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Long-run price estimation.

Salmon farming has become an international industry, with location being determined by production and transport costs, as much as by biological factors. Chile is an example of the globalization of salmon farming. Salmon is not indigenous to Chile, yet its low labor costs and good growing conditions attracted international companies. By 1992-93, Chilean output of farmed salmon reached 60,000 tons, almost double that of North America, and is forecast to exceed 100,000 tons by 1996-97. Most of the output is exported frozen to Japan, but at least a quarter is sold "fresh" to the U.S.

With the influx of Chilean salmon, North American producers have experienced sharp price declines. To estimate how far prices might fall, a cost analysis was made. In a perfectly competitive market, long-run prices fall to the bottom of the long-run average cost curve of the cheapest producers [DeVoretz, 1990, Salmon Price Forecasts For The 1990s, Simon Fraser University, Canada]. Data for North America exist and cost information was obtained from Chile. These biological and financial data were used for a simulation model of an Atlantic salmon farm producing 100 tons annually. The opportunity cost of debt and equity as based on the price of alternative financial assets and rates of interest.

For hypothetical farms in Chile and North America, an after-tax net operating cash flow was projected,

[F.sub.t] = ([P.sub.t] [Q.sub.t] - [OC.sub.t] - [D.sub.t]) (1 - T) + [D.sub.t],

where [F.sub.t] is the after-tax net operating cash flow, P is the retail price, Q is the quantity, OC is operating cost excluding depreciation, D is depreciation, and T is tax.

Using technical and financial parameters for each country, the net present value (NPV) was estimated and sensitized for the retail price. At the price of U.S. $4.43 per kilo, the hypothetical farm in Chile earns zero NPV. Interest costs, and all opportunity costs (including equity) are covered, but no excess profits are made. The breakeven price of $4.43 was higher than reported costs in Chile (as low as $3.15 per kilo) but the latter exclude the opportunity cost of debt and equity. To this production cost was added $1.50 per kilo, which is the approximate cost of air freight to Miami or New York. The breakeven delivered price was therefore $5.93 per kilo. Given the assumptions of the model, the minimum long-run price in the North American market approximates $5.93 per kilo. For even with their lower transport costs, North American producers had a delivered breakeven price of $6.40 per kilo.

The implication for North American salmon producers is that Chile has a competitive advantage in exporting fresh salmon. It should be noted that the August 1993 farm-gate price was $6.60 per kilo, which is close to the long-run breakeven point for North America. One option is to diversify into other species: the pioneer of salmon farming--Norway--is now cultivating 14 different species of finfish.

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Title Annotation:Anthology
Author:Ridler, Neil B.
Publication:Atlantic Economic Journal
Date:Jun 1, 1994
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