2.5 T ECHNICAL AND ECONOMIC ASSESSMENT
2.5.5 Risk assessment
Agricultural and aquaculture projects are particularly vulnerable to the uncontrollable externalities of weather, disease, and world markets. Aquaculture development is littered with examples of failed projects that fell foul of one or more unexpected problems. Any
Box 2.4 Selected financial indicators for assessing or comparing different enterprise and
technologies
Profit. Income minus all operating costs, including interest, depreciation, maintenance, labour, inputs etc. It may be calculated as gross, or net of tax.
Unit production cost. Total operating costs/total units or quantity produced (note – this usually declines with output) Pay-back (PB). The time required to pay off capital invested in the project; calculated as total investment/(annual profit+depreciation). While payback periods of 10 or more years may be acceptable to some very large corporations, most small businesses, including farmers, would hesitate to invest where payback periods exceed 2 or three years.
Profit margin. Calculated as (profit/income)*100%. A measure of vulnerability to product price change or increased costs.
Profit/ha/crop or profit/ha/yr. A simple measure of land productivity, which can be calculated for a single production cycle or for a year, whichever is appropriate. This should always be made clear.
Total investment/ha. The actual per ha cost of purchasing land and building/establishing ponds, tanks, buildings etc.
Essential information for people with limited access to funds.
Gross margin. GM. Gross income or sales revenue less (minus) variable costs. Full time labour and overall
management on a typical farm is commonly taken as a fixed cost and therefore excluded from GM by most agricultural economists. In many enterprise models however, labour of all kinds is taken as continuously variable and is usually related to output. For the sake of comparability between enterprises, and to allow comparison with other work, it may be appropriate to use two measures: gross margin excluding all labour (GMxl), and gross margin including all labour (including any management) (GMil). Both measures exclude all overhead costs.
Management and Investment Income (M&II). Another measure commonly used by agricultural economists. It provides an indicator of the cash surplus generated for the enterprise manager or investor. Calculated as Income - all operating costs, except interest and overhead management charges.
Return to labour and management - the net income available for the payment of labour of any kind. Calculated as (profit + labour costs).
Return on Investment (static). Profit/total capital investment)*100%. This should not be confused with internal rate of return.
technical-economic profile of aquaculture must include a thorough risk assessment. This is rarely done in practice, especially for small scale developments.
It is important to distinguish between risk and uncertainty. If an undesirable event may or may not happen, there is a risk associated with it. If the probability of this event is known, then the risk is quantifiable. If the probability of the event is unknown, then we are dealing with uncertainty, which (by definition) cannot be quantified. For example, the probability of achieving a particular food conversion rate on an intensive farm could be estimated from industry surveys, and the probability of feed costs could be calculated. Disease, which can drastically affect returns, is much less easy to predict, and is therefore associated with great uncertainty.
The risks associated with aquaculture can be reduced but not eliminated through good siting, design and management. The risk of disease is likely to be higher where there are many aquaculture enterprises in the same area.
There are many different measures and indicators of risk and risk exposure. Whenever these are used or quoted, the actual nature of the risk should always be discussed.
Time to market is the simplest measure of financial risk. The longer it takes to make a product or grow a crop, the higher the working capital requirements (see below), the greater the likelihood of crop loss due to climate or disease, and the greater the risk and uncertainty associated with the costs of inputs and the value of the output (market price).
Working capital22 requirements/crop/ha is a relatively simple measure of risk exposure. Combined with the probability of crop failure or low performance, this gives an indication of the likelihood and scale of potential losses on an individual production cycle, which may cause serious cash flow problems and jeopardise project viability.
Break-even production rates (i.e. the output or production required to just cover operating costs) can be compared with the actual distribution of production rates in the sector (locally or elsewhere) to give an indication of risk and scale of losses.
Sensitivity analysis involves assessing the sensitivity of the financial model to changes in key variables and parameters such as the cost of labour or inputs, or the rate of production. For example, the sensitivity to feed costs might be calculated as the percentage increase in production cost for a 10% increase in feed price. Alternatively, the percentage increase in feed price that would result in zero profit might be estimated, and the likelihood of such an increase might be estimated. This can be done for both prices/costs and production parameters, and may be presented in a comprehensive table. If possible, the probability associated with a change in parameter value should be indicated or discussed.
The risks relating to market prices may be judged by price elasticity (if this information is available) combined with sensitivity analysis as above. If price is elastic, it declines rapidly as total production increases; inelastic prices on the other hand are relatively stable despite significant changes in production.
22working capital is the actual cash outlay required to fund a production cycle - ie cash needed for feed or fertilizer, employed labour etc, before the crop is finally sold.
Table 2.2: Example of financial model or profile with resource use indicators: Cage Seabass farm, Thailand
production parameters
cages 28 units production/m2 105kg
cage size 50m3 production/m3 21kg
crops/yr 1.5 total
production
29,400kg
survival 50% area 0.2ha
production/cage/crop 700kg food
conversion ratio
6
production/cage/yr 1050kg
Nutrient composition
P content of trash fish 0.50%
P content of fish produced 0.30%
N content of trash fish 1.00%
N content of fish produced 1.20%
investment Q $unit cost total life depreciation
cages 28 200 5,600 2 2,800
building - 10
-truck - 6
-equip. 3,000 5 600
Operating costs
Q (kg, l or No).
$Price/rate Total cost
depreciation 3,400
interest 5% 430
rent/license
seed 2,041 0.17 350
feed 176,400 0.20 35,280
fuel 2,000 0.57 1,143
labour MY 4 4000 16,000
misc 1,500
total $58,103
Revenue 29,400 2.70 $79,380 Financial and socio-economic
indicators
Resource use/waste indicators gross income/ha $396,900 N in inputs (kg) 1,764 profit $21,277 N in product (kg) 353 profit margin 27% total waste N (kg) 1,411 return to labour $/MY $9,319 N waste (kg/ha/yr) 7,057
employment/ha 20 N waste (kg/$
revenue)
0.0178 return to labour/ha $186,380 N use (kg per $)
revenue
0.0222
employment/mt 0.14 N conversion
efficiency
20%
capital investment/job created
$2,150 protein conversion efficiency
17%