economics of feeding

7/25/2019 Economics of Feeding

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Prepared and lectured by:

Nerissa D. Salayo, Ph.D.Socioeconomics Section

SEAFDEC/AQD, Philippines

[email protected]

Economics of Feeding: Concepts,

Principles & Applications

Training Course on Feed Formulation and

Feed Evaluation for Aquaculture Species


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Why study economics of feeding?

Better understanding offeeding management andeconomics of feeding

Learn how to optimize

feeding of aquaculturespecies

Improve the efficiency of

aquaculture production Gain competency as

researchers in aquaculturenutrition

Nerissa D. Salayo, SEAFDEC/AQD, Philippines

Oh thanks

they will studyhow to feed usefficiently.


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Objectives

Introduce some concepts,

principles and approaches forevaluating and ensuring aneconomically viable aquacultureventure

Understand and apply methodsfor evaluating the economicefficiency of feeding inaquaculture

Researchers should be able todevelop sound proposals and arecompetent to conduct studies in

aquaculture nutrition

Objectives of this lecture


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Expected learnings

After this lecture, you should be able to: list and classify the cost items in

formulating aquaculture feeds demonstrate the methods in partial budgeting

discuss the economic principles and indicators indetermining the desirable and efficient level of outputin aquaculture production

apply the indices for evaluating the costeffectiveness of feeds

describe the least-cost combination approach inselecting appropriate aquaculture feeds

introduce the linear programming approach in feedformulation


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Global aquaculture continue to grow in 2010 (7.5%),but slower rate than in 1980-90s

Global

consumption

increased to

8.7kg/cap

Freshwater

production

increased to

66%

Imbalanced

global

distribution of

produce

Production

(million mt)

World

Rank

Country % Share

2.67 3rd Vietnam 4.46

2.30 4th Indonesia 8.85

1.29 6th Thailand 2.15

0.85 9th Myanmar 1.420.74 10th Philippines 1.24

53.30 Asia 89.02

59.87 Total World 100

Top aquaculture producers of food fish, 2010(FAO, 2012)



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Economics

allocation of

scarce

resources tomeet

unlimited

human needs

and wants.

Aquaculture economics

allocation of

scarce

resources in the

production of aquatic

organisms under

managed conditions tosatisfy some

human needs and wants.



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Introduction: Evaluation of Feed Qualityvs Economic Efficiency

The economic considerations

in aquaculture enterprises are

equally important as its

technical efficiency.

We may be successful in

growing cultured fish to the

desirable marketable size -

but at a high cost.

This is not advisable. In

aquaculture, profit is also an

important consideration.


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Factors affecting profitability ofaquaculture enterprises

increase in production

increase in farm prices

reduction in cost

Profit= (production x price) - cost



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Production function

Figure 1. Relationship between TPP, APP and MPP

-100

0

100

200

300

400

500

600

700

800

100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400

Level of feeding or input, X1

Levelofoutput(TPP)

-1

0

1

2

3

4

5

6

7

8

APP,

MPP

Fish yield TPP

Average yield APP

Marginal yield MPP

Stage II Stage IIIStage I

MSY

Stage I Output per unit input

increase at increasing rate

Stage II Output per unit input

increase at decreasing rate

MSY maximumsustainable yield

Stage III

Output per unit input isnegative

no economic benefits fromany additional input


Adopted from Samuelson,P. economics textbook for

aquaculture production system


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Production function

expression of thetechnical relationship

between

inputsand

outputsat a given

timeusing a

technology

Example:

Y= f (X1, X

2, X

3, X

4, X

5,, X

n)

Y= 1.2a + 0.32X1+ 0.24X2+ 0.18X3+

0.14X4+ 0.09X5

where:

Y = total fish yield

X1= amount of feed

X2= size of fingerlings

X3= amount of fertilizerX4= stocking density

X5= amount of labor

Xn= other inputs



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Profit maximization

The main

objective ofproductionanalysis is tomaximize profit.

What level ofproduction willresult inmaximum profitgiven a level ofresources suchas feed?


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Fish

farmers

should

considerprofit

attained

at

variouslevels of

input


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Relationship between MEY andother cost and revenue variables

VTP (value of totalproduct) - revenue curve

TVC total cost curve

Profit = shaded area(difference between

revenue and cost)

MEY (maximumeconomic yield) - biggestdifference between VTP

and TVC curves

MEY attained beforeMSY (maximumsustainable yield)


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Lessons learned

Maximizing farm productiondoes not always result tomaximum profits because wehave to consider the cost of

inputs.

Decision to maximize profit

is based on marginal

analysis or on whether thereis additional benefit from anyunit of additional input.


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Categories of cost items in producing aquaculture feeds

Variable costs- direct payments for theitems used in the manufacture of the feed. Costthat vary or change according to volume of thefeed produced

Examples:Material cost - feed ingredients - fishmeal,mineral and vitamin mixes, and otheringredients

Labor - wages & salaries of workersmanufacturing the feeds through grinding,pulverizing, mixing, pelletizing and oven drying

Electricity - used to operate feed mills & otherelectrical equipment


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Fixed costs- include expensesincurred regardless of whether feeds arebeing produced at any amount or not at all.

These costs include:

- Supervisory & management overheadexpenses- Depreciation of fixed assets such asbuildings

and feed milling and cooking equipment

The cost of packaging and storage of thefeeds is not included in the computation.They are classified as post-production ormarketing cost

Categories of cost items in producing aquaculture feeds


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Evaluation ofcost of feeds

1.variable costs

2.fixed costs

= total cost


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Indexes for measuring the efficiency of feeds:

1. Feed conversion ratio (FCR)

- ratio of total amount of feeds byweight to the total weight of thefish yield

The lower the ratio, the moreefficient the feed, regardless of the

cost.

FCR, however, does not take intoaccount the cost of feeds and theeconomic efficiency of using feeds.


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Feed Conversion Ratio (FCR)

Feed

ConversionRatio (FCR)

= Total amount of feeds used by weightWeight of fish yield

=600 bags of feeds consumed x 25kg/bag

14 tons fish yield x 1000kg/ton

=15,000 kg feeds

14,000 kg fish yield

FCR = 1.07 kg feeds per kg of fish yield

ExampleA fish farmer harvested 14 tons of fish in marine cages. His

record book shows he used 600 bags of feeds for the wholecropping season. Each bag of commercial feed contains 25kg. What is the FCR?


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2. Incidence Cost (IC)method of measuring costefficiency of feeds.

computed as the ratio of thetotal cost of the feed used tothe weight of the fish produced.

The feed with a lower incidencecost is economically moreefficient.



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ExampleA fish farmer harvested 14 tons of fish in marine cages.

His record book shows he used 600 bags of feeds for thewhole cropping season. Each bag of commercial feedcosts US$9.00 and contains 25 kg. What is the incidencecost (IC)?

(IC) = Feed costWeight gain

=600 bags of feeds consumed x US$9.00

14 tons fish yield x 1000kg/ton

=US$5,40014,000 kg

IC = US$0.39/kg fish

Incidence Cost (IC)


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Percent Return on Feeds (% RF)- method of measuring economic efficiency of feeds

based on the value of the fish produced and the costof feeds.

- The value of the fish not only accounts for the weightor volume, but also on quality of the harvest. Goodquality fish obtain higher price.

- % RF is computed as the ratioof the total value of the fishproduced to the total costof feeds used.



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Example

A fish farmer harvested 14 tons of fish in marine cages.His record book shows he used 600 bags of feeds for thewhole cropping season. Each bag of commercial feedscost US$9.00. He sold the fish at US$1.15 per kg. What isthe Percent Return on Feeds?

%RF =Total value of fish produced Total cost of feedsused= (14 tons fish produced x 1,000 kg/ton x US$1.15) (600

bags of feeds x US$9.00/bag)= (14,000 kg x US$1.15/kg) (600 bags x US$9.00/bag)= US$16,100 US$5,400= 2.98 x 100

% RF = 298%

Percent Return on Feeds (% RF)


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Profit Index (PI)- index for measuring economicefficiency of feeds.

PI shows the proportion of the net profit relative tothe cost of feeds

Higher PI is most desirable.



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Profit Index (PI)

Example

A fish farmer harvested 14 tons of milkfish in marine cages.His record book shows he used 600 bags of feeds for thewhole cropping season. Each bag of commercial feeds costU$9.00. His total cost is US$7,000.00. He sold the fish at

US$1.15/kg. What is the profit index?

Profit index (PI) = Net profit / Cost of feeds

= (14 tons fish produced x 1,000 kg/ton x US$1.15/kg) - (US$7,000.00 total cost)

600 bags of feeds used x U$9.00/bag

= (US$16,100 - 7,000)5,400

PI = 1.68


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Cost and returns analysis of pen culture of Clar ias macro cephalusat stocking density of 10 fish/sqm and fed three different diets for120 days (values are on a per ha per crop basis in US$)

Diets 2 and 3showed lowerincidencecosts, higherprofit indexand higherreturns onfeeds relativeto diet 1.

Using diet 2and 3 are cost-efficientoptions, butnot diet 1.


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Determining Least-Cost Combination of Feeds

The cost of feeds is a factor affecting the economicviability of fish farming. Keeping the cost down is crucial.

Least-cost combination techniquesare used in

determining the lowest cost among the different feedcombinations but result to the same production output.

Marginal Rate of Substitution (MRS)- indicates therate of substitution between two production inputs, for

example, feed combinations. The MRS between inputs (feeds)is a physical relationship. The value of MRS is negative.

MRS = Amount of Feed A / Amoun t o f Feed B


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Price Ratio- refers to the ratio of prices of the two feeds.The inverse of the price ratio is compared with MRS.

Price ratio = Pric e of Feed B / Price of Feed A

Least-Cost Combination (LCC) - this occurs when MRSequals the inverse of the price ratio.

LCC: MRS = Price ratio

Amount of Feed A x Price of Feed A = Amount of Feed B x Price of Feed B

We note that at LCC, the cost of change in one feed is equal

to the cost of change in the other feed.


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Least-Cost Combination (LCC)- this occurs when MRS equalsthe inverse of the price ratio.

LCC: MRS = Price ratioAmount of Feed A x Price of Feed A = Amount of Feed B x Price of Feed B

We note that at LCC, the cost of change in one feed is equalto the cost of change in the other feed.

Amount of Feed A = Price of Feed BAmount of Feed B Price of Feed A



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Example: Least-Cost Combination

Feed A cost US$11.5 per bag andFeed B cost US$9.00. Each bagcontains 25kg of feeds. Using therelatively cheaper Feed B, the fishfarmer can expect the same level of

fish production.

Feed A is more expensive than FeedB and it has a higher nutrientcomposition.

Thus, to produce the same output, alittle more of Feed B is needed thanthe amount of Feed A that was

replaced.


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Example: Least-Cost Combination

Table 10.6 shows the combinations of Feed A and Feed B. Therate of substitution indicates the amount by which Feed Amust be replaced by a unit of the amount of Feed B.

You will see that the least cost combination occurs when weuse 310 bags of Feed A and 400 bags of Feed B.

The total cost of this feed combination is lowest atUS$7,165.00.


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Computations for finding the least cost combination for replacingFeed A with Feed B (Price of Feed A, PA= US$11.5/bag; price of

Feed B, PB= US$9.00/bag)

S f L L d


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Summary of Lesson Learned

Lesson 1 - Computation of costs of formulated feeds to help us findways to reduce production cost and obtain more net profit.

Lesson 2 - Production function analysis - technical relationshipbetween inputs and outputs at a given time using a technology.

Lesson 3 Profit maximization - finding the level of production that

will result in maximum profit given a level of input or resources suchas feed. Maximizing farm production does not always maximizeprofits because we have to consider the cost of input.

Lesson 5 Indexes for evaluating the economic efficiency of feeds -feed conversion ratio (FCR), incidence cost (IC), profit index (PI) andpercent return on feeds (%RF).

Lesson 6 - Concept of Least-Cost Combination of resources such asfeeds based on the evaluation of the marginal rate of substitution(MRS) and price ratios of feeds


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Thank you!

economics of feeding

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