Shrimp fishing isn’t easy, as previous issues of Shrimptails have shown. Neither is finding investment for aquaculture, as investors have proven to be wary of financing the sector. Nonetheless, aquaculture may well be a solution to the demand of feeding the growing global population. However, for this to be a sustainable solution, shrimp will need to be farmed responsibly, and this requires investment.
IDH, the Sustainable Trade Initiative, is a public-private partnership convener and a firm believer in the ability of sustainable production and trade to benefit the planet. With the support of the Walton Family Foundation, IDH has led the development of Investment Guidelines for Sustainable Aquaculture in Indonesia. IDH believes that by strengthening collaboration, combined with innovation and smart use of technology, the aquaculture sector can be more efficient and profitable, and will attract investment.
While the guidelines focus on Indonesia, they can be seen as a blueprint for the shrimp sector worldwide. This article dives deeper into the best practices mentioned in the guidelines, risks and risk mitigation strategies that investors might encounter and put to use, as well as the financial models proposed by IDH – all with the goal of establishing why now is the time to invest in sustainable shrimp.
Potential risks
Before looking at ways to diminish investment risks, let’s take a look at what those risks might be. As with any other investment, aquaculture is not without risks. In its guidelines, IDH identifies three main risk categories investors can come across: Production risks (such as failed crops), market risks, and political and social risks.
The first category encompasses the most common risk: occurrence of diseases. This can often be attributed to poor seed quality or to poor health management which is a result of a combination of inadequate pond preparation and poor water quality management – temperature fluctuations, low oxygen concentration or toxic substances in the water. Lack of communication and collaboration between neighboring farms can also cause the spread of disease.
The second risk category identified in the guidelines relates to market risks. One of these risks is price volatility, which can be caused by shrimp diseases or supply-demand dynamics, and rejections of products at the border – due to non-compliance with hygiene, public health and animal health standards – all of which can lead to financial losses and can negatively impact the reputation of a producer and hence its associated investor.
Another type of market risk IDH warns investors to be wary of is reputational risk. For example, investors should be careful to only invest in producers complying with existing legal frameworks and who respect ecosystems, not in producers that have recently converted mangrove forests or wetlands into farms. Neither should they support poor farming practices, such as farms that pollute water, have a track record of disease outbreaks and use antibiotics.
Social conflicts as a result of farming can also have a negative reputational effect. The Investment Guidelines mention the example of the salination of agricultural land due to the discharge or leaking of brackish water from shrimp farms. This can ultimately lead to livelihoods being lost and social conflicts arising. Several NGOs have consequently campaigned against the consumption of cultured shrimp. Investors should also avoid illegal, unreported, and unregulated (IUU) fisheries, as it is the investors who will be accountable for the entire production process from boat to market. IUU fisheries also often negatively impact the environment, and have been associated with poor labor conditions.
Lastly, political and social risks are also associated with aquaculture. These can relate to bureaucracy, sudden policy changes due to elections, limited cooperation between ministries (as is the case in Indonesia), and social friction and conflicts.
Risk alleviation
Having taken a look at the risks that investors might want to consider before investing in aquaculture, let’s examine possible ways to alleviate those risks. Investors paying close attention to the practices of the farms they invest in can go a long way towards helping to reduce these risks.
IDH has identified parameters for investors to determine whether their investee has the potential to become a successful investment. The first one is siting: IDH encourages investors to invest in farms that comply with aquaculture zones and plans, in water bodies that have undergone a carrying capacity study and that are developed in collaboration with local communities. Farms that use a central water drainage system, seed from certified hatcheries, use certified feed with data on the source of the fish products, and employ Better Management Practices (BMP) or Good Aquaculture Practices (GAP) are also excellent candidates for investment.
Moreover, investors should keep an eye out for farms using technology and data tools, for example by adopting farm data management tools, automatic feeding units and water quality sensors, as this technology significantly reduces the risk of crops failing. Farms should also have access to diagnostic services and offer good labor conditions.
Collaboration is another key point according to IDH. Farmers that are part of a cooperative or farmer group can agree on a water management system and on ways to respond to disease outbreaks. They can also hold joint assets, which can be used as collateral. Moreover, IDH recommends investing in farmers that have long-term relationships with trading partners and that participate in value-chain collaboration initiatives. A successful example of value-chain collaboration is the Seafood Task Force (STF), which works collectively to address human rights abuses and illegal fishing in the seafood supply chain.
The STF has, until now, mainly been active in Thailand and is currently exploring other geographies like Vietnam. Indonesia should gear up to embrace the approach. Interested companies should engage with offtakers involved in the STF and encourage them to initiate STF activities in Indonesia in order to strengthen the oversight of the supply chain.
The financial bit
Even if producers comply with all best practices for sustainable aquaculture that we’ve outlined here, investors may still see hurdles that need to be overcome, and they may find it hard to recognize bankable solutions. Fortunately, IDH proposes four solutions to tackle the most common risk categories.
Firstly, by sharing risks along the value chain. Where collaboration can always reduce risks (such as production and market risks), the risk-sharing model is designed to share financial risks between different players, reaching an acceptable risk level for financial institutions, farmers, exporters, banks, etc. For example, risk sharing can occur between a local bank and a farmer cooperative, or by financing smallholder farmers through seed or feed suppliers. In agriculture, one example of a risk-sharing agreement can be illustrated in the partnership between IDH, a bank and a coffee trader, aimed at doubling the coffee incomes of farmers in Uganda within two years. IDH is now applying the same principle to the aquaculture sector.
Another way to ensure a profitable investment is by investing after break-even point, which is the moment in a production cycle when total expenses and revenue are equal. If investors were able to assess the break-even point accurately, this would reduce the risks borne by them.
Other options that IDH proposes are introducing Islamic finance, a profit-sharing mechanism aimed at preventing a loss in profit, without any interest, and crowdfunding, where small amounts of money are collected from large groups of people via the internet. The latter option gives investors the added benefit of online access to the investee’s progress, allowing them to monitor their investment.
Next steps
These guidelines were developed in consultation with several financial institutions and in partnership with Indonesia’s Financial Services Authority (OJK) and the Ministry of Maritime Affairs and Fisheries (KKP). Over the next few months, IDH, together with these institutions, will visit East Java to deliberate how to bring the guidelines to life with specific financial models. And from these initial guidelines, in partnership with Aqua-Spark – one of the few investment funds focused entirely on the aquaculture industry – IDH will develop international principles for investment in sustainable aquaculture.
Meanwhile, actors across the globe can already benefit from these guidelines. For one, farmers may well be more likely to comply with best practices and use the latest technology, knowing it can help secure investment and avoid great losses. If investors only invest in developing sustainable practices, they give a great incentive to make the aquaculture sector more responsible. And that’s a future we should all be invested in.
Image courtesy of Seafood Trade Intelligence Portal
