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Is it a good idea for Marine Harvest to manufacture feed?
Wednesday,4 April,2012 07:48:56
Feed costs are a large component of aquaculture production with the ultimate cost depending on how efficient the feed is being managed and the feed composition. Depending on the species, feed costs can easily exceed 60 percent of the cost of production. I have always been a strong advocate of vertical integration in aquaculture operations and see Marine Harvest’s interest in determining if they should set up their own feed operation as a smart move. Of course there are some that are concerned that perhaps it is not, although I would venture that most of these are feed companies. I think that Marine Harvest may find that this is not necessarily straightforward but it is achievable and is a good business decision.
Salmon farming is big business and it is an agricultural commodity. As competitive and various economic forces act upon profitability, it makes perfect sense to look at eliminating the profits that are being given to the feed manufacturers. Despite the popular notion that formulating feed is a complex process and that only feed companies are qualified to do so, the reality is that the trick in formulating a high quality feed is to find the right partners and employees who understand the issues. Feed companies do not have a monopoly on this. There are many sources of the resources that are needed.
One of the most challenging parts of the process is raw material acquisition. This requires an in-depth understanding of commodities, the ability to store very large amounts of raw materials under conditions that are conducive to ensuring that they stay high quality until they are used and how to juggle the demands of large feed mills. None of these are issues that Marine Harvest should have problems with. Raw material prices are going to increase. There are few who think otherwise. This will drive up feed prices and further pressure companies to adopt feed formulations that may not be optimal. Not all feed companies are the same. Some feed companies are more progressive in terms of the amount and quality of research that is done to ensure that feeds offer the best possible mix of nutrients for optimum production of protein. Given the difference between what it costs to manufacture feed and what feed is sold for, I would venture that at the volumes that Marine Harvest will require, they could easily conduct their own research and development and have money left to spare.
I see this as a good move and encourage others to consider this route. Yes there are challenges but as raw ingredient costs go up and commoditization causes prices swings that make it difficult to ensure profits all of the time, it makes absolute sense for companies that are nowhere near as large as Marine Harvest is to consider manufacturing their own feeds. There is no one best approach to take, although cooperatives may work better in some areas than out right ownership. I believe that we are at or near the time for a number of farmed species where giving profits to feed mills and hatcheries ceases to make economic sense. This will increase competitiveness and profitability as well as encourage feed manufacturers to become partners where this is viable and in the end those companies who take the risks will see these risk pay off with better production, greater control over costs and for their share and stake holders, increased profits and returns on investments.