It is to be assumed that when deciding on investing in the construction and operation of a Mediterranean fish hatchery a potential entrepreneur has some interest in the subject and some knowledge of what a hatchery is in terms of facilities and how it operates. Essentially before investing in the construction and operation of a hatchery there are some basic questions that the future hatchery owner should ask himself as a sort of check list in order to make a decision. Typical questions, assuming that he does not own a site, would be:
a. Where can I establish the hatchery?
b. Where could I sell the fingerlings?
c. At what cost can the fingerlings been sold?
d. How should I produce to have an acceptable margin?
e. Are technology, technicians and equipment locally available?
f. Are there any schemes to assist funding these type of relatively new technologies?
g. Is the banking system willing to finance hatchery construction and operation? Or are they penalizing the funding by increasing the interest rates on this type of business?
The previous questions mean dealing with aspects of: existing legislation and regulations for use of sites (a), marketing considerations (b and c), technology choices (d and e) and, financing and financial analysis (f and g). They have been listed here because all of them interact and have a bearing on the final decision of the investor and should be dealt with simultaneously. Also, it has to be remembered that the answers to the various questions will vary considerably from place to place in the Mediterranean making this sort of check list analysis compulsory for the investor before deciding to embark on hatchery construction and operation.
Fig. 89 - Mediterranean fry production (in millions) from 2001 to 2004
The section that follows will give the potential investor some guidance on the various choices to be made. Regarding financial analysis and calculation of financial indicators on the investment, such as IRR or NPV, hatchery construction and operation is no different from any other agro-industry. Therefore economists should have no problems applying the same reasoning to evaluate fixed, variable and financial costs, as well as profits. Specific models are not discussed here because the methodology is not specific to Mediterranean hatcheries. The variability that characterizes investment in the Mediterranean countries, in terms of cost of land, construction costs, energy, manpower, cost of money etc, would invalidate any attempt to provide an example which could be applied to the entire region. In addition, the changes in technology are rapid and impacting on the economics so that a single model, even if the conditions in the region were more homogeneous, would become obsolete very rapidly.
Therefore, it has been decided to write about considerations that the manager or investor should take into account on the various elements of cost that have to be considered when selecting a design for a new hatchery.
Fig. 90 - Mediterranean production by countries
The choices implicit in the construction of a hatchery, and therefore in the design of the project, depend not only on zootechnical choices but they are also linked to managerial choices with impacts on the investment. These design choices will affect the economic capacity of the hatchery.
Putting aside on purpose the consideration related to infrastructure typologies (greenhouses or workshop, water intake open or in pipelines, etc.) which are usually affected by local or technical reasons, and putting aside the elements of cost, there are two typical choices characterizing the project and management of the hatchery:
a. High automation of procedures and controls with limited use of personnel;
b. Low automation of procedures and controls with greater use of personnel.
Both choices have advantages and constraints. The first choice requires additional funding, favorable conditions as far as the availability of personnel, and infrastructure that can support the high automation.
Before entering into the pros and cons of high or low automation two fundamental concepts should be borne in mind:
Staff are always a key factor in production and may represent a fundamental bottleneck. As much as the investor may wish to install sophisticated equipment for monitoring, management and automation of procedures, nothing will replace the interface between staff and animals in a farming operation. The risk involved in a hi-tech investment which does not properly consider the choice of staff is very high. It might even fail.
Any structure built to work with a low level of automation whilst considering the possibility of using automatic devices, can be easily transformed into an infrastructure with high automation. Therefore, one choice does not preclude the other. A possible upgrading could be planned at the time of project design. This is particularly true in cases not requiring programmed investments such as the case of public funding to be implemented in a short period of time.
Fig. 91 - Low technology versus high technology choices for sediment removal
PROS AND CONS OF HIGH AUTOMATION SYSTEMS;
Optimization of management fees
High investment cost in infrastructure
PROS AND CONS OF LOW AUTOMATION SYSTEMS;
Low ratio product/staff time
The best approach would be to plan a very modern and extremely flexible facility, reaching its maximum level or automation about three to five years after its construction. This would be a facility with an initial higher cost, but will be able to grow in efficiency as it becomes progressively a high automation facility.
Once the level of automation and the time span to achieve it has been decided, construction typologies and related technology have to be decided. A hatchery can be built as a greenhouse, as a prefabricated building or even as a reinforced concrete building.
These decisions obviously have to be related to the work which is going to take place inside the building, (for example it would be difficult to create a properly insulated facility to work on photo and thermoperiod controls in a non-insulated greenhouse intended for agricultural production). Moreover these decisions have to be linked to the economic and financial plans related to the investment planned by the entrepreneur, as well as to the depreciationof the various possible choices
In fact, from the initial steps of the project there is a close link between funding or financial aspects and the implementation of the project in terms of design and technology. To underestimate this link leads often to unachieved dreams or to projects which have to be drastically reviewed in the course of their implementation.
Fig. 92 - Costruction typologies: greenhouses versus concrete
As in many other production related activities where the cost of money has a big influence on the economic feasibility of the enterprise, so in the case of hatcheries, timing of construction has an important role in the implementation strategy to be adopted. Entrepreneurs approach this matter in two different ways:
1. Completing the construction of the entire facility, testing it, before starting any production;
2. Completing the construction in sections could be operative even if what follows in the production process would not be yet ready.
The first option could be implemented only in cases where the impact of payment of interest would be very low, which is rare. In all the other situations, it is clear that the second option will be the preferred choice. However, in this second case due to the higher risk incurred (e.g. larval rearing units could be producing 35 day old postlarvae with the risk that the weaning section would not be ready in time and the entire production would have to be discarded), a few but important precautionary considerations are necessary to limit the risks:
1. To include a specific delivery schedule with clearly established penalties for delays in the construction contract to be signed;
2. All common civil works must be built at the same time in order to save on their construction;
3. All the services and systems should be completed (pumping stations, PVC piping, generator, monitoring and alarm systems) before starting any production;
4. Then follow with the building of the production units maintaining the same order as in the production procedures (e.g. algae, rotifers, Artemia...) leaving last the broodstock unit (because it is most likely, with rare exceptions, that breeders will not produce eggs the first year). Some time for troubleshooting should also be allowed.
Fig. 93 - Construction and production strategic choices
When dealing with the construction of a hatchery that has to produce profits, particular attention should be paid to economies of scale. This could also be related to the minimum number of fry to be produced and sold to obtain an acceptable return, and profit margin, in relation to the capital invested. In this context, the direct involvement or not of the owners in the production activities would also have a bearing on the results of the economic performance of the hatchery. A small hatchery managed by a family could be apparently penalized by limited resources. But it could coexist in the market with larger facilities thanks especially to the flexibility it offers on personnel costs and to the direct involvement of the same people in the economic results and distribution of profits. Therefore, the size of the facility would not be the only thing that counts on the economies of scale but also how the personnel costs and profits are distributed.
On the other hand, a decision in favour of investing in an industrial facility to be managed by external staff can also be extremely valid. In this case the lesser flexibility and lack of direct involvement of the owners in production should be compensated by production numbers that could absorb occasional scenarios of price drops and/or small difficulties with production.
In fact, the most difficult choice for a production model is something in-between. For example, a hatchery of average size (and the concept of average size should be adjusted to the prevailing local technologies) will have to face the high production numbers and the marketing capabilities of large hatcheries. It will also be unable to compete with small family hatcheries in terms of flexibility and personnel costs.
The construction of a hatchery in modules is strictly related to the design phase and can be a valid alternative for the future development of the hatchery in order to adjust to variable market and price conditions. A modular design has higher initial investment costs (some investments will have to be calculated for the expected final size of the hatchery), but also allow an easier adjustment between production capacity and growing objectives. Indeed, a correct modular design may be the key to success for many hatcheries.
Apart from purely administrative regulations, which obviously vary from one country to another, the choice of the project construction typology has a strong influence on the depreciation of the investment made by the company.
The choice of light infrastructures (such as greenhouses) combined with simple project typologies (such as open circuit) and species which are simple to rear (such as seabass), will result in moderate investment that, however, will have to be repaid quickly as the infrastructure will have a short life span and will deteriorate rapidly. On the other hand, hatcheries designed with heavier infrastructure (such as brick buildings), more sophisticated systems (closed circuits for example) and producing several species, will require higher initial investment that can be repaid over a much longer period. Both choices, with the continuum of intermediate situations, pose a decision problem which has to be studied carefully by the entrepreneur. It is nevertheless important to point out that a hatchery is a very hostile environment for most materials due to the location of the facilities and the utilization of seawater. The duration of materials is considerably reduced compared with similar uses for other activities in dry or freshwater environments.
In addition to considering the markets where the production of the hatchery will be sold, there are three other important points which influence financing aspects in a hatchery. First is the relative simplicity of the facility. Second is the relatively rapid turnover generated by production (when compared with the growout phases). Third is the fact that there will be a natural and gradual improvement in the production corresponding to a learning curve which should take about five years to reach the plateau of production of the facility.
One more aspect should be considered. If the hatchery is going to operate to supply fingerlings for a growout farm in the same company, then its construction costs can be integrated in the overall financing of the company. Otherwise, if the hatchery is going to operate as a separate company selling fingerlings to other farms, then the financing of its construction can follow the normal channels through banks.
Investors must bear in mind that aspects of maintenance of facilities and equipment have to be taken into account. Since the hatchery environment is particularly aggressive for materials and equipment, maintenance represents an important element of expenditure, both in terms of requirements of manpower and spare parts. It is thus recommended to select products and equipment which value quality over low cost. Equipment should be easily serviced locally. Spare parts should be available quickly: otherwise the investor will need to purchase a large amount of spare parts in advance.
Before entering into the analysis of the various items involved in the operational costs of a Mediterranean hatchery, it would be opportune to highlight some aspects that characterize the operational cost of this activity and have a considerable influence on the various elements of a budget.
The first aspect to be considered is that this is an extremely variable activity, as it is a relatively new one and is subject to important changes in a short period of time. The technology, the markets, the farmed species, the credit for the sector, the productivity of the facilities, are all very sensitive variables, and even today are subject to oscillations that suggest a very cautious approach in the analysis of operational costs. Too much optimism is certainly a serious danger and this is perhaps quite often the first risk factor for the entire sector.
A cautious approach to the analysis of operational costs would involve several steps which would progressively transform the base cost into something more similar to the real situation the entrepreneur will face:
1. Base cost, which is the list of standard cost items, but not adjusted to the local production situation of the company
2. Average cost for the last five years, or costs which are derived from production experience. Even if this average is not representative for a specific financial year, it will, give the entrepreneur a better idea of how the company operates.
3. Costs including the risk or loss elements of the last 5 years, which are the costs indicated in the point above augmented by the risk factor, which is derived from the risk/losses experience of the company in the last five years.
4. The above plus the financial cost incurred would provide a more real picture of what the operational costs are going to be.
In the sections that follow only the cost items to be considered for the operating base costs (step 1 above) will be discussed.
Fig. 94 - Evolution of manpower needs (man/year) to produce 10 million fry
The base operating costs elements are composed of two main groups of cost items: fixed and variable costs.
Fixed costs are cost items the entrepreneur will have to incur and which are not directly linked to the amount of production of the hatchery.
A. Permanent technical staff
For many Mediterranean hatcheries the cost of permanent technical staff is the highest item of the base cost elements. Therefore, the managers, in many cases, tend to reduce it as much as possible, transferring this cost to variable costs, recruiting temporary technical staff. In the case of a hatchery this approach would not be correct as well-trained permanent staff represent perhaps the best asset of the company. Success in production is not only related to the utilization of equipment, but is rather related to the combination of management and equipment.
Therefore this approach must be avoided as far as possible or, eventually, the use of temporary staff must be limited to less than 30% of the total staff time. Permanent staff should also be estimated in terms of total number of hours of work or of staff per quantities of product. This obviously should be related to the total size of the company.
B. Administrative staff
The cost of administrative staff is usually separated from that of the permanent technical staff. This is due to the fact that, being in many cases rather small companies, it is not always convenient to recruit administrative staff on a full-time basis. In many cases, managers make use of external personnel or services. Even if the cost of the administrative staff is not directly linked to production, it can impact substantially on the balance of the company, especially in the more developed countries of the Mediterranean where the existing bureaucracy requires a considerable amount of work.
With leasing becoming more common in many countries it would be possible to transfer part of the cost of equipment as rapid amortization costs. When this arrangement is possible, it is rather convenient for hatchery operations because of the continuous technical progress and the rapid deterioration of materials and equipment in a marine hatchery. However, in countries where investment is subsidized or supported by the state, leasing arrangements cannot always be used. They may not be compatible with the public funding provided.
Depending on the country and on the level of automation, service costs can be very different. Telephone, water (which would have also an element as variable costs), and sewage, are all costs which have lower limits which cannot be reduced and which are linked to the registration of the company as a user of these services.
E. Tax, licenses
Tax costs are strictly related to the regulations of the country in which the hatchery will operate. They are an important element to take into consideration when preparing a feasibility study. License costs could be related to the use of consultants and, in this case, are directly related to negotiation between the company and the consultant. Quite often, license costs are linked to the number of fish produced. This approach which, in principle, could appear to be interesting for the manager, can be tricky in a market the size of which is not entirely known and which could vary substantially from year to year. In fact, the consultant may tend to increase hatchery production to the maximum possible and, in the case of a crisis in the markets, the company would be forced to pay royalties without selling the product. The best solution would be to set a minimum production fee that could be increased by the addition of a variable royalty.
Variable costs are those directly linked to the production plans and therefore are the costs elements which can be changed in relation to the production targets of the year. Nevertheless, variable costs are not always directly related to production. Electricity is a classic example of a variable cost with some, although usually limited variations in relation to the quantity used. Feeds and oxygen are typical variable costs which are not related to tariff/consumption brackets, but their costs are related to negotiation with the suppliers and therefore to consumption levels. Nobody would pay the same prize per kg of feed if he had to consume in a year 100 kg or 10 tons.
In a modern hatchery, energy is surely one of the highest variable costs. This is because a lot of complex equipment is used. Managers should pay attention to this cost item since it could be optimized easily, both in terms of direct consumption, but also in relation to the contracts to the signed with the companies. Quite often energy costs are considered unavoidable and managers may tend to pay limited attention to the optimization of this cost item. On the contrary, an analysis of the various production activities and the energy consumption involved in each of them could lead to substantial savings of 20-30% of the annual costs without affecting the operation of the hatchery.
Feed costs are surely an important cost element, but in order to carry out a rigorous analysis, up to four different cost categories can be identified:
1. Cost of products required for algal culture and for rotifer rearing. This is directly proportional to the amount of fry planned for production and is also a function of the type of technology adopted. For instance, if for rotifer culture the hatchery uses commercial diets the quality of the final product will be more uniform and indexes of production will be higher. In the case of utilization of yeast only, we will get lower production/volume ratios and lower production costs.
2. Cost of Artemia cyst. This is now an international commodity. Large market price variations, which can reach 700%, influence heavily this element of cost. With the rapidly increasing cost of Artemia cysts in the last years, many operators would think, wrongly, that this cost element could influence heavily and directly the final cost of production of fry. Luckily this is no longer true since, in recent years, the use of Artemia has been reduced substantially. There are now also feeds replacing it. In fact, often an increase in the cost of Artemia of US$20/kg has a reduced impact on the final sale price of the fingerlings.
3. Cost of enrichment products. This is also a cost directly proportional to the production, but strictly related to the technological choice. It is not easily replaceable if the operator is interested in production of high quality fingerlings.
4. Cost of dry feeds. This has been going up recently as dry feeds replace a large part of the Artemia biomass previously utilized. Dry feed should be sub-divided into two categories: larval feeds and feeds for post-larval stages of high quality and relative high cost, but used in limited quantities than those employed in the nursery and pre-fattening stages with a much lower unit cost (up to ten times less than the first group). Therefore, from the above it is evident that considerable attention should be given to the optimization of the use of the last category as it has a considerable impact on the cost of the fingerlings.
Oxygen is a relatively new cost item for hatcheries as, only in the last decade or so, has this product become of common use for production of fingerlings. Because of this, even today, it is relatively difficult to give an estimate of the impact of oxygen on the final cost of the fingerlings. Although poor use of oxygen will continue, a process of optimization in its use will start in the hatcheries, although at present it is not very common. Oxygen supply systems dilute oxygen in water and therefore increase the availability of oxygen as gas for farmed fish. At present, an average efficiency does not exceed 25-30% which means that in the best of cases 70% of oxygen is wasted. In addition, extra energy costs are needed to dissolve oxygen efficiently. The operator should find a compromise between the use of energy and efficiency of oxygen transfer to optimize costs.
This cost element is a recurring one for small hatcheries which do not have a breeder section, or else should be calculated for medium and large size hatcheries as the annual cost to maintain and reproduce the broodstock.
The increasing attention given to the quality of the eggs has resulted in a progressive increase of this cost in recent years.
Fig. 95 - Example of relative weight of cost categories between hatchery production and an intensive growout facility (concrete tanks)
E. Temporary staff
As previously indicated the use of temporary staff is a strategic choice of the entrepreneur, as this type of personnel should only cover routine duties which are seasonal in nature and should have limited technical capacity (grading, extra-ordinary cleaning and maintenance activities). We would insist on the fact that personnel is one of the most important assets in a hatchery and therefore it should be used in a continuous manner all year round, avoiding the recruitment of temporary staff as much as possible, except for activities such as the ones indicated above. Moreover it is important to note that this is a personal view of the authors and one of the various strategies adopted on the use of personnel. In many hatcheries the owners maintain a constant rotation between staff involved in routine and nonroutine duties.
F. Sales and distribution
Sales and distribution cost are essentially irrelevant in the case of hatcheries except for the case of transport between hatcheries and growout facilities. This is not a real production cost but an additional service that could be provided by the hatchery. Sales costs are minor since the number of clients and the frequency of contacts is relatively limited. In fact, with the exception of a few very large Mediterranean hatcheries, only a few have a full-time commercial section, and often this function is covered by the production manager together with the administrator.
Financial costs are closely related, as in any other agro-business, to the way the hatchery has been financed and to the wealth of the investor. It would thus seem unnecessary to mention them if it was not for the slow and progressive annual increase in the production that modifies the cash flows and the related financial costs. In other types of activities, once the production facilities are built and the staff is trained, the planned production capacity is rapidly reached and maintained with the exception of catastrophic events.
On the contrary, in a hatchery one often finds a slow increase in production capacity. Due to the seasonality of the production cycle this can last three, four or even five years. This phenomenon which is seldom considered during the project preparation is often the cause of financial crisis of the hatchery and of the related increase in the financial costs. Cash flow requirements follow the process mentioned above and very often in the first years of operation are considerably higher than expected.
Moreover, because of the seasonality of production, the cash flow requirements tend to vary with a peak that, in Italy for example, coincides with the May-June period. In Italy, this is a period of maximum financial exposure. Outgoings are high but income is low. Payment for fingerlings produced in autumn and sold in February-March has not yet arrived because very often they are paid for up to 120 days after collection from the hatchery. Obviously the months in which cash-flow requirement peaks appear may differ in other Mediterranean countries according to the calendar of production and the sales agreements. Payment for fingerlings is an essential element of cash-flows. With the exception of the initial years, when the hatchery reaches its regular production target, they can be the main source of worry due to the frequent and unforeseen delays in payments, complaints or, in the worst case, bankruptcies.
Altough hatcheries and growout farms are two sides of the same coin, hatcheries are in a better financial position. This is due to the shorter production period. It takes 4-5 months to produce fingerlings of 2 g against the 14-20 months that a growout operator will take to bring the fingerling to a marketable size of 350-400g. That is why payment for fingerlings may take from six months to a year.
To answer this question is foresee the future. Unfortunately this is not yet possible but nevertheless some rules of thumb can help in providing a partial answer.
How to produce. Taking into account the company economic set-up and its position on the market and local area. Avoid a static view of the production as final goal and rather trying to sell profitably the hatchery production and therefore adapting to the dynamics of the markets. Quite often, in fact, production targets have taken the upper hand against the optimization of the economics of the hatchery, leading to large and unjustified economic losses which could have been avoided with a more careful analysis of the dynamics of the markets.
What to produce. What the market demands in terms of species and quality of product (which is a key factor in the long term). At the same time being aware of innovations, not only new species, but also better services, improved quality, different sizes of product and different time to sell the product in the market.
As for other topics dealt with in this manual, they have to be regarded as subjective views based on the experiences of the authors.
From what has been discussed so far, it is evident that hatchery operation and in general aquaculture as well is still a sector in which risks are high compared to other industrial activities, and again not fully understood as in the case of pathologies, deformities, markets, etc.
As with other zootechnologies it is impossible to exclude all the possible risks. But, to a certain extent, the hatchery manager should try to prevent what it is possible. The sector is usually divided in two categories of operators; the optimist and the pessimist. Belonging more to the second than to the first category, we believe that it will be impossible to avoid problems (Murphys Law...) but to foresee the problem and to limit the impact is the duty of the hatchery manager.
Apart from the general risks typical of any entrepreneurial activity the main specific risks of the hatcheries are:
Disease risks, and
Risks related to non-foreseeable natural events.
To insure a hatchery is at present a rather complex business, but it is becoming something possible and a duty of the management. In the previous paragraphs on risks, it has been indicated that the duty of the hatchery manager is not to ignore them, but to prevent them and to create mechanisms to reduce the impact. Insurance is an instrument of the collectivity, which, if well structured, will permit losses that the single operator would not be able to absorb alone without high costs in terms of money and personnel. Good insurance, in fact, is nothing more than a collective cost paid to a third party by several participants who are aware that in the collectivity someone could have problems.
The main concept is therefore that the insurance should cover mainly for losses of medium and serious importance and not for the small losses. This limits annual losses and enables the hatchery to confront a serious situation which could otherwise lead to bankruptcy.