Pinching Pennies for a Market Edge

Fellows Fall 1998

By Kristan Hutchison

June 07, 2009

Fall, 1998 -- Lorenzo Wiese-Hansen watches his salmon on a video screen as he tosses food pellets, which sink into the water like pennies.

As soon as the salmon stop nibbling, he stops feeding them and pushes the portable video monitor to the next net cage at his Anacortes, Wash., fish farm. It's one of the many ways fish farmers control their expenses, allowing them to market salmon more cheaply than the Alaska fishing industry can. In 10 years the farmers halved the store price of farmed salmon.

Competition from pen-raised salmon has hurt Alaska's fishing industry, as farmed salmon drive down prices and fill markets. Alaska salmon are wild, but they're not free or predictable. While salmon farming companies find ways to save pennies, invest in better equipment and spread the costs over a year-round harvest, Alaska fishermen and processors must pay for all their expenses from whatever is caught in an unpredictable few months.

``Our seafood industry is really hamstrung because we're so seasonal, we're so volatile,'' said Terry Gardiner, president of Norquest Seafoods, with processing plants in Ketchikan and other Alaska towns. ``We really have one hand pinned behind our back.''

In a good year, it actually costs less to catch a salmon in Alaska than to grow one in a pen, but all the added expenses of processing and transporting the fish make it more expensive by the time it reaches the store.

Fishing costs vary depending on the boat, the species and the season. But on average, Southeast salmon fishermen who owned their boats each spent about $57,700 in 1994, based on a survey by state fisheries economist Jeff Hartman in Juneau. That was a good year, so the fishermen pocketed $21,000 on average, after expenses were paid.

Fishing could be cheaper and compete better with salmon farming, said James Anderson, an economist and editor of Seafood Market Analyst, an international publication. He and Anchorage economist Gunnar Knapp said Alaska's fisheries would be more efficient with fewer boats allowed to catch more fish in the most cost-effective way and backed up by a better on-shore infrastructure.

As it is, Alaska fishermen and processors gamble each year with forces beyond their control, while farmers can modify even the food their salmon eat to save money.

``Beneath it all, technology and knowledge are the driver, not all that much different than biotechnology and computers,'' Gardiner said. ``New technology comes along and boom, things take off.''

Pennies per pound

The cost of raising fish fell 30 percent in the last 10 years and continues to decline, said Joe McGonigle, head of the Maine Salmon Farmers Association. It costs $1.36 to $1.86 to raise a pound of Atlantic salmon in British Columbia, and even less in Chile.

The biggest expense for fish farmers, which has no parallel for fishermen, is the grocery bill for the ravenous fish. Penned salmon eat oily brown pellets that smell like pet food. Food is 40 to 47 percent of the cost of raising salmon at the fish farm Wiese-Hansen manages in Anacortes, Wash.

The biggest expense for fish farmers, which has no parallel for fishermen, is the grocery bill for the ravenous fish. Penned salmon eat oily brown pellets that smell like pet food. Food is 40 to 47 percent of the cost of raising salmon at the fish farm Wiese-Hansen manages in Anacortes, Wash.

Labor accounts for another 30 percent of the cost in Anacortes, compared to 37 percent for Southeast Alaska salmon fishermen.

In Chile, farmers spend 60 percent of their money on fish food because labor is so cheap.

The high cost of food has driven fish farmers to find more efficient ways to feed fish, including using underwater cameras to avoid overfeeding. Breeding programs also favor salmon that grow faster with less food.

The goal is always to reduce the amount of food needed to grow a pound of fish. In Chile, the average ratio is now 1.45 pounds of food for every pound of fish, less than what a chicken eats to gain a pound of edible meat. Some Norwegian farms can get a pound of fish per pound of feed.

The salmon farming industry is also trying to reduce the cost of the feed itself, which is made of fish meal, fish oil and some vegetable materials. Concentrated rapeseed/canola protein, soy, worm-meal or animal parts could be cheaper alternatives.

About 20 percent of the feed cost is pigment. The coloring is fed to farmed fish so their meat develops the same pink tone wild salmon get by feeding on crustaceans, said Eugenio Larrain of Fundacion Chile, which oversees fish farms in the South American nation.

Chilean biologists are breeding fish that will develop the color with less pigment and B.C. researchers found a more effective pigment created naturally by red yeast.

Preventing and treating disease is also costly. Fish farmers are switching from expensive antibiotics to cheaper methods, such as vaccination and leaving sites empty for several months after harvesting so they will self-clean. At Fjordo Blanco in Chile the fish are fed vitamin C to boost their immune systems and kept in remote sites where there is less chance of catching diseases.

Location, location, location

Some areas are naturally better for salmon farms than others, giving them an economic edge. As with beer and bagels, the key to good salmon production is in the water. In southern Chile, the Humboldt Current flowing north from Antarctica keeps the water temperature a nearly constant 48 to 57 degrees.

``Those temperatures are ideal for the growth of salmon,'' said Thomas Kehler, director and general manager of Salmoamerica, a salmon farming company in Puerto Montt in southern Chile.

Salmon are more apt to get sick in warmer water and grow slower in colder water, so salmon in countries where the water temperature varies more have uneven growth.

In Norway the water temperature fluctuates from 34 to 64 degrees. Southeast Alaska has a similar range of temperatures. Fishery research biologist Bruce Wing has seen the temperature in Auke Bay go from an occasional winter low of 34 to a rare high of 64 degrees.

``We have water highly productive all year,'' said Luis Veas Saenz, an aquaculture technician for Invertec, a fish farming company in southern Chile. ``This is the primary reason fish grown here is cheaper.''

It takes 10 to 14 months to grow a coho salmon to a 10-pound harvest size at the Salmoamerica site on Chiloe Island in Chile, said site manager Jorge Uribe. In the wild, the same type of fish takes three to five years to reach maturity, getting most of its growth in the final months.

``Our fish grow as much in one month as theirs (Alaska's) do in two,'' Saenz said. Chilean salmon companies also don't have to pay as much for people to raise or process the fish. Senior fish farm managers make the same as their counterparts in North America, but below management, the employees make a third of what is paid in the United States. Salmon processors in Chile earn $300 to $450 a month, less than some people earn in a week on the slime line in Alaska.

``It's the labor differential that actually allows the Chileans to be competitive,'' said Bill Drope, who has managed fish farms in Canada and Chile, ``because if there wasn't that wage difference there wouldn't be a Chilean salmon industry.''

With cheap labor, Chile doesn't need to replace employees with expensive equipment, as Norway has done. Chilean farmers employ three times as many people as those in Norway for the same amount of salmon.

In comparison, Alaska fishermen fall in between, using twice as many people to haul in the same catch as a Norwegian farmer, but fewer than in Chile.

``We do things with a different mix of capital and labor,'' said Kehler, of Salmoamerica in Chile. ``We are slower to implement technology, but we throw away a lot less money on things that don't work.''

Regulations can also make or break an industry. In Chile and Norway the government smoothed the way for salmon farms, investing in research, developing the infrastructure and making it easy for companies to lease bays or inlets.

The opposite is true in Washington state, where it has become so difficult to get a salmon farm permit most companies gave up, said Dan Swecker, a state legislator. Swecker spent $5,000 and five years to get such a permit. That permit, which went through 13 appeals before being approved in 1992, was the last one granted in Washington.

Regulation adds to the expense of fishing in Alaska as well. Not only is there the obvious cost of permits, but also fisheries managers set rules to protect wild salmon that also drive up fishermen's costs, said Anchorage economist Knapp.

``Our goal in Alaska has never been to keep costs low,'' said Knapp. ``We deliberately catch fish in ways that are relatively expensive compared to what we could do.''

Both the fishing and fish farming industries need to be regulated to protect the environment, but the public-hearing process and use of lawyers for every farm site could easily make it too expensive in the United States, said fish economist James Anderson Requirements to use expensive technology, such as the land-based farms B.C. environmentalists want, could essentially banish the industry to friendlier waters.

``We're participating in a global economy,'' Anderson said. ``Anybody who doesn't think we are, you're completely crazy.''

Stringent regulations in British Columbia and a moratorium on new fish farms forced Heritage Aquaculture to expand in Chile, said Bill Drope, who was sent to run the Canadian company's new Chilean farms.

``It's cheaper to produce salmon here,'' Drope said, ``but of course transporting them into the U.S. offsets much of that advantage.''

To market, to market

Chile's salmon companies have worked with the transportation industry to overcome the 4,000-mile disadvantage by repaving roads and expanding cargo facilities.

Chile's transportation infrastructure is built on farmed salmon, as is clear from the Lanchile Cargo signs lining the road to the airport in Puerto Montt. Each ad shows a skyscape of clouds with either a Lanchile plane or a salmon flying over. Clearly Lanchile considers cargo synonymous with salmon.

``The most important product in Chile today is salmon, sin duda (without a doubt), for the air industry,'' said Oscar Salazar, sales manager for FastAir Cargo in Santiago, Chile, ``because it provides a product all the time.''

Half the cargo flown out of Chile is salmon, about 55,000 tons last year. Ten years ago the airlines and Santiago airport didn't have the capability to handle that much fish, but because salmon is a year-round export of high value, the cargo companies were able to expand their fleets and infrastructure to accommodate it.

Now the cargo terminal has enclosed, temperature-controlled loading docks able to handle 20 trucks at once. Fish and other produce are kept in refrigerated rooms until jets are loaded in the early hours of the morning. The 32,000-square-foot facility handles 400 tons of perishables a day, three quarters of them headed for Miami.

That still isn't enough space. The volume of salmon shipped increased 18 to 22 percent during the last five years and keeps rising. This year the cargo facilities will be tripled as part of another airport expansion.

Cargo companies work on volume, so as the volume of salmon flown increased the transportation costs plummeted. In 1990 it cost $1.75 to ship a kilogram of salmon and now the price is 75 cents, said Sergio Acevedo, head of Alfinco Air Cargo. He expects the price to keep going down as volume goes up.

``We have to travel a lot of mileage to be on the market in the U.S. or Japan, but the industry can handle that just because of its volume,'' Acevedo said. ``It's crazy. In a week the market moves about 1,400 tons just of salmon.''

Some of Chile's main roads have also been repaved or improved, making it easier to truck the salmon from the processors in southern Chile to Santiago, 560 miles away. Norway also has an extensive road system linking the coastal communities where salmon grow to international airports. That allows farmers to raise a fish hundreds of miles north of the Arctic Circle and still get it from the pen to the United States in 24 hours, fisheries economist Anderson said.

``In Alaska the roads aren't there and it's hard to justify the planes being there because it's seasonal,'' Anderson said.

Farmers have other economic advantages as well, including the ability to plan ahead and market their fish. They control their harvest to avoid times when the market is likely to be glutted with fish from Alaska and prices will be low, letting their fish grow and gain value for another month.

``You look at how we do it, we don't have a clue how much fish we're going to have,'' said Ketchikan processor Gardiner. ``We still do it cowboy style. The fishermen have to compete.''

Many fish farmers get Anderson's regular newsletters analyzing the global fishing markets, but none of the fishermen do, Anderson said.

``The fishermen can't think two or three years ahead just because they don't know what the runs will be,'' Anderson said. ``That's the primary difference in mentality.''

If the fishery were run differently, with fewer boats, more efficient gear and management, and a better infrastructure, the costs of bringing a wild Alaska salmon to market could be less than a farmed fish, said Anderson. But farmed fish will continue to set the price because they dominate the market.

As with other agricultural crops, the price will go through some fluctuations and eventually stabilize sometime in the next decade, said McGonigle of the Maine Salmon Farmers Association. He expects the price to end up around $1.50 a pound, which will translate to $2.50 to $2.75 in the supermarket.

``It's a market that will eventually settle down and produce a relatively cheap source of protein,'' McGonigle said, ``similar to chicken.''