R&D, Innovation and Productivity Growth in Aquaculture: Implications for Future Growth? Frank Asche, Kristin H. Roll and Ragnar Tveterås

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1 R&D, Innovation and Productivity Growth in Aquaculture: Implications for Future Growth? Frank Asche, Kristin H. Roll and Ragnar Tveterås AQUA 2012, Praha, 3. September 2012

2 Global innovation challenges Aquaculture sectors need to innovate to be able to satisfy the increasing global demand for seafood With scarce farming area and feed raw material resources, and many environmental challenges, global supply of farmed seafood cannot increase at a sufficient rate without innovating further in several key technology areas.

3 Global production 160 Mill. tonnes Wild Aquaculture Total Source: FAO

4 Production of major internationally traded farmed fish species 1000 Metric Tonnes Cobia (ex. China) Turbot (ex. China) Barramundi (IN, TW, VN) Atlantic cod Olive flounder Coho salmon European Sea Bass&Bream Rainbow trout Channel Catfish Pangasius catfish Atlantic salmon Tilapia Source: GOAL 2011

5 is growing at a slower rate % Growth Production Volume 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2,0 0,0-2,0-4,0 % growth Production volume Production Volume (1000 Tonnes) Source: GOAL 2011

6 Slower growth demand (recession) or productivity (innovation) driven?

7 Example of productivity driven stagnation: US catfish Production (Metric tonnes) Production Catfish, USA Real price of live catfish Real price of live catfish (USD per kg) 2, , ,5 0 0

8 Example of productivity driven stagnation: Mediterranean Sea Bass and Bream Production (metric tonnes) Real Price (Euro per kilo) F 2011F Production Sea Basses and Breams Real price fresh Gilthead seabream Real price fresh seabass

9 Case: Salmon Aquaculture

10 Salmon aquaculture towards biological manufacturing? An industry which has increased its degree of control with the production process through many innovations in key technologies: fish feed, feeding equipment, IT based monitoring of live fish, vaccines and genetics Salmon production has moved from a technological regime with poor degree of control of many processes to one that can be described as approaching biological manufacturing. Many of the tasks that before was manual, such as fish monitoring, fish feeding, fish harvesting and equipment maintenance, have now been automated to a large extent.

11 Examples of innovations in salmon farming Innovation area Other Firm integration allowed Several licenses per farm allowed Equipment Feeding equipment Automated feeding Central feeding system Automated appetite regulated feeding FishTalk Fish health Coldwater Vibriosis vaccine Oil based Viral furunculosis fish vaccine vaccine Vaccine using DNA technology PD vaccine Feed Synthetic astaxanthin commercially available Increased availability feed raw materials Health feed glukan Amino- Balance More stable feed due to quality req. fishmeal Lipo- Balance Target Lice MicroBalance Time

12 Salmon farming technology

13 Products based on farmed salmon Carpaccio Cooked Burger Salmon taco Salad with smoked salmon Grilled Smoked salmon crackers Sushi Salmon spread

14 Innovation and labour input in salmon aquaculture The industry has moved from a labor-intensive production where workers had few formal skills, to a production which is more capital-intensive and where computer hardware and software based technologies have replaced several of the manual tasks of labor. At the farms the monitoring of the salmon, feeding, and environmental variables are based on sophisticated information technologies. Labor input has become more specialized; workers now tend to have certificates, and there is a much higher proportion of labor with a variety of specialized university educations.

15 R&D and input of feed and medicines Salmon feeds, which represent over 50% of farms production costs, have evolved dramatically partly due to large investments in R&D. Formulation of salmon feeds are now based on extensive knowledge of how different ingredients influence salmon growth and health and interact with each other. R&D has also played a significant role in disease management, where a number of targeted vaccines have been developed to combat various diseases. To some extent these have replaced curative medication such as antibiotics. Salmon farming now uses much less antibiotics per kilo of meat produced than is the case in terrestrial meat production such as pork and poultry.

16 The innovation system A technological innovation system can be defined as a dynamic network of agents interacting in a specific economic/industrial area under a particular institutional infrastructure and involved in the generation, diffusion, and utilisation of technology. The Norwegian government, particularly the Ministry of Fisheries - legislation, policies and funding. The private actors - salmon farming companies and their suppliers, feed companies, equipment and software suppliers, pharmaceutical companies, etc. Universities - suppliers of trained labor and researchers, R&D activities Independent and public research institutions - R&D activities.

17 R&D by performing sector and funding source in million Norwegian kroner Mill. NOK Private funding Public funding Universities Research institutes Private sector Totalt

18 Aquaculture R&D in Norway by funding source 1400 Mill. real NOK Public Total Private

19 Norwegian aquaculture R&D intensity R&D / sales revenue R&D per kilo produced * R&D /sales revenue (%) and R&D per kilo produced

20 Development of Norwegian production cost, export price and global production in salmon aquaculture

21 Innovations and costs Innovations in key technologies have contributed to a significant productivity growth in salmon farming. As a result the cost of producing farmed salmon has declined to less than 30% of production costs in the late 1980s. However, productivity growth in the salmon industry as measured by the cost of production per kilo of live salmon has stagnated in the recent decade The industry has been facing changing bottlenecks in production over time, such as diseases and food raw materials. It is highly dependent on new innovations to further increase the degree of control with production and increase productivity

22 Econometric specification to test for technological progress Translog long run cost function lnc = α 0 + Σ i α i lnw i + 0.5Σ i Σ j α ij lnw i lnw j + α y lny + 0.5α yy (lny) 2 + Σ i α iy lnw i lny + Σ t α t D t + Σ t Σ i α it lnw i D t + Σ t α yt lny D t + u. C is inflation-adjusted cost of production, y is output level, w i is the inflation-adjusted price of input i (i = Feed, Labor, Capital), D t is a vector of time (year) dummy variables (t = 1986,, 2008) for the years after the base year 1985, u is a stochastic error term, and α are parameters to be estimated.

23 Econometric specification to test for technological progress To improve the efficiency of the parameter estimates, the cost function is estimated together with the cost share equations S i = lnc/ lnw i, using Zellner s [5] seemingly unrelated regression technique. The model specification allow us to decompose technological progress into three components: (1) neutral (Σ t α t D t ), (2) input biased (Σ t Σ i α it lnw i D t ), and (3) scale biased (Σ t α yt lny D t ) components. The rate of technical change (TC) with these three components is specified as: TC = (α t α t-1 ) + Σ i ((α it - α it-1 )lnw i ) + ((α yt - α yt-1 )lny).

24 Sample Mean Elasticity Estimates from Estimated Translog Cost Function Variable Mean St.Dev. Min Max RTS E Feed E Labor E Capital TC No. of observations is 4904, except for TC (N=4723) due to omission of observations in 1985.

25 Production cost including feed, labor and capital per kg produced fish (Cost/kg) and the estimated rate of technical change (TC) TC Cost/kg Rate of Technical Change (TC) Cost/kg (in NOK)

26 Decline in rate of technical progress in salmon farming coincide with decline in aquaculture R&D intensity Technological cgange (TC) index TC index (1989=100) R&D / sales revenue R&D per kilo produced * R&D /sales revenue (%) and R&D per kilo produced

27 Causes of stagnation in productivity growth? Inability to reduce salmon mortality rates, which have fluctuated around 20-30% of the stock of live salmon since the 1990s. Growth in salmon production has lead to an increase in disease pressure, as fish population densities have increased both at the regional and farm site level. The salmon industry has not been able to innovate sufficiently fast to reduce disease losses.

28 Fish losses in % of stock of live fish Percent

29 Future challenges salmon farming Innovations required in all key technology areas. Salmon feed, which represents over 60% of total - continue replacement of scarce marine ingredients with vegetable ingredients Several salmon diseases which require improved vaccines and other strategies to reduce mortality Other environmental challenges - may not affect productivity directly, but will have consequences for the government s permission to expand

30 Future salmon aquaculture R&D Increase productivity of salmon aquaculture R&D - more innovations per million Norwegian kroner invested in R&D. R&D financed by the government and undertaken by government institutions have been highly necessary in the past to develop key technologies. Essential to have greater proximity between those who finance and undertake R&D and the industry to increase the innovation rate. To an increasing degree possible as the industry itself has much greater financial and human resources today than in the past to finance, manage and undertake R&D.

31 Global challenges Growing constraints on aquaculture: Increased environmental and food safety standards Increased scarcity of marine feed ingredients and farming areas Some aquaculture sectors can benefit from technology adaption from leading sectors But technological leading aquaculture sectors have to move the technology frontier

32 Global challenges no free lunch To sustain growth significant increase in R&D spending may be necessary Governments must focus on R&D which has significant public good component I.e. low private financial returns Private sector need to increase its spending R&D levy mandated through law? R&D tax deductions?

33 Thank you!