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2.1 Business Risks
2.2 Pure Risks

Aquaculture is an industry of great diversity. This is because there are a large number of species produced (almost 200 species of aquatic animals and plants are recorded by the Food and Agriculture Organization of the United Nations (FAO) and there are many systems and farming practices which vary according to different resources in different parts of the world. Consequently any attempt to produce a simple framework for the identification of the most common risks is not easy, even within a genera of animal or plant species. For example, the risks of trout production in Denmark are substantially different from those in Italy; and the risks for cage farming salmon in Scotland are different from those in North America or in New Zealand. Similarly, in the Philippines the risks of onshore pond production of milkfish are different from those of shrimp production.

In addition, the exposure to different types of risk can change during the life cycle of a species. These differences may be subtle if the species has a simple life cycle, or they may be dramatic if the species has a complex life cycle with major metamorphoses. The pre-smolt production of young salmon in the freshwater hatchery stage, for example, has risks greatly different to those during grow-out in offshore marine cages. Consequently there is a range of differences in terms of risk between one species and another, and each with its own sub-set of associated risks.

Fortunately, despite all the complicating differences arising out of the peculiarities of species and life histories, there is a substantial number of components of production which are common from one practice to another. For example, moving water in a controlled way is a common denominator of many production practices; so too is the treatment of water in hatcheries, such as heating, filtration, and sterilization. The engineering associated with the mooring of structures in the sea is a common element of several practices in the industry, for example, sea cages used for marine fish farming or floating rafts for growing molluscs. Similarly, although all aquatic animals and plants have different life histories, many species are subjected to the same pathogens, fungal infections, and parasites which, for farming purposes, may often require the same biological and chemical treatments.

Finally, equally common to all production systems and practices, and which have no relationship to species or life history, are the pure risks, such as the climatic perils of high winds, unusual wave forces, floods, drought, abnormal temperature conditions, and natural hazards of earthquakes and volcanic activity.

The following framework summarizes the principal areas of risk faced by the farmer in the pursuit of profitability in the aquaculture industry. They are separated into (i) business risks, that is, risks directly related to the business of producing aquatic animals and plants; and (ii) pure risks, that is, the risks of life and business in general.

Business risks

1. Production risks

(i) Operational risks

Risks which interrupt the production cycle, such as mechanical failure, failure of technical processes, late delivery of supplies and services

(ii) Technological risks

Risks associated with lack of adequate technology, such as hatchery propagation, or lack of technical information and expertise

(iii) Financial risks

Risks due to government financial policies, use and dependence on government policy instruments, terms of credit, changes in operational costs

(iv) Social risks

Risks due to actions of special interest groups, such as environmentalists and conservationists

2. Market-related risks

Risks due to loss of product quality, lack of market information, actions of third party (the marketing middleman)

3. Consumer-related risks

Risks due to loss of consumer appeal, health regulations, actions of third party (the consumer)

Pure risks

(i) Physical risks of nature

Risks due to extreme climatic and meteorological conditions (wind, flood, drought, earthquake, volcanic action)

(ii) Social and political risks

Risks due to theft, malicious damage, and fraud

(iii) Liability

Risks due to legal actions against the farm

The examples are far from exhaustive but they indicate the principal types of risk for each process which are important for farmers in the aquaculture industry to consider. In their own right, each area is worthy of identification and should be given appropriate thought in the context of the particular operations of each individual farm, its location, the market system, and the target consumers of the product. To neglect this exercise possibly creates a third risk category, namely management risks, which would identify elements of poor planning and poor business control.

2.1 Business Risks

2.1.1 Production risks
2.1.2 Market-related risks
2.1.3 Consumer-related risks

The business risks are those directly related to the production of aquatic animals and plants, and the associated commercial business of the industry. The risks are conveniently sub-grouped into three activities or processes described earlier, namely production on the farm, marketing, and preparation for consumption.

2.1.1 Production risks

Production risks are the principal concern in the daily routine of the farmer, as the production process is his sole responsibility. There are many and varied risks in the production process which can reduce profitability, compared with those which may occur in the subsequent processes of marketing and consumption.

Production risks can be conveniently categorized into (i) operational, (ii) technological, (iii) financial, and (iv) social risks.

(i) Operational risks

A large number of farms have failed to attain profitability in one or more years because of accidents or major disruptions in the production process. A principal cause of disruption in daily operations is often mechanical failure of plant and equipment. Mechanical failure is an area of weakness which requires expert engineering assistance.

The most important plant and equipment on the farm are those maintaining life-support systems, for example, those which deliver water, or provide aeration and oxygen. Farms can be divided into two types depending on their systems for life-support, namely (a) those which depend, to some degree or other, on the natural movement of water bodies to deliver water (such as gravity flow, tidal movement, and wind-assisted circulation), and (b) those which require water delivered by mechanical means.

The former include the simple ongrowing practices which are located in natural water bodies and watersheds, and which do not require any mechanical or human intervention to deliver water. Among these operations are floating cages, submerged cages, floating rafts, net pen enclosures, and self-sustaining ponds. Although these practices have some specific risk management elements of their own, such as appropriate moorage systems and pollution, they are all considered relatively simple and uncomplicated in terms of their life support system.

The latter, those which require controlled water delivery, include operations relying on artificial ponds, tanks, raceways, and all hatchery complexes. All have inherent risks of mechanical failure. Failure may be with pumps, pipework, valves, any heaters or filters, or water treatment processes. It may be primary mechanical failure of components themselves, or mechanical failure due to a break in utility services (electricity, gas, and mains water), or fractures in the system due to accidents (caused by physical damage or sudden low temperatures). Risks associated with mechanical life support systems are significant for the farmer to a high degree.

A number of farming practices are not dependent on regular water delivery but function on water treatment and recirculation. A life support system is even more at risk of failure when there are a number of mechanical components. For example, recirculation systems are often constructed as "package" units, with all mechanical components having back-up components and safety systems. However, these only add to the mechanical complexity of the system and increase the risk of equipment failure almost exponentially.

Life support systems using mechanical recirculation have a use on farms, for example, in cases where water resources become suddenly and unexpectedly limited. They are also of use for "low-density" activities, such as quarantine tanks and broodstock tanks, and also in stock transportation. However, with life support systems for high-density production the risks of mechanical failure are high, and there are greatly increased biological risks associated with them. They are used invariably in locations where water resources are in short supply, and when the high-value of the product justifies the initial large capital investment and operating costs.

The risk of disruption in daily operations of the farm's life support system is alleviated to some degree by the automatic alarm system. However, automatic alarm systems are themselves mechanical devices capable of failure. Furthermore, they invariably only monitor a limited part of a site. Alarm systems also require a human response, and by the right individual capable of dealing with the problem quickly. Although useful to the mechanical operations on a farm, alarm systems often provide a false sense of security.

The alternative or supplement to the automatic alarm is the interested and well trained reliable watchman (who may have the secondary job of site security), with a telephone or radio link to the farmer or technical staff.

The life support system is the principal system of the farm, and must function constantly. The response to any mechanical failure of the system must be fast, and the action taken must be appropriate. Automatic alarms have a role to play but must be used judiciously. Watchmen and employees must be trained on the interpretation of each alarm, and the consequential actions required.

There are a number of routine activities in the daily operation of any farm which may be described as "hazardous" to the stock, and create risk. Typical hazards are those which expose the stock to a new environment, albeit temporary; for example, all handling activities required for such things as injection of veterinary medicines to treat pathogenic organisms, counting, weighing, measuring, or transferring stock around the farm, and also the use of chemical baths.

Finally, yet another potential breakdown in the smooth operation of the plant is the lack of supplies, particularly seed from hatcheries, and feed from manufacturers. It is vital that the farmer has prompt delivery of quality seed at the time required, and it is necessary that a farm has facilities for the proper storage of feed and other supplies.

Risks to lost production through disruption in the production process can be alleviated by livestock insurance. Insurance is a proven technique for the farmer to divert risk (see Section 4.3). However, as production risks are so diverse some underwriters will often only agree to share the risk, and often restrict the cover in various ways. The stock mortality insurance market which exists at the present time is relatively sophisticated, both at underwriting the risks to stock and applying the technique of risk management.

(ii) Technological risks

Aquaculture is a new technology, and the industry is still emerging. It cannot be assumed that the risks associated with aquaculture production are the same as other advanced and established businesses, such as agriculture, horticulture, or fishing. Comparisons are meaningless. However, it is interesting to compare man's level of knowledge of the natural history and biology of a few key aquatic species produced by aquaculture with those of certain domesticated land animals, cereals, or vegetables. For example, if it is assumed in relative terms that about 75% of the biology of the human is known, then probably about 50-60% of the biology of the major domestic land animals, poultry, and crops is known. But the knowledge of the biology of the aquatic animals and plants probably ranges from 20% (for such as the salmonids, and carps), down to 5%.

Even if this comparative quantification is only indicative of a relationship, it illustrates the lack of information which the farmer has about aquatic crops which are intended to give profits on his investment. His lack of information is compounded further by the dimension of water in which he has to work, and all its physical, chemical, and biological ramifications involved in the production equation.

The inadequacy of aquaculture technology is a significant risk to the industry at the present time. For example, the farmers themselves have the greatest need for information which will improve and guarantee farm production. Technological information is of prime importance to the future of the industry. It is up to the individual farmer to make certain that he is well informed about those technical developments which will help him reduce his risk. Production risks are increased where a high level of biotechnical skill is required, but is not readily available. In Japan, Taiwan Province of China (PC), and the USA, some years ago, it was remarkable to note how many new farms located themselves as close as possible to centres of research and development, thus reducing the risk of technical ignorance.

(iii) Financial risks

Many financial risks are common to all business enterprises and therefore might be considered "pure risks" (see Section 2.2). However, there are always some conditions which make them peculiar to the aquaculture industry, and therefore they must be considered by the farmer as factors which can influence the profitability of the enterprise.

Aquaculture farmers, like agricultural farmers, invariably require repeated loans. In addition to loans for capital construction, the farmer usually requires initial operational loans. These may be followed by short-term loans for annual supplies of seed, feed, new equipment, or expansion. Thus the government monetary policy is important (see Section 5.1). For example, government measures to control inflation or high interest rates on loans obviously have a bearing on the farm's profitability.

The government's policy toward a new industry, such as aquaculture, may include a number of non-fiscal incentives for the farmer. These may include grants for development, development infrastructure (such as industrial zones), government equity shareholding, government insurance, leasing of facilities, and even compensation schemes. There may also be subsidies for construction, equipment, and supplies, labour and manpower schemes, and price support. Finally there may be credit on advantageous terms through quasi-government credit schemes, special loans with deferred repayment schedules, and loan guarantees. One or all of these non-fiscal incentives may be available to the farmer and, where economically sensible, they should be used.

Similarly the government often implements a number of fiscal incentives for a new industry with a special policy toward duties, taxes, and quotas. Typical fiscal incentives include duties on physical inputs, import-export duties of products, corporate taxes and income taxes, including tax exemption on commodities earning foreign exchange, quotas, and levies on sales.

It is important for the farmer to determine continuously the extent to which these non-fiscal and fiscal incentives are making the farm operations profitable, as government incentives are usually removed once the industry is established.

Governments may also support the developing industry through a number of valuable services, such as market services (market information, intelligence, promotions, etc.), and technical services (research and development, extension, technical training schemes, etc.). Again, these are to be taken advantage of by the farmer, but with the recognition that these services will not necessarily be there for ever. A change of government, or changes in government policy, are risks to the utilization of capital by the farmer.

The farmer has also to be aware of changes in the industries which are peripheral to aquaculture, and which will influence his profitability. For example, changes in the prices of fish meal, a staple of the majority of animal feeds, will change the price of the feed he purchases. Increases in the price of fuel will increase not only his transportation costs, but also general energy costs for pumping water, and heating water in the hatchery. Changes in salaries and wages obviously alter the monthly balance sheet.

The profitability of any farm is closely tied to the farmer's management of capital and cash flow, but also to his overall financial awareness of other changes going on about him which have a direct or indirect effect on the profitability of the enterprise. The farmer will continue to need short-term credit to maintain the operation, and the lending institutions must make certain that credit is always available.

The lending institutions, to-date, have made little attempt to understand the intricacies of farm operations and their capital cycles, and invariably offer credit with terms they normally apply to land-based farmers, or fishermen. As a result, the lending institutions have made a number of inappropriate investments in the sector because of their conditions for the loans. In most instances these losses could have been avoided by a risk management assessment first. Risk management has a great deal to offer the well-informed farmer and the lending institutions in terms of the utilization and management of investment capital.

(iv) Social risks

National goals for the aquaculture sector in many countries, and the individual profitability of many farms, are invariably programmed through a series of development phases. This projected expansion, when considered in its entirety, is making considerable demands on natural resources. As a result, many other industries, equally important to the economies of countries and local areas, now compete openly and vigorously for the same resources.

The principal competitors of the aquaculture industry are those industries which also require water and adjacent space (such as electrical generation, agriculture, forestry). But aquaculture is also facing increasing competition for both inland and coastal waters and space from tourism and recreational industries. Furthermore, all are subject to the increasing demands of the environmentalists who want no industrial development at all around these natural resources.

Disorganized and ill-considered expansion often brings social resistance to any proposed development, as well as hostility from other economic competitors. For example, there is already evidence of social hostility against the aquaculture industry in parts of Europe and North America. Typical accusations are unsightliness and smell of farms, dangers to wildlife, and hazards to navigation. Social unacceptance is often exacerbated by the speed with which any new industry develops in its formative years, mainly because society does not readily embrace substantial short-term changes. The corollary, the impoundment of agricultural land, occurred over many hundreds of years and therefore caused no general social unrest.

In many European countries, at least, all "land" below high water lines belongs to the crown or state, and the general public has full right of access - a right regarded as sacrosanct. Any impoundment of tidal and offshore areas of the sea, or any restriction of the right of access to public coastal lands and inland water bodies, for the purposes of production of aquatic animals and plants is proving to be unacceptable and results in public outcry.

For the individual farmer social problems may result in the non-renewal of a lease (if he does not own the property), or limit important expansion plans. They may also lead to the loss of rights to take water for the farm, or to install costly water treatment to purify farm effluents. These are all risks to his business.

Social behaviour may also effect the individual farmer in other ways. For example, again mostly in the developed world, a zealous group of "animal rights" activists have caused damage by illegal actions, including the release of fish from cages. They have also been responsible for the release of minks from farms, for the release of dolphins from aquariums, and animals from zoos and medical research centres. Potentially such a group is local, and a small risk to farmers as a whole, but a risk none the less, particularly if there is an organized and concerted effort against, say, salmon farmers.

There are obvious risks to the future of the industry if farmers do not get reasonable access to the key natural resources of water and adjacent land. Once again these risks can be alleviated to some degree by better information. It is important that farmers as a group are well informed about other industries in the region, and programmes for development. However, it is also necessary for governments to be equally informed about the aquaculture industry, and allocate resources appropriately. A number of countries, for example, Hong Kong and Singapore, have zoned offshore areas solely for the use of the aquaculture industry, and in the USA a number of industrial marine parks have been developed where farmers have a reserved area for farming, and share communal water delivery systems with other farmers and other industries.

2.1.2 Market-related risks

In theory, once the production process has ended, and the healthy live animal has left the farm gate (or the on-farm processing plant), and payment has been made, the product is no longer the responsibility of the farmer. This, under normal circumstances, would be the end of his risk. In practice, unfortunately, this is not the case. The farmer is still exposed to risks which may change the quality of his product until purchased by the consumer. If the quality changes, then both the consumer and the marketing middleman will not make future purchases, and this obviously will have an influence on the profitability of the enterprise.

These risks the farmer now shares with the marketing middleman, as the middleman is also dependent on a satisfied consumer. Therefore, to avoid the risks of loss of quality of his product, and the loss of future consumers, it is important that the farmer works with a marketing system and middleman whom he can trust to handle his product correctly. Some farmers, of course, choose not to take this risk, and process and retail their product to the consumer directly, either at the farm gate or in local urban markets.

Aquaculture products, particularly those which are known to the market as "seafood", are gaining substantial ground in the world's food markets. It is highly probable that they can continue to increase their market share for some time to come, and to hold it. This is due to increasing world populations, increasing affluence, and static natural resources.

Identification of the market for the farm's product and forecasting of its growth trends by the farmer require considerable knowledge and skill. Basic market information and market intelligence are often provided through government services or active farmers' associations. However, using that knowledge to programme farm production, or to invest in new facilities, etc., is an individual decision. Furthermore, it is not always possible to know the plans of the farmer's competitors to increase their market share and attack the same markets.

For the farmer to compete in the market place it is important that once again he is well informed. In addition, his product must leave the farm for post-harvest handling (slaughtering, processing, packaging, and transportation) in perfect condition, and the quality must be maintained until purchased by the consumer. The flexibility of aquatic farming to harvest the product at the time of peak demand and optimal market prices is one of the advantages which aquaculture has over competing products supplied by capture fisheries. On the other hand, the farmer often has to deal with problems which are not evident in wild fish, such as diseased fish, malformations or unbalanced growth, "muddy" taste, and poor bone/shell-to-meat ratios.

Risks to product quality can often be avoided through processing cooperatives. These are invariably geared to large institutional markets, such as the catfish industry in the United States, and the processors apply stringent quality control methods to the benefit of all producers.

2.1.3 Consumer-related risks

Again, in theory, once the consumer has purchased the product in the market place, the responsibilities for the quality of the product by the farmer and the marketing middleman have ended. This, under normal circumstances, should be the end of their exposure to risks. Again, in practice, this is not the case. The farmer and the middleman are dependent for their individual profitabilities on repeated purchases by the consumer. Consequently the risks continue until the product has been consumed, and a verdict of approval has been given. The risks, however, are now shared by the farmer, the middleman, and the individual consumer.

The extent of the risks can be alleviated to some degree by selling a quality product to the same consumer (a franchise, or restaurant chain) who can be relied upon to handle it properly. The quality of aquatic animals and plants in particular is very susceptible to poor handling in the kitchen, and wrong cooking. For the individual consumer the risks can be reduced by information on short-term storage, cooking instructions, and even suggested recipe preparations. On a larger scale, the circle of consumers can be increased (to reduce the risk) by consumer programmes sponsored by the marketing and farmers' associations.

The greatest risk, not only to the individual producer and his marketing middleman but to the industry as a whole, is if the health of the consumer is endangered in any way. This may be the result of ignorance or the lack of attention by the farmer, for example, if his mollusc beds are directly affected by pollution, or if his shellfish accumulate the toxins which cause paralytic shellfish poisoning, or the fault of his middleman with unhygienic processing of the product, or poor storage. Any risks to public health invariably cause closure of the producer's farm and stringent examination of all neighbouring farms. Immediately all consumer faith in the product (and sometimes other farming products) is lost and, for all intents and purposes, the market is lost and may be irrecoverable.

2.2 Pure Risks

2.2.1 Physical risks of nature
2.2.2 Social and political risks
2.2.3 Liability

Pure risks describe a group of risks common to life and business in general, and are not specific to the aquaculture industry. Their occurrences are not selective, but the consequences of some of them have a priori relevance to the aquaculture industry compared with many other industries.

2.2.1 Physical risks of nature

Many pure risks are due to the uncontrollable physical forces of nature. Typical risks are damage to the farm through wind storms, floods, droughts, earthquakes, and even volcanic actions. Unfortunately many farm investors do not research the background meteorological conditions of the site of the farm, and only learn of the extremes of nature once the farm has been built and an incident has occurred.

Of all these risks, those which have specific relevance to the industry of aquaculture are those which concern water. All farms are obviously entirely dependent on water. Many are constructed in natural water bodies, such as cage farms in the sea or inland lakes, or net pen farms, or coastal enclosures; others are pond farms or tank farms on land adjacent to the coast or inland water bodies which rely on pumped water. Therefore the prime pure risks are flooding, drought, changes in salinity, and depositions of silts.

The consequences of flooding are not only physical damage to the farm structures, and consequential loss of fish. Floods invariably cause great changes in the quality of water which can damage the aquatic animals or plants of the farm. These may be a simple change of salinity, say from freshwater to brackishwater, or heavy depositions of silts, or more complex changes if the flood waters carry pesticide residues from nearby agricultural practices. Flood waters may also introduce predators into a farm, or new pathogens, and also provide an opportunity for farm animals to escape confinement.

Drought is equally serious. Water provides the aquatic animals and plants with oxygen for life, and the volume of water passing through the farm regulates the carrying capacity (or the biomass of life which the farm can support). As the water resources decline through drought, the carrying capacity drops below profitable levels, the growth rate decreases below optimum, and finally all the stock may die.

The success of the production process is therefore highly dependent on the volume and quality of water, and any changes to the norm through the consequences of climatic forces are extremely serious. It is therefore imperative that the farmer is well informed of the climate characteristic of his locale, and the chances of certain incidences, such as levels of 100-year flooding, abnormal high spring tides, and incidences of drought.

2.2.2 Social and political risks

The second sub-group of pure risks includes a number of common social risks and less common political risks. Of the former, these are typically theft, malicious damage, fraud, and of the latter riot, sabotage, and possibly war.

The social risks are obviously the most immediate concern to the farmer. Poaching, in particular, has been a major risk to farmers. Poaching is likely to continue and probably increase as such practices as cage farming increase, with large numbers of high-value species held in a compact and convenient enclosure. Similarly, some large farms may be 200-400 hectares in area, and almost impossible to patrol.

Random malicious damage is less of a concern to the farmer unless motivated by the special-interest groups of people described in Section 2.1.1. (iv), and any business enterprise must always give some regard to the possibility of fraud. Fraud can be external, from individuals and companies supplying goods and services, or internal, from employees bookkeeping or handling cash, or diverting the product.

2.2.3 Liability

Any business, not only that of aquaculture, is always at risk from the legal actions of employees, clients, and the general public. The origins of the actions are not always obvious. For example, the purposeful treatment of nets with a toxic TBT-based anti-fouling paint have resulted in a number of liability claims from the general public. Similarly the risks to public health from the production of aquatic animals and plants in polluted waters, or the poor handling of molluscs, have both resulted in bad publicity for the industry, and sometimes legal actions.

These examples give evidence of the vulnerability of the farmer's profitability, not only from total loss of sales but also liability actions. They illustrate how careful the industry must be to reduce its exposure to such risks, even though the technological information to guide the industry is lacking (see Section 2.1.1 (ii)).

The liability exposure of the industry will increase as the industry evolves. Certain areas in the production process (on the farm itself) have already indicated that they will require special attention. Among these may be listed the transmission of disease at all levels, damage to the environment by farm effluents, health and safety of workers, health hazards to the public, and the recent issue of genetic conservation of natural stocks.

In turn, the liability of the public and other industries will increase as the numbers of farmers increase. There is also evidence that certain areas will require special attention, such as improvement in the standards of performance by designers, contractors, and by equipment manufacturers, and also the protection for farmers against pollution from other industries.

Unfortunately, although attention in these areas will benefit the farmer, the incidences of liability themselves are invariably accompanied by a disruption of the production process, and hence the loss of short-term profitability. Consequently these liabilities are still direct risks to the enterprise.

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