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« October 2008 Table of Contents

The need for feed

Economics, environment drive fish feed reformulations

Stable pricing has given farmed fish a foothold with U.S. seafood buyers, who also like the consistent quality and year-round availability. But over the past year, prices for many of the United States' most popular farmed seafood species - including Atlantic salmon, catfish and tilapia - have risen, and a major reason why is the cost of fish feed. Since 2005, prices for major feed commodities have roughly doubled, and in just the past 
 12 months, fishmeal prices have skyrocketed, increasing up to 125 percent.

Because corn, soy, wheat, canola, fishmeal and fish oil are all increasingly expensive, farmed fish aren't likely to get cheaper any time soon, especially now that livestock and fish farmers, the primary fish oil buyers, are competing against a growing field. The popularity of nutritional supplements containing omega-3 fatty acids from fish oils and the burgeoning alternative fuels market - not to mention the turbulent rise in petroleum costs - have established a new pricing dynamic.

On top of it all, producers of carnivorous species like salmon must address mounting non-governmental organization (NGO) concerns that their fish simply eat too many fish. Global forage fisheries that are harvested almost exclusively for fishmeal and fish oil reduction, including Peruvian anchovies and U.S. menhaden, are in heavy demand. Securing a nutritious and sustainable feed supply is quickly becoming the aquaculture industry's top priority.

"Feed can make you or break you in the production world," says John Schramm, president of Tropical Aquaculture in Rutland, Vt., a vertically integrated tilapia producer that manufactures about 20 percent of the feed used on its farms in Central and South America. "Efficiency is paramount in the survival of an aquaculture operation."

To lower costs, Tropical and other fish farmers work with feed manufacturers to reformulate fish feed's blend of protein and other key nutrients to grow healthy, high-quality fish at an affordable price. However, that is becoming a difficult task. According to a 2002 report by the Virginia Cooperative Extension, a joint program between Virginia Tech University and Virginia State University, fish feed represented 40 to 50 percent of production costs for global finfish aquaculture operations. Most sources interviewed for this story say it's now more than 60 percent.

"The industry is under pressure to reduce [fishmeal] inclusion rates. We used to use 20 percent fishmeal and now it's closer to 10 percent," says Joshua Goldman, managing director of Australis Aquaculture in Turners Falls, Mass., the United States' largest barramundi producer. "But at a certain point you can't keep doing that."

The price of fishmeal, Goldman notes, jumped from $800 a ton last year to $1,800 a ton in recent months. The increase is one factor prompting Australis and other aquaculture companies to seek alternative sources of protein and other nutrients for their feed.

"It's always a balance," Goldman says. "Science always tells us we can use less of these ingredients than what we find is practical in the field. It's pushed us in the right direction in terms of sustainability. But we can't risk performance."

Reducing dependence

Both economics and the environment influence feed prices as well as the level of reformulation activity, says Chris Beattie, sales manager for Skretting North America in Vancouver, British Columbia. Skretting, a subsidiary of Nutreco, one of the world's largest feed manufacturers, has experimented with protein substitution techniques for two decades.

"Like a lot of things, [reformulations] don't necessarily come into play until economics put you on that route," he says. "Now every day I have a conversation about some kind of nutritional aspect or [protein] substitution."

With commodities becoming increasingly volatile in price and availability, manufacturers must balance their feed's nutritional needs with affordability. And the competition among feed providers is fierce, says Beattie.

"It's almost like a perfect storm of everything we use [in our feed]," Beattie says. "Economics will always be a big driver in feed formulations."

Finances were an afterthought when Kona Blue Water Farms in Kailua-Kona, Hawaii, decided to reduce its dependence on the world's forage fisheries, says company President Neil Sims.

When Kona Blue began raising Kona Kampachi®, a yellowtail relative, several years ago in net pens off Hawaii's Big Island, the fish were fed pellets comprising 80 percent fishmeal. Like Atlantic salmon, kampachi require a diet reflecting its wild cousin's, which until recently meant a heavy reliance on fishmeal.

Knowing this dependency was one of the environmental community's chief complaints about farming carnivorous species, Kona Blue decided in 2006 to reformulate its feed to about 50 percent fishmeal and fish oil. Two subsequent reformulations - the latest coming this August - reduced the feed's fishmeal content to 20 percent, with poultry byproducts filling in for the losses in proteins and essential amino acids.

It was a decision their environmental consultants applauded, but it cost the company one of its major customers. Natural-foods retailer Whole Foods Market subsequently removed kampachi from its seafood counters because its policies don't allow for farmed fish to be fed land-animal byproducts.

"We talked with Whole Foods extensively. They weren't interested in changing their policy," says Sims, "There are vegetarians out there who still like to eat fish, but they don't want to eat fish that eat land animals."

Kona Blue, however, had its eyes on a bigger prize: a "good alternative" rating from the Monterey Bay Aquarium's Seafood Watch program, a consumer-based pocketsize seafood buying guide that determines what it says are the most responsible seafood choices regarding sustainability, food safety and environmental impacts.

"It's very important to us to be in a position of leadership," says Sims. "But to have that broader recognition in the marketplace with the MBA ranking is a tremendous response. The fact that this is achievable is a huge step forward for this industry and should change the tone in the debate about the ecological viability of growing fish in the ocean."

The makeup of fish feed, even for carnivorous species, will change as researchers learn more about aquaculture, which is in its infancy compared to livestock, says Diane Bellis, Ph.D., a researcher with AgSource in Washington, D.C.

"We have a very limited understanding of what fish need," says Bellis, who is a consultant for the United Soybean Board and collaborated with Kona Blue during its feed trials. "Chicken, they're all genetically the same. That's just not true of fish."

Bellis is bullish on soy's potential use for aquaculture feeds, including the development of orange-hued soybeans that could replace beta-carotene and other nutrients used in salmon feed to give the farmed fish their customary orange color; otherwise, the flesh would be gray and unappealing.

"[Soybean] farmers see the aquaculture market as a big opportunity," she says. "But that's not to say it won't come at a premium."

The price of soybeans has increased tremendously over the past several years. According to the USDA's National Agricultural Statistics Service (NASS), the average U.S. price of soybeans increased from $4.38 per barrel in 2001 to $10.40 per barrel in 2007.

Higher feed costs are hitting the farmed salmon industry particularly hard, especially in Chile, where growers are also wrestling with infectious salmon anemia (ISA), a disease that spread quickly after first being detected there in July 2007; ISA, while harmless to humans, also arose in Norway and Canada in years past with devastating effects. One producer of farmed salmon from Chile says worldwide fish oil demand for nutritional supplements is making it challenging to remain profitable, adding that salmon feed prices are up 32 percent this year compared to last.

"Higher feed costs, coupled with the challenges Chile has faced with ISA, will make for a rough year or two," says Jason Paine, VP of sales and marketing at Multiexport Foods' Miami office.

The right direction

A commitment to environmental needs will pay off, says Becky Goldburg, director of marine science at Pew Charitable Trusts in Washington, D.C. Moving toward alternative feed ingredients is the most important challenge facing the aquaculture industry, she says, because it is a global issue. For carnivorous species, essential long-chain omega-3 fatty acids come only from marine sources. Therefore, reduction fisheries are crucial, but the aquaculture industry's awareness of its dependence on them is growing, Goldburg says.

"In terms of a global footprint, feed is probably the aquaculture industry's biggest - [about] 33 percent of world's fisheries go to reduction for fishmeal," Goldburg says. "And there's now some evidence that some reduction fisheries may be expanding because of demand for fishmeal worldwide."

Matt Elliott, senior associate at California Environmental Associates, a San Francisco consulting firm that is working with the David and Lucille Packard Foundation and its sustainable seafood research, says global animal production is increasing 3 percent annually. Aquaculture is growing at a 9 percent annual rate, he says, and not even a lack of fishmeal can stop its expansion.

"Science is improving the 
 ability to substitute other products for fishmeal and fish oil," Elliott says. "All the major feed producers recognize this. It's in their interest to investigate all the substitutes. It's the direction the industry has to head in. The challenge is to make it cost effective."

The United Nations' Food and Agriculture Organization reported earlier this year that demand for fish oil will strengthen in the near future for both animal feed and for human consumption. "A price level of $2,000 a ton will be considered an average price level, with some room for upward movement," the report stated.

"The fact that everyone has started to take fish oil pills - the aggregate effect of that is a significant variable," says Goldman of Australis Aquaculture. "Nutritional use is up. And all of the oils [we're] competing with are up."

Global fishmeal production is dominated by Peru, followed by Chile, China, Thailand and the United States. According to the International Fishmeal and Fish Oil Organization, a United Kingdom-based nonprofit group that represents fishmeal producers worldwide, Peruvian anchovies represented 29 percent of all fish stocks used in global fishmeal production from 2002 to 2006. U.S. menhaden and pollock represented only 5 percent combined.

"If we're going to increase the scale of open-ocean aquaculture, we can't do that on the backs of Peruvian anchovetta," says Sims.

But if commodities are already fully exploited, where will feed ingredients come from to fuel the industry's growth?

"There's not a panoply of options now, but investment in technology by government could play an important role in creating better fish feeds for the future," says Goldburg. Because of price, soybeans and other agricultural commodities "are less attractive alternatives than they used to be," she says.

"Some members of the aquaculture industry are making considerable progress [with reformulations], even some of the salmon farmers," says Goldburg. "Part of it is a price issue, so there's an incentive to reduce inclusion."

Trading catfish for corn

Despite a far lesser dependence on fishmeal and fish oil, producers of catfish, tilapia and even shrimp are paying more for feed.

Schramm, of Tropical Aquaculture, says his feed costs jumped in the last year from $320 to $530 a ton. All other costs aside, he says, feed costs are responsible for a 50-cent per-pound increase in Tropical's fresh tilapia fillets, and fuel is responsible for another 30- to 50-cent increase.

"It's all about managing your input for the highest output," Schramm adds. "But are we [as an industry] more responsible about how we farm as opposed to 10 years ago? Absolutely."

Unsurprisingly, fuel is a major influence on agricultural products. According to NASS, U.S. farm production expenditures increased 9.3 percent last year compared to 2006 and nearly 30 percent compared to 2001. Farmers are paying more for not only petroleum, but also for fertilizer products, chemicals and transportation services. And indirectly, NASS says, growing demand for ethanol from corn has led to higher crop prices, resulting in increased costs for livestock and aquaculture feed.

The increase has hit the domestic catfish industry particularly hard, forcing more farmers to leave the business. A Mississippi State University economic report from August found that catfish feed prices increased from $250 a ton last year to more than $400 a ton this year. Even as live fish prices increased from about 70 cents per pound to more than 80 cents, many catfish farmers simply couldn't come out ahead and are draining their ponds to plant corn.

The major question remains, how much higher can the price of feed commodities go, and, in turn, the price of farmed fish? It appears there is no ceiling.

"Nobody's saying the price of energy is going to go back to where it was," says Bellis of AgSource. "I'd say protein is the same way, whether it's fishmeal or soybean meal. What's important [for fish farmers] is to have as many options as possible."

Add to that a customer base willing to pay higher prices for fish.

"Thankfully, [price increases are] being accepted and understood, because it's something we have to do to stay in business," says Rob Mayo, president of Carolina Classics Catfish in Ayden, N.C.

Assistant Editor James Wright can be e-mailed at jwright@divcom.com