NRAC Publication No.

107-2008

University of Maryland, 2113 Animal Science Building

College Park, Maryland 20742-2317
Telephone: 301-405-6085, FAX: 301-314-9412
E-mail: [email protected] Web: http://www.nrac.umd.edu

Aquaculture Risk Management

Dennis McIntosh, Delaware State University

Overview understand the three important concepts summarized in

One-Minute Risk Management.
The farming of aquatic organisms, whether fish, Managing risk effectively requires that you have a
shellfish, plants, or algae, is subject to a variety of risks. sense of what risks you are likely to face and what the
As in agriculture, these risks include disease, poor prod-
uct quality, competition, equipment failure, and natural
disasters but specific to aquaculture are others, for One-Minute Risk Management
example, water quality degradation and the competitive
impact from capture fisheries. Knowledge of these risks, What
their severity, and how best to manage them, is critical for The effective risk manager assures financial solven-
the success of your enterprise. cy against the consequences of risk at the lowest
To begin with, we need to first define risk and risk possible cost.
management. In the most general terms, the USDA Risk
Management Agency (RMA) defines risk as the chance
of something bad happening. By bad, RMA refers to How
an event or outcome that is adverse, such as a crop fail- Understanding financial statements provides the
ure it is a relative term, in that losing more money is foundation on which a sound risk management plan
worse than losing less money. Chance implies a degree can be devised and appropriate risk management
of uncertainty that an adverse event will occur and tools employed.
means that if something bad is absolutely, positively,
guaranteed to happen, there is no risk because uncertainty Guiding Rules
isnt present.
Since it is not possible to eliminate all risk from Do not risk more than you can afford to lose.
aquaculture or agriculture, you must do your best to min- Do not risk a lot for a little.
imize the impact that risks will have on the financial sta- Understand the likelihood and severity of
bility of your enterprise. In a business context, risk possible losses.
management is about reducing the cost of risk. Aquacul-
Adapted from Risk and Risk Management (PA-1667-03), from
ture, like other business endeavors, is entered into for Mehr and Hedges, Risk Management in the Business Environ-
financial gain; therefore, managing risks is critical for ment, Irwin Press, 1963.
success. To understand risk management, you need to
consequences of each will be when encountered in supply existing markets; competition from other produc-
other words, how much do you stand to lose? This con- tion strategies, including capture fisheries as well as other
cept, known as risk assessment, is a critical first step in culture technologies; competition from alternative com-
developing a sound risk management plan. The goal of modities such as beef, chicken, or pork; or simply compe-
risk assessment is to quantify the value of each potential tition from other producers, either local, regional,
risk and determine the likelihood that it will occur. Once national, or international. Like production risks that can
this information is known, you will be able to determine if reduce the quantity and/or quality of the marketable prod-
a particular approach to managing that risk makes finan- uct and result in a financial loss, market risks can have
cial sense. It does not make sense to spend thousands of equally dramatic impacts on your bottom line. If you
dollars to save a few hundred. cant sell what you are producing for more than it costs to
produce, you face financial loss.
Risk in Aquaculture
Generally, risks associated with aquaculture are sim- Managing Risk in Aquaculture
ilar to those facing agricultural enterprises and relate to
A number of options exist to manage aquaculture
components that can affect the aquacultural crop itself,
risk and for any one particular risk, there are generally
whether it is disease, equipment failures, or unexpected
many solutions available. Consider disease as an exam-
competition. This discussion will be limited to just two
ple: some producers might decide to implement an exclu-
major areas where you are likely to feel the effects of risk
sionary approach, where the aim is to prevent the
in aquaculture: production and marketing.
introduction of disease to their facility, while other pro-
ducers may decide that post-infection treatment, where
Production Risks disease symptoms are treated after they appear, is a better
Due to the vast number of aquaculture species being approach. While both approaches can be effective, the
cultured and the diversity of production methods, the better option will depend on how you respond to the three
focus here will be on categories of risk (i.e., disease) guiding rules of risk management presented above: (1)
rather than specific risks (e.g., Viral Hemorrhagic Sep- dont risk more than you can afford to lose, (2) dont risk
ticemia or VHS). Some of the more common types of a lot for a little, and (3) understand the likelihood and
production risks are disease, predation, natural events, severity of possible losses. To effectively manage risks
water quality, and power outages or equipment failure, then, you must know something about the likelihood and
though these are by no means the only risks aquaculturists severity of loss from each possible risk and then decide on
may experience. Risks due to disease, power outages, and how best to manage it (i.e., risk assessment). Options to
natural events can result in catastrophic losses; others, like manage risk in aquaculture include a wide range of tech-
predation and poor water quality are more likely to result niques and approaches that can generally be grouped into
in decreased survival or poor feed conversion ratios. The two distinct categories, insurance and non-insurance
severity of individual risks differs and will likely change options.
depending on when each is encountered during the pro-
duction cycle. Regardless of which potential risk becomes Insurance Options
problematic, each has the same impact: an overall de-
crease in your production of a marketable quality product One approach to managing traditional agricultural
that then results in financial loss. risk is crop insurance. Typically, crop insurance programs
are intended to transfer risk from one party to another,
generally away from the producer and to the insurance
Marketing Risks underwriter. Of course this comes at a price, namely, an
As with production risks, aquaculturists face market- insurance premium. Aquaculture commodity insurance in
ing risks that are often species and system specific; there- the U.S. has not yet become commonplace. The reasons
fore, broad categories of market risk are presented here. for this mirror the complexity of the aquaculture industry
All too often, a lack of proper business planning can leave itself, in that a vast number of species are being produced
the producer asking the question, Ive Grown It, Now through a myriad of production methods. This industry
What? (See NRAC Fact Sheet, 101-2008, Planning for diversity has made it difficult, if not impossible, to devel-
Success in Your Aquaculture Business.) Other market- op an affordable insurance product that is appropriate for
ing risks include: product pricing, where the cost of pro- all species or production methods. Despite this apparent
duction exceeds the available market price; the inability to hurdle, the USDA Risk Management Agency (RMA) is

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investigating insurance options for aquaculture and does provide significant protection from some risks; (2) care-
have other insurance programs that could provide aqua- fully observing animal behavior (e.g., fish off feed, errat-
culture producers some protection from risk. ic swimming) and/or monitoring key water quality
Currently, RMA has three insurance programs that variables such as dissolved oxygen, pH, and ammonia
would afford aquaculture producers some protection from will provide sufficient warning that a problem is looming;
risk, specifically, the Cultivated Clam Crop Insurance (3) building redundancy into your operation (e.g., back-up
Pilot Program, the Adjusted Gross Revenue-Lite program generators, oxygenation systems) can mean the difference
(AGR-Lite), and the Noninsured Crop Disaster Assistance between an inconvenience and failure; (4) improving feed
program. While neither of the two latter programs targets management can result in higher feed conversion ratios,
aquaculture specifically, both would protect an aquacul- better water quality, and ultimately reduced production
ture producer from certain risks. For example, the AGR- costs; (5) employing stringent bio-security measures
Lite Program is intended to protect a farms revenue when and/or the use of Specific Pathogen Free (SPF) animals
faced with natural disasters or market fluctuations, while can help to exclude disease from a culture facility; (6)
the Noninsured Crop Disaster Assistance Program is taking proper precautions should a disease outbreak occur
intended to safeguard against low-yields, loss of invento- can significantly reduce the severity of any outbreaks by
ry, or the inability to stock as a result of natural disaster. minimizing cross contamination; (7) knowing appropri-
More information, including eligibility and reporting ate chemical and drug therapies can ensure that disease
requirements for each of these programs, can be obtained outbreaks are properly treated when they are encountered
directly from the RMA website (www.rma.usda.gov). and can ensure that disease organisms do not become
Conversely, the National Risk Management Feasibility resistant to treatment this is particularly important
Program for Aquaculture is a partnership between Missis- given the limited number of therapeutic drugs that aqua-
sippi State University and the USDA RMA and has begun culturists are permitted to use, making the exclusionary
to assess the feasibility of developing commodity insur- approach to managing disease risks the best option.
ance for four aquaculture species groups: catfish, baitfish, Diversification of your production to include other
salmon, and trout. More information about the status of species, categories of production (e.g., foodfish, baitfish,
this program can be found online at www.agecon. ornamentals, plants, sport fish) or production technologies
msstate.edu/aquaculture. In addition to the USDA RMA (e.g., ponds, raceways, recirculating systems), and inte-
insurance programs that are available to aquaculture pro- gration of production with other enterprises (e.g.,
ducers, some private insurance companies (e.g., The Hart- aquaponics) may help alleviate some productions risks.
ford International Agribusiness Group, The American While these options will likely not be as easy to imple-
Farm Bureau Insurance Services, Inc.) also provide crop ment as changing husbandry techniques, they will also
insurance that can help protect aquaculture producers provide some protection from marketing risks, too, in that
from loss. Consult with your local insurance agent to you will have additional products to bring to market.
determine what coverage is available to suit your needs. Traditional agricultural marketing practices dictate
that a producer is a price taker, not a price setter this
often holds true in aquaculture as well, where producers
Non-insurance Options generally sell into commodity markets with similar prod-
In some instances, non-insurance options to manage ucts and try to compete on price alone. An alternative
risk in aquaculture may provide a producer with a viable approach to offset the risks associated with this type of a
alternative to crop insurance. While, non-insurance risk marketing strategy is to create a unique identity that can
management options are likely to be as varied as the very help differentiate your product from others in an attempt
risks they are intended to manage, these too can be to capture a higher consumer price (i.e., niche marketing).
grouped together based on the type of risk encountered, Options to achieve this goal include branding, where
namely production and marketing risks. While some con- the product form does not necessarily differ from your
cepts will overlap, others are unique to either production competitors, but the brand association indicates to a con-
or marketing. Regardless of the specific risk they are sumer that your product is of superior quality or has other
intended to deal with, they all are intended to preserve the desirable characteristics (e.g., locally produced, all natu-
bottom line. ral); creation of value-added products, where the origi-
Management of production risks such as disease, nal commodity is further processed to make it more
predation, water quality degradation, and power outages, appealing (e.g., vacuum packaging, smoking, breading),
can be accomplished by a number of methods: (1) chang- and selling into alternative, often higher value markets
ing husbandry practices is one simple method that can (e.g., live, direct to retail, retail).

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 Conclusions gating risk management issues. USDA also has a fact
sheet, Risk and Risk Management (USDA RMA Fact
All business involves risk the best we can do is to min- Sheet # PA-1667-03) that may be useful. Extension
imize the impact that risks have on the financial stability agents and specialists, university personnel or your state
of our operations. How we manage risk in aquaculture is aquaculture association can help provide further informa-
almost as important as the risk itself. While any number tion; a list of state aquaculture extension personnel is
of options may exist to manage each potential risk, each available on the NRAC website (www.nrac.umd.edu) or
option has associated costs and benefits that you must you can contact your local Cooperative Extension Office
weigh against the risk itself. Keep in mind the three guid- for an initial contact. Further information about aquacul-
ing rules of risk management: (1) dont risk more than you ture insurance programs around the world is available
can afford to lose, (2) dont risk a lot for a little, and (3) from Review of the Current State of World Aquaculture
understand the likelihood and severity of possible losses Insurance (FAO Fisheries Technical Paper No. 493.
prior to investment or initiating an aquaculture business. Rome, FAO. 2006. 92p).
Whether you are new to aquaculture or an experienced
producer, these rules should be second nature. Doing your Acknowledgments
homework, educating yourself about aquaculture produc-
tion and marketing strategies, and remembering that aqua- This work was conducted with the support
culture, as with other agricultural enterprises, is a business of the Northeast Center for Risk Manage-
will help you manage the risks that lay ahead. ment Education and the Northeastern
Regional Aquaculture Center, through
grant number 2004-38500-14589 from the
For More Information Cooperative State Research, Education, and Extension
The National Risk Management Feasibility Program Service, USDA. Any opinions, findings, conclusions, or
for Aquaculture website (www.agecon.msstate.edu/ recommendations expressed in this publication are those
aquaculture/) and the USDA Risk Management Agency of the author and do not necessarily reflect the view of the
website (www.rma.usda.gov/) are first stops for investi- U.S. Department of Agriculture.