The Economic Framework for the Aquaculture Industry in Denmark

Transcription

1 The Economic Framework for the Aquaculture Industry in Denmark Conference New productions in Nordic freshwater Aquaculture in Billund September 23 th -24 th 2010 Niels Vestergaard Department of Environmental and Business Economics Centre for Fisheries & Aquaculture Management & Economics (FAME)

2 What I will talk about Global trends Examples of global innovations Observations from the Danish aquaculture sector Development of unit cost learning curve Technological progress: Sources, diffusion and effects Pollution control

3 Global trends for farmed seafood Aquaculture is today the worlds fastest growing foodproduction and will very soon dominate the market for seafood. This is possible because one has control over the productionprocess so the production can be increased and because one produces a competitive product that many wants to buy. The productivity will continue to increase. The control with the production process makes it possible to run systematical innovation work. This has created a range of innovations in the production and value chain for farmed fish.

4 xamples of innovations in the value chain The control with the production process makes innovation possible in the value chain Salmon is today available as fresh over the whole world Fish was not transported by airplanes decades ago No regular trunk-service with fresh fish Planning of marketing campaigns Just-in-time logistic systems

5 Global trends Supermarkets are the best friends to aquaculture sector In 1990 the supermarkets in France and UK had less than 20% of the sale of seafood. In 2003 they had over 80% of the sale. They are demanding customers, but the aquaculture sector has greater ability to meet their demand than wild fish. For species from the harvesting sector the price increases, while species where the main part of the production comes from aquaculture (salmon, shrimp) falls in price. Further fall in prices has to be expected for main farmed fish species where productivity and supply is increasing. Large scale aquaculture will develop to a food industry The product range is developing fast and the industry looks more as chicken and less as traditional fishery.

6 Supplier has to adjust to the consumer in several areas Before Price Price Fisherman/ breeder Fish industry Consumers Quantity Quantity After Price Price Fisherman/ Breeder Quantity Timing Fish industry Quantity Timing Comsumer Quality Quality

7 Observations from Denmark A relative small sector in Denmark with around 160 firms, 270 production units, employment 730 and a yearly turnover around 1 billion DKK (2008). Yearly production around tons including everything. The main production is trout, trout and trout, but also eel and mussels. The size of production is however significant compared to the wild fish production for human consumption.

8 Economics (1,000 DKK) Profit 26,365 79, ,722 90,561 42,402 Capital 539, , , , ,212 Profitability 4,9% 13,6% 22,4% 14,8% 6,4% Not stable profit, but positive, but too low? Average profitability around 12%

9 Many traditional units, so what about new investments? Fish farm model type 3 (1,000 DKK) Profit 1,340-1,491 12,213 11,849 8,301 Capital 33,936 78,489 92,908 95, ,611 Profitability 3,9% -1,9% 13,1% 12,4% 7,9%

10 The production in Norway has increased enormous

11 60 Market price and total costs Norwegian Atlantic Salmon and Trout Production , prices corrected for inflation (1998 basis) Unit revenues Unit costs

12 The learning curve gives good predictions of the future unit-costs.

13 The source of technical change Technical change can come from: improvements in the quality of the inputs (capital, labor, management, etc.). The effectiveness of physical capital in the production process tends to be positively influenced by infrastructure (roads, communications, etc.). The quality of labor and managerial input is often called human capital. Improving human capital can be done through education, experience and training. As a result, investments in infrastructure and human capital tend to stimulate productivity growth. investments in research and development, as a means of stimulating the creation of new technologies.

14 The process of technical change The process of technical change is often decomposed into two stages: inventions, which correspond to the creation of new technology, i.e. of new ways of producing particular outputs or even new outputs. Current knowledge together with inventions thus define what is technically feasible at a given time. Note that many inventions are never utilized because, while being technically feasible, there are no incentives (e.g. profit incentives) to implement them. innovations, which correspond to the adoption of new technologies in a production process. For innovations to take place, they must be technically feasible and there must be some incentive to implement the new technology (e.g. profit incentives).

15 The induced innovation hypothesis The induced innovation hypothesis states that inventions and innovations are guided by economic incentives and relative resource scarcity. To the extent that relative prices reflect relative resource scarcity, it follows that, under the induced innovation hypothesis, relative prices influence the nature and direction of technical change. For example, a higher (lower) input cost would stimulate the development and adoption of technology biased toward saving (using) this input. Example: A higher labor cost tends to stimulate labor-saving technical change.

16 The creation of new technology role of patents to stimulate private research. role of public institutions (e.g., universities) in research (stimulating the creation of new technologies), education and extension (stimulating adoption rates). long lags: between 1 and 30 years from research to technical adoption. internal rate of return on agricultural research is high (between percent).

17 The diffusion of new technology The diffusion rate of a new technology in an industry can vary over time, over space, as well as across industries. On the "demand side", the profitability of the new technology, its adaptation to local conditions, and the quality of human capital in the firms (education, experience) tend to have a positive effect on the adoption rate. On the "supply side", the size of the eventual market for the new technology, the quality of the infrastructure, and the quality of the research or extension programs tend to have a positive influence on the adoption rate.

18 The effects of technical change Technical change in an industry tends to reduce the cost of production. Under competition, lower cost will get translated into lower consumer prices and thus benefit consumers. The treadmill hypothesis: Since a new technology is never adopted at the same time by all firms in an industry, the distinction between early adopters and late adopters is always relevant. Early adopters gain from technical adoption: they have lower costs while the output price is still "high".

19 The effects of technical change #2 However, this is typically not the case for late adopters. Under output augmenting technical change, supply increases as the adoption of the new technology becomes widespread, putting downward pressure on output price. As output price declines, the late adopters profit declines, implying that late adopters lose. Thus, in industries where technical progress is high (e.g., agriculture), firms must continuously innovate if they want to stay in business. This is the treadmill hypothesis.

20 Pollution control Basically three types of regulation: 1. Direct regulation Technology standard Performance/emission standard Restriction on input use 2. Market-based/economic incentive regulation Taxes/fees Quotas 3. Institutional approaches Corporate social responsibility

21 Choice of environmental policy instrumen General principle: A policy instrument is more efficient the better it targets the source of a market imperfection Targeting emissions as the source of a negative externality by taxes or tradable emission permits is the most efficient approach Only if emission taxes are linked to high transaction costs, input taxes should be considered Only if emission and input taxes cannot be implemented output taxes should be considered

22 Optimal combination of inputs producing a certain level of output Isoquant

23 Cost=4*24+2*32=160

24 Technology or input standard Technology Standard Use a specific technology Fish farm model type 3 FREA plants. One chooses a technology standard to reduce emissions Input standard Can use no more than X tons per (choose one) per year (absolute!) per ton of fish produced (output) Obviously get very different results depending on what you choose

25 Regulator knows of technique to use only 20 units of feed and make Q*. Inefficient technique

26 The reasoning behind the regulation When you make Q*, you may use no more than 20 units of feed. You may use the technique the regulatory engineers have discovered (20,80) or any other technique that uses no more than 20 units of feed and has output Q*. Why this way? Regulator knows that it can be done Regulator has upper bound on cost Regulator is assured of a certain level of pollution which are related to the use of feed.

27 Technique (20,80), the basis for the regulation, costs 240 and makes Q*. Technique (20,50) costs 180 and is least cost way to make Q* using 20 units of feed

28 Some conclusions on regulation Unless the regulator has very detailed information on each producers cost and productions relationship he will never select the right technique or input standard. A performance standard on the critical emission parameters (nutrient) will be in accordance with the principle of regulation (target the source of emission). The advantages of this can be seen using the same diagrams where output is nutrient instead of fish. The firm will apply the least-cost combination of inputs. But performance standards/quota have also its shortcomings because to give the right level of the standard, information on the firms cost- and production structure is needed. Can be solved by allowing trade with standards/quota.