Dead Loss - (Just Economics)

Here is the summary of the report.

Executive Summary

Salmon aquaculture is worth close to USD$20 billion annually but is dominated by a small number of multinational producers operating in just four farming regions – Chile, Norway, Canada, and Scotland. Not only is it already the fastest growing food production sector in the world, but a continued global growth in demand is expected. However, it also generates considerable controversy, which has seen demand growth slow in developed countries, not least due to negative consumer perceptions of farmed salmon.

Although the big four producing countries all have ambitious plans for growth, these are endangered by economic, environmental, and regulatory pressures. Governments in these countries are largely uncritical of their salmon farming industries, and official literature tends to promote a positive image. A typical narrative is that of a clean and healthy source of protein that is helping to revive coastal communities. Beneath the marketing discourse, however, transparency and accountability are extremely weak by comparison with land-based farming. Data are often absent on important phenomena such as mortalities, escapes and environmental impacts. The sector lacks robust regulation and proper social, environmental, and economic accounting, which makes it difficult to assess its impacts holistically.

The report has two aims therefore:

• To highlight the unnecessary costs borne by the salmon industry because of poor fish husbandry and welfare and to estimate potential savings from improved farming practices; and
• To estimate the social and environmental costs of the salmon industry and to estimate the value to consumers and wider society of reducing those costs by improving social and environmental performance.

The study was commissioned by the Changing Markets Foundation as part of its Fishing the Feed campaign. The research was carried out independently by Just Economics.

Aquaculture is a diverse farming practice, and we acknowledge that it can make a positive contribution to food security and livelihoods. However, as the research highlights, there are significant problems with the highly industrialised, intensive form that salmon farming currently takes. The aim of this report is to draw attention to these issues by placing financial values on the costs they incur to highlight their scale and importance.

The report focuses on the four big producing countries (which account for 96% of farmed salmon production) and the top ten producers globally (which account for 50% of production). In conducting the research, we encountered significant data limitations. Table 1 lists the variables that were included and excluded (although for the producer analysis data were only available on two variables: salmon mortality and lice fighting technologies). Decisions to exclude variables were based on data availability, rather than importance, and future research should seek to address these data gaps.

Table 1: Variables included and not included in country level analysis

For each variable included, we drew on existing research to estimate incidence for each country/producer and cost. These were modelled for the seven years to 2019 i.e., from the point at which the industry began to expand rapidly. The findings for each variable are discussed in turn, beginning with economic costs.

Economic costs
Mortality rates on salmon farms are high, with parasites (and their treatments), disease (and their treatments), pollution and escapes being the major contributing factors. Although some mortalities are inevitable, the rates have increased dramatically in recent years and far outstrip those found in other forms of intensive farming. The factors that induce mortality are often directly related to the quality of fish husbandry, and mortality could therefore be considered an indication (and cost) of poor farming practices. Mortalities data are only available for Norway and Scotland. The combined cost since 2013 of mortalities in these two countries is estimated at USD$9.8 billion (8.9 billion in Norway and almost 922 million in Scotland). If we apply the average mortalities for these two countries to Canada and Chile, we get an estimate of USD$768 million and $4.9 billion respectively. Using this methodology, the total cost across the four countries is USD$15.5 billion, representing a huge opportunity cost for farmers. The analysis also shows that reducing mortalities to 5.5% - closer to mortality rates on egg-laying hen farms - in Norway would represent an annual saving of over $892 million USD (based on 2019 volumes and prices).

Even when parasites and disease do not result in deaths, their treatment is costly, and the presence of lice in particular is a barrier to sector expansion. There are also clear consumer concerns about the use of medicines and chemicals to control them. Lice and disease spread are hastened by high stocking densities which are designed to increase the productivity of farms. However, this is arguably a false economy. Estimates of the cost of controlling lice alone is between 6 and 8.5% of the cost of production. Using these data, we estimate a cost to the sector from lice control of over $4 billion since 2013.

Aquafeed is the single largest cost centre for salmon farmers with much of this being driven by the high cost of fish meal (FM) and fish oil (FO), which are derived from wild fish. We estimate that the cumulative costs of using marine ingredients in salmon farming is over $8 billion in the four countries over the period (2013-2019).

We can also apply these estimates to the top ten producers, which had combined total revenues of USD$12 billion dollars in 2018. By comparing the expected and actual harvest for these companies since 2010 (Table 2), we can see that between them they were responsible for the loss – through mortalities and escapes - of over half a million tonnes of salmon during this period (or about 100 million salmon). This equates to almost USD$3.7 billion. In about 70% of cases the cause of mortality is either not known, or not disclosed. For the remaining 30%, the leading cause is sea lice, followed by disease and algal blooms (as a result of pollutants). Using a global estimate of 6% for the cost of combatting sea lice, allows us to estimate a cost for these companies (UDS$3.5 billion since 2013). This gives a combined cost of mortalities and lice treatment of USD$7.1 billion or 12% of revenues over the period.

Table 2: Estimated mortalities and associated losses by producer (2010-2019)

Environmental costs
Salmon farming is generating and running up against several environmental pressures, which are inextricably linked to its commercial success, and these are a major source of risk for the industry. Atlantic salmon can only be farmed under certain conditions and as seas warm and available locations become exploited, the industry is running out of viable sites for new farms. This means that new sources of growth are dwindling, creating pressure to locate farms in less suitable environments and to increase stocking densities, which further exacerbate environmental pressures.

Aquaculture activities are an interconnected part of the ecosystem in which they exist, and salmon farms make use of 'free' coastal ecosystem services such as clean water, appropriate temperatures, nutrient levels and so on. They also contribute to their deterioration, however, due to local pollution impacts from uneaten feed and faeces, which are directly discharged into the marine environment. The Pollution Abatement Cost (PAC) measures the amount that would be required to preserve or restore a unit of an environmental good. Unless the full PAC is accounted for, salmon farms are 'free riding' on these environmental services. A PAC has been calculated for Norwegian salmon farming. Although one of the best environmental performers of the countries included here, this still amounts to an economic cost of 3.5% of total production. When this is applied across the four countries, it gives us a total cost of over USD$4 billion since 2013.

Salmon farming is also impacting negatively on wild fish stocks. There are three ways in which this manifests: damage to wild salmon stocks, the use of pelagic fish in FMFO, and the use of cleaner fish in parasite control.

There have been serious concerns about the status of wild Atlantic salmon stocks for many years now, and the numbers of returning salmon are at an all-time low. Several studies have reviewed the social, economic, and cultural value of the Atlantic salmon, which has an iconic status within communities along the Atlantic seaboard. This value can be observed in contingent valuation studies that show high ‘Willingness to Pay' (WTP) amongst households to protect and restore wild salmon stocks. Although the reasons for declining salmon stocks are many and varied, it is widely believed that salmon farming is a contributing factor. Farms spread lice and disease to wild populations and pollute local areas through which returning salmon will sometimes pass. Escaped farmed salmon also hybridise with wild populations and reduce their ability to survive in the wild. Our economic analysis of the loss of salmon stocks attributable to salmon farms is focused on Canada, Norway, and Scotland where the contingent valuation studies have been carried out. We find the value destroyed by salmon farming through loss of wild stocks to be USD$308 million.

Pelagic fish are highly nutritious forage fish and are the main fish source used in the production of FMFO used in salmon feed. Almost one-fifth of the world's annual wild fish catch is taken out of the ocean for this purpose, the majority of which is used in seafood farming. However, (in addition to being a key source of protein for many coastal communities) forage fish also play a central role in the ecosystem as they are the primary food source for many marine mammals, seabirds, and larger fish; and some species such as sardinella in West Africa are now heavily overfished. Valuing their role in the ecosystem is extremely complex but just considering their contribution to the commercial catch of carnivorous species gives us an additional 'hidden' value of $219 per tonne. Applying this to FMFO use in our four countries gives us an indication of the ecosystem value of forage fish lost to fish farming (USD$1.78 billion over the seven years). Data suggest that the removal of wild fish from feed formulations has plateaued; if this is the case, we would expect to see these costs rise considerably in line with the expansion of production that is planned in all of the countries studied (a fivefold increase in Norway by 2050 and a doubling in Scotland by 2030 to give just two examples).

Compared with salmon, there is limited research on cleaner fish, and their biodiversity impacts and welfare are only discussed in a limited way in the literature. More research is required therefore to fully account for the impacts of salmon farming on wild fish populations.

Finally, we consider climate change impacts. Aquaculture is often positioned as a low carbon alternative to land-based farming, and whilst the farmgate emissions are low relative to agriculture it is argued that these figures underestimate the true carbon cost once feed and airfreight are taken into consideration. Life Cycle Analysis (LCA) provides a more complete estimate of carbon emissions because it includes impacts throughout the supply chain. LCA of carbon emissions across producer countries shows that Norway has the lowest impacts, whereas impacts are consistently highest in Scotland. However, due to data limitations, we have applied the Norwegian LCA estimates to the four countries. This analysis reveals that the minimum social cost of carbon from salmon farming in the four countries is almost USD$8.3 billion during the timeframe studied.

Social issues
The main social issue included in this report is the impact on salmon welfare. As we have seen, farm profitability and salmon welfare are inextricably linked. In the short-term there may be a financial incentive to take shortcuts with fish husbandry but over time these lead to disease, lice, stress and ultimately higher mortality rates, which also result in financial losses. It is therefore in the long-term interests of farms to keep densities at the optimum level for fish health and welfare, and to adopt the highest farming standards. Moreover, there are strong, and growing consumer preferences for high fish welfare. especially in Europe. A European study finds that the average European consumer would be willing to pay 14% more for salmon with higher welfare standards. If we apply this to European and Canadian consumers of salmon (where attitudes are similar) we get a value of $4.6 billion.²

The final cost considered is the impact of diverting forage fish away from direct human consumption (DHC) in low and middle-income countries for use in the FMFO industry, in large part to feed European aquaculture. Countries such as those along the West African seaboard have significant food security issues. In addition, the growth of the FMFO industry may lead to net economic losses because of the loss of jobs in traditional fishing and food preparation (especially for women). Finally, as already discussed, these waters are already heavily fished and further declines in the catch will disproportionately affect local fishing communities. Data limitations mean it was difficult to value these financial losses. However, a case study for Norway, which imported 8.4 thousand tonnes of fish oil from Mauritania in 2018 shows a loss to Mauritania in 2019 of USD$37.5 million.

Conclusions and recommendations
The demand for seafood is expected to increase in coming years and part of this will have to be met by increased aquaculture production. Fish farming has the potential therefore to be a significant source of social, economic, and environmental value but farming practices matter greatly and determine whether the industry can be considered a net loss or net benefit to society. Although we encountered significant data gaps, this analysis has allowed us to place a value on some of the costs of salmon farming as currently practiced. It suggests that salmon aquaculture has produced private and external costs of USD$47 billion since 2013 (see Table 3 for a summary of these). When we segment these into private and external costs, we can see that around 60% fall to producers and 40% to wider society (USD$28 billion and USD$19 billion respectively).

Table 3: Summary of costs for each variable by country (MUSD)

Considering the full range of costs and benefits may well demonstrate positive benefits from aquaculture (and even salmon farming). Yet what this report shows is that there are substantial costs that are not currently included on the balance sheet and that the scope for improved environmental and social performance is considerable. In addition, a combination of growing environmental impacts, consumer demand for ethical and environmentally friendly products and direct losses from poor fish husbandry are creating long run economic risks to the industry, that can only be mitigated by investing in better farming practices and reduction of environmentally harmful aspects, such as use of wild-caught fish.

Our recommendations focus on the four most significant stakeholders in salmon farming: governments, investors, farmers and consumers, each of which has a role to play in transitioning to a more sustainable aquaculture and food system.

For governments
Economic benefits of salmon farming need to be balanced against other coastal industries such as tourism, angling and wider environmental impacts. Governments should be prepared to support alternative technologies that improve social and environmental standards, as these are likely to be net beneficial in the long run.

Better oversight and more robust regulation of salmon farming should lead over time to competitive advantage as consumers increasingly seek out more ethical and environmentally friendly products. Governments can lead the way on this by restricting licences to companies that meet higher social and environmental standards.

The industry would benefit from guidelines for sustainable feed ingredients along with stricter due diligence and governance frameworks in aquafeed supply chains. Governments should also support the phase-out of whole wild-caught fish for use in aquafeed. Furthermore, aquaculture that relies on wild-caught fish should not receive any subsidies or other public support measures. Policy should support the development of alternative technologies (for feedstuffs and farming methods) and provide effective economic incentives.

Governments should also require more transparent reporting in this industry and should resist industry pressure not to publish mortalities data that are in the public interest. In addition, consumers increasingly expect transparency in supply chains and companies/sectors which fail to respond to that expectation will place themselves at a disadvantage in the market.

More generally there is a need to improve the quality of social, economic, and environmental accounting in salmon farming. This would have the dual benefit of supporting more holistic decision-making and incentivising better farming practices. By revealing costs and benefits, governments could create a race to the top amongst salmon farmers, and a level playing field for small producers that may be operating to higher standards. At a minimum, governments (e.g. in Scotland) should refrain from making a priori economic arguments in favour of salmon farming, given the narrowness of these arguments and their responsibilities to a wider group of stakeholders.

For investors
As a result of growing environmental and regulatory pressures, investment decisions are required that drive a rapid transition towards alternative feeds and better farming practices. These already exist but require more investment to make them viable in the short-term.

Although the risks of existing farming practices are often understood, investors continue to support them due to short-term returns. This creates a barrier to the adoption of new technologies and improved practices, and investors need to take a long-term view. This may involve accepting lower returns in the short term but as discussed in this paper issues with both supply and demand should create competitive advantage in the long run.

For farmers
Mortalities, lice treatments and disease are creating huge costs for farmers and damaging the reputation of farmed salmon. Significant opportunities exist to dramatically improve the environmental and social performance of salmon production through a focus on the development of least-environmental cost (as opposed to least-economic-cost) feed formulations. These technologies exist – and have been shown to work - and producers could appeal to the growing consumer demand for an ethical product by being early adopters of these formulations. As the cost of marine ingredients is expected to increase, these may also prove to be a lower cost alternative in the medium term.

As demonstrated in this report, poor fish husbandry is a false economy as it leads to significant direct and indirect costs. We recommend therefore that farmers adopt better husbandry, such as stocking densities commensurate with higher survival rates.

For consumers
Salmon was once a high value food that was only available in season and consumed on special occasions. In line with the need for investment from all stakeholders, some consumers should also be prepared to pay more for salmon where their economic circumstances allow, and/or to consume it less frequently. As part of this, consumers could seek out alternatives to carnivorous fish such as molluscs that provide dietary and economic benefits at lower social, economic, and environmental costs.

¹ In the previous section, we report that the lice control estimates for the four countries is $4bn. These were developed from lice treatment costs per kg. whereas this figure derives from a percentage of revenue. As discussed in the main body of the report, the country-level analysis most likely underestimates the cost of lice.
² Studies of welfare tend to be conducted amongst consumers rather than producer citizens and the calculations have been focused on these consumers where data are available and animal welfare issues are most salient.