk in Aquaculture Businesses Managing Labor Economic and Financial Analysis of Aquaculture Businesses The Enterprise Budget and Partial Budgeting in Aquaculture Financial Statements: Balance Sheet and Income Statement in Aquaculture Cash Flow Analyses in Aquaculture Investment Analysis (Capital Budgeting) in Aquaculture Lending in Aquaculture

ix xi 1 3 13 23 41 57 67 81 93 105 115 117 131 143 159 173

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viii III

Contents

Research Techniques to Analyze Farm-Level Decision-Making

183 185 197 207 219 231 235 241 255

15 Use and Misuse of Enterprise and Partial Budgets 16 Risk Analysis in Production Aquaculture Research 17 Whole-Farm Modeling of Aquaculture 18 Managing Government Policies and Regulation in Aquaculture Businesses Bibliography Webliography Glossary Index

Preface

The volume of aquaculture production worldwide has grown at a rate of approximately 8% per year over the last decade. Continued growth is expected due to increases in world population and the apparent leveling off of the capture of many commercial sheries species. Farmed salmon and shrimp production have grown to dominate their respective world markets over the last several decades. More recently, new global markets have emerged for farmed species such as tilapia (Oreochromis sp.), channel catsh (Ictalurus punctatus) and the basa/tra species (Pangasius sp.). Continued growth, however, depends not just on demand but also on the economic and nancial viability of the businesses developed. Aquaculture production presents some unique challenges for economic analysis. While there are many books that address the theory and methodology of economic and nancial analysis, there are few that present clear details on applications to aquaculture businesses. The few that do are quite general in nature and rely on hypothetical examples that omit the often-messy details of the real world. The difculties posed by aquaculture businesses are rarely discussed or addressed. The problem is exacerbated by the lack of practical knowledge and experience in aquaculture on the part of many economists. Simplifying assumptions make analyses more tractable, but too often obscure the problems and challenges faced by those attempting to make a living from aquaculture. As a result, researchers who wish to add an economics component to a production aquaculture trial have little guidance. The unfortunate result is that key costs are too often ignored, invalid assumptions are made, and analytical tools are applied incorrectly. These errors degrade the quality of the work and may lead to erroneous or misleading conclusions. The intent of this book is to provide a detailed and specic set of guidelines for both aquaculture businessmen and women and researchers related to the use ix

of economic and nancial analysis of aquaculture. The goal of the book is to remove the mystery or voodoo from economic analysis as it is applied to aquaculture and to provide a guide for its accurate application. This book discusses key issues related to both nancing and planning for aquaculture businesses, how to monitor and evaluate economic and nancial progress, and how to manage the capital, labor, and risk in the business. The book works through the specic application of farm management and nancial analysis tools for aquaculture. Particular attention is paid to those line items and valuation methods that are most often confused or in error in aquaculture. A section on use and misuse of budgeting techniques in research should assist aquaculture researchers to avoid common mistakes. Additional chapters on risk analysis and whole-farm modeling provide a sense of more advanced techniques and their applicability. Finally, a chapter on managing government regulations provides guidance for adjusting to an increased number of regulatory activities. The book is based entirely on aquaculture examples and literature with an emphasis on farm-level data and analysis. It is written in terminology that aquaculture researchers and business persons will readily follow and understand. The section on the application of economic analysis in aquaculture research is unique; no other book outlines how to value parameters measured in aquaculture eld trials. The book includes a specic, detailed example of a practical application in each chapter. A section on other applications in aquaculture is included to paint a broad picture of the economics of aquaculture around the world while providing comprehensive guidance on each particular topic. The three principal audiences for this book are: (1) aquaculture business owners and managers; (2) those who conduct research on aquaculture production systems, strategies, equipment, or management practices;

Preface

and (3) students preparing for careers either in the industry or in aquaculture research. The book should appeal to practitioners in a number of different countries, but especially those with aquaculture industries. Aquaculture business owners and managers will likely be most interested in Section I: Managing Aquaculture Businesses. The chapters in this section are designed for those who are likely to hire an accountant to develop the analyses, but need to know what questions to ask and how to interpret the answers. This section works through the key questions related to starting an aquaculture business, some basic marketing considerations, business planning, understanding how to interpret the nancial statements prepared by accountants for businesses, cash ow, nancing, and management of capital assets, labor, and risk. The key focus in this section is on the use of information to make management decisions. Those aspects of aquaculture businesses that are unusual or different from other types of businesses are emphasized from the perspective of managing the business effectively for prot. Chapter 18 on managing government policies and regulations will also be of interest to aquaculture business owners. Section II, Economic and Financial Analysis of Aquaculture Businesses, is for students and those who wish to understand the details of how to develop

and complete the various types of economic analyses that are commonly used in the economic analysis of aquaculture. Each chapter presents in detail the mechanics and methodology for developing enterprise budgets, partial budgets, balance sheets, income statements, cash ow budgets, and investment analyses. Challenges and common pitfalls associated with use of each of these methodologies are discussed in each chapter. Section III, Research Techniques to Analyze FarmLevel Decision-Making, is written especially for those who conduct research on aquaculture production systems, strategies, equipment, or management practices. Misleading assumptions, omitted costs, overestimating revenues, and misapplication of research data can be common in economic analysis based on aquaculture research. This section reviews these challenges and describes detailed approaches to developing accurate economic analyses with production research data. The book includes an annotated bibliography and a webliography of resources. Software products available for economic and nancial analyses are listed and described. It is my hope that you will nd this book useful and that it will help aquaculture businesses to be efcient, viable, and protable.

Acknowledgments

There are many people who contributed either directly or indirectly to the content of this book. Some of this material was drawn from earlier training programs developed with the assistance of Diego Valderrama, Steeve Pomerleau, and Ivano Neira. Ganesh Kumar has provided invaluable assistance throughout. Insightful and useful review comments were provided

by Diego Valderrama, Anita Kelly, Madan Dey, and George Selden. Umesh Bastola, Pratikshya Sapkota, and Abed Rabbani also provided suggestions. Finally, sh farmers throughout Arkansas and other states provided the continuous ground truthing of the economics and nancing of aquaculture.

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