5. ECONOMIC ANALYSIS

5.1 Markets and Marketing Strategies

5.1.1 In assessing the feasibility of future aquaculture production, a vital consideration must be the market potential for the products from the proposed operations. Obviously, good returns are necessary if profitable production is to be established. Consequently, aquaculture operations which have relatively high production costs need to be based on products which have a reasonable chance of giving good profit margins to the farmer.

Moreover, where there is a likelihood that major increases in the volume of product supplied to the market, as is the case with the species considered for development in the Iskenderun Bay area, decisions to invest have to be based on assessments of the markets' capacities to maintain viable price levels in the future.

5.1.2 The three species under consideration - shrimp, sea bass and sea bream - can all be regarded as being of high value and, if current price levels were to be maintained, viable returns to farmers would be possible. However, major increases in the production of the species are likely.

5.1.3 At present, global production from both capture fisheries and aquaculture is approximately three millon tonnes of shrimp and six thousand tonnes of sea bass and sea bream. Of this, 600,000 tonnes of shrimp and 2,500 tonnes of sea bass and sea bream are traded internationally.

Shrimp markets are widespread with the major importers being Japan (210,000 tonnes), the U.S.A. (180,000 tonnes) and Europe (190,000 tonnes).

The principal markets for sea bass and sea bream are Italy and France.

5.1.4 For product from Turkey, European markets are clearly the most accessible. Distribution to Europe is possible by overland truck for frozen product and by air transport for fresh product.

Recent trends in Europe for shrimp from warmwater environments indicate that the market has expanded significantly and a general preference in southern European countries exists for whole, as opposed to tailed, shrimp. Good prices have been available for high quality product.

For sea bass and sea bream, prices in Italy and France have been high in recent years for fresh product although the size of the market is very small.

5.1.5 On a more general level, demand for shrimp in world markets has shown itself to be sufficiently elastic to absorb major increases in production. This feature of the market has been obvious throughout the mid-1980s when major increases in supplies from aquaculture were successfully absorbed.

Between 1980 and 1985, shrimp imports into the major markets rose significantly by 20% into Japan, by 62% into the U.S.A. and by 18% into Europe.

The capacity of sea bass and sea bream markets to absorb major increases in production from aquaculture is, on the other hand, unclear. At approximately 6,000 tonnes the market is small and limited to the Mediterranean region and to date there have been no major increases in supplies from aquaculture.

5.1.6 At the local level, average wholesale prices for shrimp (all sizes) varied from $6 per kilo (Mersin) to $8 per kilo (Iskenderun) in 1987. This market is, however, very small and the processing and marketing infrastructure and expertise, which is critically important for international shrimp markets, is lacking.

Similarily, the national market is relatively small at 4,000 tonnes and it is considered that the local and national markets would not be able to absorb at premium prices the large quantities of medium sized shrimp which would become available from aquaculture over a short period.

5.1.7 Local average wholesale prices for sea bass and sea bream were well below those achieved in Italy and France in 1987. At Iskenderun, average prices were $2 per kilo for sea bream and $4 per kilo for sea bass and, at Mersin, average prices were $2.4 for sea bream and $2.8 for sea bass.

To some extent, these prices reflect the small sizes of fish landed but the major factor influencing price in this region is distance from the main market in southern Europe.

Fish from the capture fisheries are landed in irregular and unpredictable quantities and buyers are consequently not in a position to establish regular air transport contracts which would enable them to supply fresh product to the Italian or French markets. The fish are therefore sold locally or frozen for export where prices for such product are well below those obtained by fresh fish.

5.1.8 A general marketing strategy for farms in the Iskenderun Bay area should be to produce for and sell directly to distributors in Europe where demand and size of markets are greater than national and local ones¹. Exporting whole frozen shrimp to France, Italy or Spain by freezer truck and fresh sea bass and sea bream to Italy or France by air transport would seem to be the best initial options.

¹ While the basic strategy advised is to pursue export opportunities, farms should also identify and develop any opportunities in the national market for some of their production in order to minimize risk.

Such a strategy implies that any new aquaculture industry must develop, along with its' fish production capabilities, appropriate processing and marketing capabilities. The models presented take account of this need and cost estimates include elements for processing, packaging and distribution to selling points within the importing countries.

5.1.9 Similarly, the price levels which have been selected for projecting income from sales have been derived from an assessment of what might be obtained within these markets. Thus, a price of $ 10,12 per kilo for whole frozen shrimp of medium grade reflects early 1988 wholesale prices in Spain for similar product. A deduction of 20% has been applied to take account of mark-ups and levies for wholesalers and intermediary agents. EEC import regulations, which apply a 0% tax rate to shrimp from Turkey, would put such product on a favourable basis vis-a-vis other shrimp producing countries, where import taxes applied range from 4.5% to 18%.

For sea bass and sea bream, price levels of $17.44 and $16,64 have been applied. These are based on average wholesale prices for these species in northern Italy in 1987 and similar allowances have been applied for intermediaries' mark-ups.

In order to indicate the possible effect of price falls from factors, such as major increases in supplies or enforced dependence on less attractive local markets through processing or distribution difficulties, more conservative price levels of $7.50 per kilo for shrimp and $ 13.35 per kilo for sea bream and sea bass have also been applied.

5.1.10 Finally, it should be emphasised that any decision to invest should be preceded by a more detailed investigation of markets than is possible in the present study. Markets for shrimp in particular are highly varied with different areas showing different preferences for species, product forms and grades of products and a more precise matching of the products from shrimp aquaculture with specific demands in particular markets should be carried out.

5.2 The Economics of Production

5.2.1 The cash flows for the models presented in sections 3 and 4 on shrimp, sea bass and sea bream production are summarized in Tables 2, 3 and 4. Details on the development of the farms and the corresponding phasing of expenditure, cost estimates and the bases for these estimates as well as the major assumptions regarding production capacity are given in these sections and in Annexes 2, 3 and 4. Note that the models for shrimp and seabream are not based on camera cast assumptions. Costs would have to be verified if models were to be used for investment purposes.

5.2.2 For both shrimp and marine fish aquaculture, land-based systems of production appear to be technically viable options for Iskenderun Bay at the present time. A comparison with current land-use is shown in Table 1. From this it is clear that, where suitable conditions for the construction of ponds exist, significantly higher returns might be possible from aquaculture in comparison with these from agriculture.

5.2.3 In projecting cash flows, inflation has not been taken into account and local cost estimates have been stabilised by translation into US dollars. The exchange rate applied is 1250 Turkish Liras to 1 US dollar.

5.2.4 Interest rates of 12% on loans for capital expenditure and 15% on working capital have been applied and it has been assumed that sources of finance would be 40% in the form of equity and 60% in the form of loans.

5.2.5 In the primary models, public subsidy possibilities have not been taken into account, although the need for these and the possible forms which they might take are discussed.

5.2.6 To give some indication of likely return on investment, the Internal Rate of Return is calculated for each model. The I.R.R. is the discount rate which reduces the sum of project expenditures and returns to zero. Tax deductions have not been applied.

5.2.7 Production costs per kilo have been estimated for the first full year of production (year 4).

5.2.8 It should be emphasised that the primary models are intended as indicators of basic commercial viability and they are set at a scale of operation which would enable them to function independently as integrated production, processing and marketing units. This framework is not intended to imply that public supports to reduce major development cost burdens should not be introduced or that the development of an industry structure based on smaller-scale production units is not possible.

5.2.9 The analysis of cash flows of the three different forms of production point to the following main conclusions regarding their commercial potential in the Iskenderun Bay area:

• The farming of shrimp in ponds and of sea bass and sea bream in ponds and concrete raceways involves high capital investment and long delays before positive cash flows are established.

• The farming of shrimp in ponds may in favourable conditions provide good returns on investment. Farming of sea bream in ponds can provide good returns on investment.

• Capital costs involved in the development of vertically integrated sea bass cultivation using concrete raceways are too high to provide good returns on investment in the short to medium term.

• The margins between estimated unit production costs (See Table 5) and likely selling prices indicate good potential for shrimp and sea bream produced in ponds.

• The margins between unit production costs and likely selling prices for sea bass produced in concrete raceways are narrow and indicate a high degree of risk for commercial operations based on this system of production.

5.2.10 The breakdown of the different cost elements involved in production (See Table 6) shows that the major costs are feed, processing and distribution and financial charges arising from high expenditure on capital items and the need for working capital to cover lengthy delays before returns are created. This analysis has particular relevance to possible government strategy for the development of the industry.

5.2.11 That is, if government wishes to enhance the development of aquaculture in the Iskenderun Bay region or to improve opportunities for small-scale development, it would be necessary within reasonable limits to provide supports which would reduce the burdens created by these major cost elements.

In particular, action could be taken to reduce dependence on expensive imported feeds, to organize and invest in centralised processing and distribution infrastructure and expertise and to subsidize capital and operating expenditure during the development phases to reduce the high financial burdens on the commercial operator.

Critical areas where constraints exist and where government support would be appropriate include the provision of technical expertise, the establishment of central seed and training services and the provision of land and infrastructure to serve farms in remote areas.

5.3 Summary

The ability of species produced by aquaculture to provide and maintain viable returns to farmers is vital. Shrimp, sea bass and sea bream are all high value products with current price levels which can justify relatively high-cost methods of production.

The development of a successful aquaculture industry is highly dependent on good environmental conditions. Risks from pollution or pesticide contamination should be avoided.

The various markets' capacities to absorb future increases in production is an important consideration in investment decisions. In this context, the market for shrimp has to-date a demonstrated capacity to absorb major increases in supply. The capacity of the market for sea bass and sea bream to absorb such increases is, however, not clear.

In the Iskenderun Bay area, markets and processing and distribution capabilities are weak and, consequently, a marketing strategy which involves farms processing, distributing and selling directly to importers in other, stronger European markets is advised.

By following such a strategy, good returns could be possible; investigations and analysis suggest that viable operations can be established for shrimp and sea bream produced in ponds. However, in both cases, pilotscale operations should be developed and tested as a basis from which to establish the industry.

If government support were available for reducing the burden arising from the high costs involved in developing commercial aquaculture and for providing critically important expertise and services, the chances of successful development would be greater. Moreover, the provision of such support would mean that the development of small-scale aquaculture operations could be undertaken.

TABLE 1
COMPARISON BETWEEN LAND USES - AGRICULTURE AND AQUACULTURE

* Combined crops.

Source of data for agriculture: Ministry of Agriculture, Provincial Directorate, Adana.

Note: Production costs in aquaculture are also significantly higher; returns on production cost approximately similar.

MODEL 1. SHRIMP (SEMI-INTENSIVE PONDS)

TABLE 2. (a) SUMMARY OF CAPITAL COSTS, OPERATING COSTS AND CASH FLOW (US $'s).

(b) Return on Investment:

Equity Required (4): US $ 765,000, Internal Rate of Return > 50%

(c) Effect of Change in Price.

The following results are obtained by reducing the selling price from US$ 10.12 per kilo to US$ 7.50 per kilo.

Equity Required : US $ 825,000.
Internal Rate of Return = 40%

NOTES TO TABLE 2:

1. Based on $ 10.12 per kilo selling price, 80 hectares, 2,880 kilos per hectare.

2. Interest changes are based on:

1. 12% per annum of 60% of capital costs.
2. 15% per annum of 60% of operating costs for years 0 to 4 and 15% of 50% of operating costs thereafter.

Sources of finance are projected at 40% equity and 60% loans.

3. Depreciation is based on:

1. Land and buildings - 20 years.
2. Equipment - 50% at 10 years, 50% at 5 years.

4. Equity is based on 40% of the maximum fixed and operating capital required.

MODEL 2. SEA BREAM (SEMI INTENSIVE PONDS).

TABLE 3. (a) SUMMARY OF CAPITAL COSTS, OPERATING COSTS AND CASH FLOW

(b) Return on Investment:

Equity Required 4) US$ 420,000
Internal Rate of Return > 50%

(c) Effect of Change in Price:

The following results are obtained by reducing the selling price from US$ 17.44 to $ 13.35 per kilo.

Equity Required : US$ 420,000
Internal rate of Return = 44%

NOTES TO TABLE 3:

(1) Based on US$ 17.44 per kg selling price, 17 hectares, 3 529 kg per hectare.

(2) Interest charges as in Table 2.

(3) Depreciation - see Table 2.

(4) As in Table 2.

(5) As in Table 2.

MODEL 3. SEA BASS (INTENSIVE HATCHERY AND RACEWAYS)

TABLE 4. FINANCIAL ANALYSIS

SUMMARY OF CAPITAL COSTS, OPERATING COSTS AND CASH FLOW. (US $'S).

(b) Return on Investment: Equity required: $1 650 000
Internal Rate of Return = 19.5%

NOTES TO TABLE 4:

(1) Based on US $ 16.64 per kilo selling price for 100,000 kilos. plus fry sales (0.16$ each)

(2) As in Table 2.

(3) As in Table 2.

(c) Effect of change in Price:

The following results are obtained by reducing the selling price to $13.35/kg (fry 0.16 US$ each)

Equity required: $1 750 000
Internal Rate of Return = 7%

TABLE 5. UNIT COST OF PRODUCTION (US$/KG)

1. SHRIMP (SEMI-INTENSIVE PONDS): US$ 3 736/KG

2. SEA BASS (INTENSIVE - HATCHERY AND RACEWAYS): US$ 10 912/KG

3. SEA BREAM (SEMI-INTENSIVE - PONDS): US$ 7.870/KG

TABLE 6. PERCENTAGE SHARE OF PRODUCTION COSTS