Is Bigger Really Better?

The Myth of Scale for Salmon RAS

Steve Atkinson

Taste of BC Aquafarms Inc.

There is probably no technology in food production that is as hot a topic as Salmon RAS.?Over the last ten years development of this sector has been top of mind for many.?In that time many hundreds of millions of dollars have been expended in attempt to develop the sector.?From the earliest discussions the subject of scale and economies of scale have been a key point.

The sector was driven largely by involvement by NGO’s and others wanting to find a replacement for traditional ocean base net cage sea farms.?Tides Canada was the spearhead of the most successful and important collaborative effort bringing together the leaders or RAS through the Salmon Innovation Workshops.??Focus for many were to find scale of development that would be able to displace net cage salmon farming.

I have always been a bit of a contrarian within that group as I have never had it as my goal to replace the present industry.?Rather, I believed then and believe now that RAS presents an opportunity to develop a new industry.?One that can exist and flourish with or without net cage salmon farming.?My approach has not been influenced or clouded with the goal of replacement of anything. Thus, my perspective of scale has been quite different.?

If we are to build a new RAS sector I believe we need to look at the business case of starting something from scratch.?We need to follow the normal course of business development and growth.?A few years ago, I had opportunity to make a presentation about our farm at Stanford University.?In that presentation I pointed out that Apple, and Microsoft shared a characteristic with my plan.?Many look at them and see the huge enterprises that they are now.?But often they fail to remember that they never started as huge multinational corporations.?Apple started out in a garage Microsoft started with two guys writing a software program for one computer.?Over decades they grew one step at a time.?I am not sure if the founders of Apple or Microsoft ever considered just how large their companies would become. I expect not.?I don’t think anyone really successful sets out on a path of success with a vision of the real end goal. Most start out with a goal of their next step or maybe the next few steps which change and grow along with goals met.

This is normal for business, build a success and then grow it bigger.?There are many ways to do that, but organic growth is the norm.

So back to scale and RAS.??Growing salmon on land is an incredibly challenging exploit.?It requires not only engineering but many other skills to create a completely unnatural life support system.?Salmon are complicated and fussy subjects!?From my first involvement I said I wanted to create a production system that could be proven and then replicated.?Many saw my “small” scale as not truly relevant.?What we were proposing would have little impact on net cage salmon farming.?To be competitive they said you needed to start big, and one company set out to start very big.?Economics of scale was often cited as the reason.?But the big problem was no one had actual results on which to build the business case.?All of the models that proved the need for scale were from spreadsheet projections!?

One paper was published that compared the capex of our operation with the Kuterra project. ?Our two systems are quite similar and designed by the same engineering firm.??That paper showed a slight lower cost to our operation. ????????????????????????????? (https://makeway.org/wpcontent/uploads/2015/12/Namgis_FN_and_ToBC_Capital_Cost_Comparison_Final_Report.pdf) However a deeper look into that same paper with an enlightened eye will see a quite different story.?The comparison of the two projects used a stated annual production capacity of 470 Tonnes for Kuterra and 100 Tonnes for Taste of BC Aquafarms.?The Kuterra project never produced anywhere near 470 Tonnes and now being run by Emergent Holdings the estimated annual production is stated to be 250 Tonnes.?Reevaluating the comparison on these numbers shows a very marked advantage to the Taste of BC costs per KG of production.?Taste of BC has produced more than its projected annual production in 12-month period and continues to produce at that rate. Comparing these two similar systems scale certainly does not bring economic efficiency.?Looking at some of the other large scale projects cost overruns and operating losses have a serious impact on the projected outcomes.?One for instance in one quarter produced 1.6% of it’s projected biomass.?Cost overruns have been well in excess of $100 Million and in that quarter alone operational losses equaled $56 lb. on a product that they sold for less than $5lb.?

When I look at the financial reports of the two large North American Salmon RAS operators I see a glaring problem.?In spite of the differences in size both carry some very extensive losses on their books.?Capex is significant but losses to me raise the alarm bells.??With losses over $150 Million I wonder just how many have computed the number of fish that need to be sold just to get to even??This is what I see:?The average selling price so far for both companies have been under $5.?Maybe they will be able to raise the price as market conditions improve along with their quality.?So, I am willing to concede to $8 lb. HOG.?That is 18,750,000 lb. (round weight 22,500,000) of fish to recover those revenues.. but there is a cost to raise those fish.?If any of these farms can generate a gross profit of 15% after tax dollars, which are needed to pay off loss) they will be doing well.?It would take about $1 Billion in sales to realize net profits of $150 Million.??That is 125,000.000 lbs. of fish! And these numbers assume everything going forward is problem free.?One of these facilities so far has produced a few Tons of fish the other a few hundred Tons.?Capital cost overruns would be in addition to this. So far the evidence shows that neither has a proven production system. One of the operators has a pilot or “proof of concept” facility which so far has not performed even a fraction of its goal.

So, what does this mean for scale being the answer??I think there is merit in proving a concept at a scale where losses do not become an albatross.?Salmon farming is no different than any other business venture where operational losses in the early stage plague the operator even when profits begin to roll in.?So many times, I have seen businesses spend money that they don’t have early on, and those expenditures prohibit them from ever achieving profitability.?I have seen this in the RAS sector where so many early entrants were chasing grants that they did not give attention to basic business fundamentals and when the grants run out so did they.?I often commented that they were in the business of raising grants instead of raising fish!?Now I wonder if some are not in the business of raising public funds more than raising fish.. are they raising fish for profit or are they raising fish to sell stocks?

My solution is simple.?Build a business that has good fundamentals.?Start at a manageable scale and then build from that.?Noting the complexity and unproven nature of Salmon RAS I steadfastly stayed the course to prove the technology without burying myself under a mountain of debt that I could not escape from.?Since I was convinced that salmon RAS shared characteristics with traditional agriculture practices, I thought there would be wisdom in following a pattern of development of those sectors.??In dairy, chicken and hog operations I noted one similarity.?These farms all look alike! A barn in a chicken farm is almost the same wherever you go in the world. There is a size that makes sense and in building a bigger farm the farmers just add barns, seldom do they build bigger barns they build more barns.?Dairy and Hog farms follow the same pattern.?Raising these animals’ consideration is made for ease of operation, biosecurity, predictable results, and other issues that cross over the land-based aquaculture.?Scale can be achieved predictably and with confidence.?If your goal is to achieve profitable operations there is a clear path. Building more farms on a proven model gives a route to increased scale and profitability.?Having achieved that success there may be a step of increased size but my guess is more modules will be a simpler and equally profitable answer.

A similar approach has been taken by what I consider to be one of the greatest business models of the last century.?McDonald’s Restaurants grew to become of the most recognizable company on earth.?The model – Create a system that works and replicate, replicate, replicate.?No matter where you go on earth you will not be far away from a McDonald’s.?Their system is the same and the outlets similar everywhere you go.?As a rule, they don’t build bigger, when sales reach a certain volume a new outlet is added.?Scale is defined a little differently but here scale means profit.?Very few McDonalds have ever gone bankrupt!