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Training Course on Feed Formulation and

Feed Evaluation for Aquaculture Species

Economics of Feeding: Concepts,


Principles & Applications
Prepared and lectured by:

Nerissa D. Salayo, Ph.D.


Socioeconomics Section
SEAFDEC/AQD, Philippines
ndsalayo@seafdec.org.ph

Why study economics of feeding?


Oh thanks
they will study
how to feed us
efficiently.

Better understanding of
feeding management and
economics of feeding
Learn how to optimize
feeding of aquaculture
species

Improve the efficiency of


aquaculture production
Gain competency as
researchers in aquaculture
nutrition
Nerissa D. Salayo, SEAFDEC/AQD, Philippines

Objectives

Objectives of this lecture


Introduce some concepts,
principles and approaches for
evaluating and ensuring an
economically viable aquaculture
venture

Understand and apply methods


for evaluating the economic
efficiency of feeding in
aquaculture
Researchers should be able to
develop sound proposals and are
competent to conduct studies in
aquaculture nutrition

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 in
determining the desirable and efficient level of output
in aquaculture production
apply the indices for evaluating the cost
effectiveness of feeds
describe the least-cost combination approach in
selecting appropriate aquaculture feeds
introduce the linear programming approach in feed
formulation

Global aquaculture continue to grow in 2010 (7.5%),


but slower rate than in 1980-90s
Global
consumption
increased to
8.7kg/cap

Top aquaculture producers of food fish, 2010


(FAO, 2012)
Production
(million mt)

World
Rank

Country

Freshwater
production
increased to
66%

2.67

3rd

Vietnam

4.46

2.30

4th

Indonesia

8.85

1.29

6th

Thailand

2.15

0.85

9th

Myanmar

1.42

Imbalanced
global
distribution of
produce

0.74

10th

Philippines

1.24

53.30
59.87

Total

% Share

Asia

89.02

World

100

Nerissa D. Salayo, SEAFDEC/AQD, Philippines

Economics

Aquaculture economics

allocation of
scarce
resources to
meet
unlimited
human needs
and wants.

allocation of
scarce

resources in the
production of aquatic
organisms under
managed conditions to
satisfy some
human needs and wants.
Nerissa D. Salayo, SEAFDEC/AQD, Philippines

Introduction: Evaluation of Feed Quality


vs 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.

Factors affecting profitability of


aquaculture enterprises
increase in production
increase in farm prices
reduction in cost
Profit= (production x price) - cost

Nerissa D. Salayo, SEAFDEC/AQD, Philippines

Stage I

Production function

Output per unit input


increase at increasing rate

Figure 1. Relationship between TPP, APP and MPP


800

Fish yield TPP

Le ve l of output (TPP)

600

MSY

Average yield APP


Marginal yield MPP

500

400

300

Stage I

Stage II

Stage III

200

100

0
100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400
-1

-100

Stage II

Level of feeding or input, X 1

Adopted from Samuelson,P. economics textbook for


aquaculture production system

APP, MPP

700

Output per unit input


increase at decreasing rate
MSY maximum
sustainable yield

Stage III
Output per unit input is
negative

no economic benefits from


any additional input
Nerissa D. Salayo, SEAFDEC/AQD, Philippines

Production function
expression of the

Example:

Y = f (X1, X2, X3, X4, X5,, Xn)

technical relationship

between
inputs and
outputs at a given
time using a
technology

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 fertilizer
X4 = stocking density
X5 = amount of labor
Xn = other inputs
Nerissa D. Salayo, SEAFDEC/AQD, Philippines

Profit maximization
The main
objective of
production
analysis is to
maximize profit.

What level of
production will
result in
maximum profit
given a level of
resources such
as feed?

Fish
farmers
should
consider
profit
attained
at
various
levels of
input

Relationship between MEY and


other cost and revenue variables
VTP (value of total
product) - revenue curve

TVC total cost curve


Profit = shaded area
(difference between
revenue and cost)
MEY (maximum
economic yield) - biggest
difference between VTP
and TVC curves

MEY attained before


MSY (maximum
sustainable yield)

Lessons learned

Maximizing farm production


does not always result to
maximum profits because we
have to consider the cost of
inputs.
Decision to maximize profit
is based on marginal
analysis or on whether there
is additional benefit from any
unit of additional input.

Categories of cost items in producing aquaculture feeds

Variable costs - direct payments for the


items used in the manufacture of the feed. Cost
that vary or change according to volume of the
feed produced
Examples:
Material cost - feed ingredients - fishmeal,
mineral and vitamin mixes, and other
ingredients

Labor - wages & salaries of workers


manufacturing the feeds through grinding,
pulverizing, mixing, pelletizing and oven drying
Electricity - used to operate feed mills & other
electrical equipment

Categories of cost items in producing aquaculture feeds

Fixed costs - include expenses


incurred regardless of whether feeds are
being produced at any amount or not at all.
These costs include:
- Supervisory & management overhead
expenses
- Depreciation of fixed assets such as
buildings
and feed milling and cooking equipment
The cost of packaging and storage of the
feeds is not included in the computation.
They are classified as post-production or
marketing cost

Evaluation of
cost of feeds
1.variable costs
2.fixed costs
= total cost

Indexes for measuring the efficiency of feeds:


1. Feed conversion ratio (FCR)

- ratio of total amount of feeds by


weight to the total weight of the
fish yield
The lower the ratio, the more
efficient the feed, regardless of the
cost.
FCR, however, does not take into
account the cost of feeds and the
economic efficiency of using feeds.

Feed Conversion Ratio (FCR)


Example
A fish farmer harvested 14 tons of fish in marine cages. His
record book shows he used 600 bags of feeds for the whole
cropping season. Each bag of commercial feed contains 25
kg. What is the FCR?
Feed
Conversion =
Ratio (FCR)

Total amount of feeds used by weight


Weight 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

Indexes for measuring the efficiency of feeds:

2. Incidence Cost (IC)


method of measuring cost
efficiency of feeds.
computed as the ratio of the
total cost of the feed used to
the weight of the fish produced.
The feed with a lower incidence
cost is economically more
efficient.

Incidence Cost (IC)


Example
A fish farmer harvested 14 tons of fish in marine cages.
His record book shows he used 600 bags of feeds for the
whole cropping season. Each bag of commercial feed
costs US$9.00 and contains 25 kg. What is the incidence
cost (IC)?

(IC) =

Feed cost
Weight gain
600 bags of feeds consumed x US$9.00

=
=

14 tons fish yield x 1000kg/ton


US$5,400
14,000 kg

IC = US$0.39/kg fish

Indexes for measuring the efficiency of feeds:


Percent Return on Feeds (% RF)
- method of measuring economic efficiency of feeds
based on the value of the fish produced and the cost
of feeds.

- The value of the fish not only accounts for the weight
or volume, but also on quality of the harvest. Good
quality fish obtain higher price.
- % RF is computed as the ratio
of the total value of the fish
produced to the total cost
of feeds used.

Percent Return on Feeds (% RF)


Example
A fish farmer harvested 14 tons of fish in marine cages.
His record book shows he used 600 bags of feeds for the
whole cropping season. Each bag of commercial feeds
cost US$9.00. He sold the fish at US$1.15 per kg. What is
the Percent Return on Feeds?
%RF =Total value of fish produced Total cost of feeds
used
= (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%

Indexes for measuring the efficiency of feeds:

Profit Index (PI) - index for measuring economic


efficiency of feeds.
PI shows the proportion of the net profit relative to
the cost of feeds
Higher PI is most desirable.

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 the
whole cropping season. Each bag of commercial feeds cost
U$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

Cost and returns analysis of pen culture of Clarias macrocephalus


at stocking density of 10 fish/sqm and fed three different diets for
120 days (values are on a per ha per crop basis in US$)
Diets 2 and 3
showed lower
incidence
costs, higher
profit index
and higher
returns on
feeds relative
to diet 1.
Using diet 2
and 3 are costefficient
options, but
not diet 1.

Determining Least-Cost Combination of Feeds


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

Least-cost combination techniques are used in


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

Marginal Rate of Substitution (MRS) - indicates the


rate 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 / Amount of Feed B

Determining Least-Cost Combination of Feeds


Price Ratio - refers to the ratio of prices of the two feeds.
The inverse of the price ratio is compared with MRS.
Price ratio = Price of Feed B / Price of Feed A

Least-Cost Combination (LCC) - this occurs when MRS


equals 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.

Determining Least-Cost Combination of Feeds


Least-Cost Combination (LCC)- this occurs when MRS equals
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.
Amount of Feed A = Price of Feed B
Amount of Feed B
Price of Feed A

Example: Least-Cost Combination


Feed A cost US$11.5 per bag and
Feed B cost US$9.00. Each bag
contains 25kg of feeds. Using the
relatively cheaper Feed B, the fish
farmer can expect the same level of
fish production.
Feed A is more expensive than Feed
B and it has a higher nutrient
composition.
Thus, to produce the same output, a
little more of Feed B is needed than
the amount of Feed A that was
replaced.

Example: Least-Cost Combination


Table 10.6 shows the combinations of Feed A and Feed B. The
rate of substitution indicates the amount by which Feed A
must be replaced by a unit of the amount of Feed B.
You will see that the least cost combination occurs when we
use 310 bags of Feed A and 400 bags of Feed B.
The total cost of this feed combination is lowest at
US$7,165.00.

Computations for finding the least cost combination for replacing


Feed A with Feed B (Price of Feed A, PA = US$11.5/bag; price of
Feed B, PB = US$9.00/bag)

Summary of Lesson Learned


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

Lesson 2 - Production function analysis - technical relationship


between 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 such
as feed. Maximizing farm production does not always maximize
profits 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) and
percent return on feeds (%RF).
Lesson 6 - Concept of Least-Cost Combination of resources such as
feeds based on the evaluation of the marginal rate of substitution
(MRS) and price ratios of feeds

Thank you!