An Economic Analysis of The Use of Recirculating Systems in The Production of Tilapia

AN ECONOMIC ANALYSIS OF THE USE OF
RECIRCULATING SYSTEMS IN THE PRODUCTION

OF TILAPIA.
FRANK APPIAH-KUBI
Master Thesis 30 credits 2012
Department of ANIMAL AND AQUACULTURAL SCIENCES
MASTER OF SCIENCE IN AQUACULTURE
AT
An Economic Analysis of the use of Recirculating Aquaculture

Systems in the Production of Tilapia
FRANK APPIAH-KUBI
Main Supervisor
Professor Hans Magnus Gjøen
Department of Animal and Aquaculture Sciences
Norwegian University of Life Sciences
Ås, Norway
Co-Supervisor
Bjørn-Frode Ericsson
Department of Mathematical Sciences and Technology
Machine, Process, Water, Agriculture and Product Section
Norwegian University of Life Sciences
Ås, Norway
i
DECLARATION
I hereby declare that this thesis is a bona fide record of research work done by me as a part of my
master degree program from the Norwegian University of Life Sciences (UMB), Ås, Norway.
It has not previously formed the basis for the award of any degree, diploma, fellowship to me, or
other similar title of any other university or society.
I hereby warrant that this thesis is based on work done by myself and where sources of
information have been used, they have been acknowledged.
Ås, May 2012 F. Appiah-Kubi
.. .………………………….
ii
PREFACE
The submission of this master thesis marks the end of my MSc. Program in Aquaculture. The
study was carried out at the Department of Animal and Aquacultural Studies of the Norwegian
University of Life Sciences.
Economic analysis of Recirculating Aquaculture Systems (RAS) in the production of tilapia has
been the focus of many researchers worldwide. A great deal of emphasis was placed on the
biological and engineering aspects of the production in these past researches. Research works
which incorporates the biological and engineering developments, together with the economics of
RAS in tilapia production are scarce in Norway. Also, advances in commercialization of RAS
technology in tilapia production in Norway is widely accepted to be in its infancy compared to
other aquaculture production techniques. I believe this study incorporating the biological,
engineering and economics associated with the production of tilapia on a commercial scale
would provide useful data for making logical and applicable inferences, as well as, basis on
which future researches into the economics of RAS could be hinged.
Differing from most of other studies on the economics of RAS in the production of tilapia, this
analysis primarily focused on the operational (running) costs using data from both the prototype
RAS production and commercial scale production. Another analysis which incorporated
variables such as capital and infrastructure costs, depreciation rates and tax rates was developed,
but unfortunately excluded from this final report because the plausibility of some data used could
not be verified due to non availability of information. The financial feasibility of the various
production scenarios is discussed together with the production variables found to have high
impact on profitability.
F. Appiah-Kubi Ås, May 2012
iii
ACKNOWLEDGEMENTS
I would like to express my heartfelt thanks to my supervisor Hans Magnus Gjøen for his
guidance, patience during my trying times and support in the course of conducting this
experiment and the thesis write-up. I also extend my sincere thanks to Bjørn-Frode Ericsson for
his fatherly advice and taking time to discuss various issues in relation to the RAS at UMB with
me. God richly bless him for his support.
I would also like to thank Bjørn Reidear Hansen, who helped me in the data collection and for
his moral support. Mr. Godwin Acquah Dwomoh and Isaac Kumah, your brotherly love and
support cannot go unacknowledged. To all, who in diverse ways contributed directly and
indirectly to the success of this thesis; I say, thank you and may the Almighty God bless you.
iv
DEDICATION
This work is dedicated to my son Jerome Nyarko Appiah-Kubi, my lovely wife Gloria Appiah-
Kubi, not forgetting my mum Madam Veronica Nyarko whose singular efforts saw to my rise on
the education ladder. To God be all the glory, honour and praise for how far he has brought me.
v
ABSTRACT
An economic analysis of tilapia production was conducted using a recirculating aquaculture

system facility, situated at the Norwegian University of Life Science (UMB). The goals were; (1)
to evaluate and estimate the operational cost involved and from this, estimate the breakeven cost,
(2) identify and describe the constraints unique to the RAS, (3) to perform financial feasibility of
a (hypothetical) scale-up production, and (4) to conduct sensitivity analysis on some variables to
highlight their effect on profitability. All assumptions made in this study, production scale and
the economic analysis were based on the technology design, and production parameters existing
at the UMB facility.
Tilapia (0.36g), were stocked in the tanks; temperature and water quality parameters were
carefully managed until the fish reached the harvestable size (700g) after 140days. The survival
rate and feed conversion ratio (FCR) were 91% and 0.8 respectively. Economic analyses was
conducted on three different production scenarios, (1) ‘actual’ production carried out at the
UMB facility, (2) analysis on the same scale of production, with the introduction of some
correctional data from commercial productions, and (3) scale-up (hypothetical) production
system based on the design criteria of the UMB facility.
The results showed that, the operational cost involving the UMB production was high and
economically not viable. A price of NOK 73 is required to be able to breakeven relative to the
prevailing market price of NOK 40. The production in this scenario needed to be increased by
54.8%, to be able to breakeven.
The introduction of cost data from commercial productions in the second analysis resulted in a
drastic reduction in operational cost. Breakeven price and breakeven yield estimated were NOK
42.7 and 1163kg respectively. However, for the scale-up production, NOK 40.2 was the
estimated cost to breakeven. The breakeven yield estimated for the scale-up production was
109663kg of tilapia. Indications thus, were that, prospects for economic success with RAS under
Norwegian conditions can be improved by a large scale production. The sensitivity analysis
revealed that, reductions in the cost of production variables such as labour, feed, and electricity,
have marginal effects on profitability. Increases in sales price and production scale were found
to have the highest impacts on profitability and improvements in these variables would yield
maximum profit.
Key words: Scale-up, sensitivity analysis, breakeven yield, breakeven cost, economic analysis.
vi
TABLE OF CONTENTS
DECLARATION…………………………………………………………………………... II
ACKNOWLEDGEMENTS……………………………………………………………….. III
DEDICATION…………………………………………………………………………….. IV
Abstract…………………………………………………………………………………….. V
TABLE OF CONTENTS VI
List of tables……………………………………………………………………………….. VIII
List of figures……………………………………………………………………………..... VIII
Abbreviations………………………………………………………………………………. X
1.0 INTRODUCTION……………………………………………………………………. 1
1.1 Species and production parameters………………………………………………….. 2
1.2 Culture attributes of Tilapia………………………………………………………….. 2
1.3 World Production and Trade………………………………………………………… 3
1.4 Recirculatory Aquaculture Systems…………………………………………………. 5
1.4.1 Advantages of Recirculating Aquaculture Systems……………………………... 6
1.4.2 Risk Management………………………………………………………………... 6
1.4.3 Recirculating Systems in Norwegian Aquaculture industry……………………... 7
2.0 MATERIALS AND METHODS……………………………………………………. 8
2.1 Description of the UMB fish laboratory……………………………………………... 8
2.2 Production Setup……………………………………………………………………... 9
2.3 Production scenarios and models of estimations…………………………………….. 11
2.3.1 Biological model…………………………………………………………………. 11
2.3.2 Economic (model) analysis techniques………………………………………….. 12
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2.3.2.1 Cost Volume Analysis……………………………………………………….. 12
2.4 Sensitivity analysis…………………………………………………………………... 14
2.5 Alternative budget and Economies of scale (scale-up production)………………….. 15
2.6 Cost estimations of the main operational areas in the production…………………… 17
2.6.1 Fingerlings……………………………………………………………………….. 17
2.6.2 Feed and feeding………………………………………………………………… 17
2.6.3 Labour costs……………………………………………………………………… 17
2.6.4 Electricity………………………………………………………………………… 18
2.6.5 Water analysis……………………………………………………………………. 19
2.6.6 Chemical analysis (Bicarbonate/lime)-pH control………………………………. 20
2.6.7 Slaughtering……………………………………………………………………… 20
2.7 Operational cost analysis-UMB RAS facility……………………………………….. 21
2.8 Alternative Budget…………………………………………………………………… 21
2.9 Scale-up production………………………………………………………………….. 21
3.0 RESULTS……………………………………………………………………………... 22
4.0 DISCUSSION…………………………………………………………………………. 28
4.1 Cost of labour………………………………………………………………………... 28
4.2 Electricity…………………………………………………………………………….. 28
4.3 Cost of feed………………………………………………………………………….. 29
4.4 Fingerlings…………………………………………………………………………… 29
4.5 Economies of scale…………………………………………………………………... 31
4.6 Sensitivity analysis…………………………………………………………………... 31
5.0 CONCLUSION……………………………………………………………………….. 32
viii
5.1 Limitations of the study……………………………………………………………… 32
6.0 REFERENCES……………………………………………………………………….. 33
7.0 APPENDIX……………………………………………………………………………. 40
LIST OF FIGURES
Figure 1: Major Tilapia producing countries in the world………………................................. 4
Figure 2: Global Aquaculture production of Nile Tilapia………………………………...…….5
Figure 3: A schematic design of the basic components of the facility...…………………………….9
Figure 4: The hatchery (part) used in the production of fingerlings…………………………….10
Figure 5: The weaning tanks used in the production……………………………………………10
LIST OF TABLES
Table 1: Summary of variables used in sensitivity analyses and the corresponding variations
applied to assess the potential impacts on the financial performance of the UMB facility
and the scaled-up production……………………………………………………………………15
Table 2: Basic costs and units of economic, engineering and biological parameters monitored
at the UMB facility………………………………………………………………………………16
Table 3: Shows the various components where electricity usage occurs and the amount
consumed………………………………………………………………….……………………..18
Table 4: Summarizes the fixed and variable costs, cost of prod. Kg of tilapia and the % of
parameters to total production cost (UMB laboratory)………………………………….....22
Table 5: Summarizes the estimations from the economic models for the UMB facility………….23
Table 6: Summarizes the operational costs, cost of producing a kg of tilapia and the %
Impact of each parameter to total production cost for the alternative budget.................23
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Table 7: Summarizes the results of the economic model estimations for the alternative budget..24
Table 8: Summarizes the fixed and variable costs, total operation costs, cost of producing a kg
of tilapia and the % impact of each parameter on the total production cost for the
scaled-up production…………………………………………………………………………….25
Table 9: Summarizes the results of economic model estimations for the scaled-up
(hypothetical) production…………………………………………………………………………………26
Table 10: Summarizes the results of the sensitivity analysis performed for the identified
variables………………………………………………………………………………………….26
x
ABBREVIATIONS
UMB: Norwegian University of Life Sciences
RAS: Recirculating Aquaculture Systems
FAO: Food and Agriculture Organization of the United Nations
EU: European Union
TAN: Total Ammonia Nitrogen
UAN: Unionized Ammonia Nitrogen
FCR: Feed conversion Ratio
CVP: Cost -Volume –Profit
Kg: kilogram
NOK: Norwegian Kroner
GIFT: Genetically Improved Farmed Tilapia
NCRAC: North Central Regional Aquaculture Center
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1.0 Introduction
Aquaculture is one of the fastest growing sectors of food production in the world. Cultured
species such as tilapia, catfish, salmon, trout, oysters and clams are high in demand and the profit
level is very high. The boom in this industry can be attributed to the growing demand for a
healthy, tasty and affordable food as well as the sharp decline in wild fish populations as a result
of overharvest and water pollution (Helfrich & Libey, a). The rampant pollution of fresh water
resources has also necessitated the need for the culturing of fish in waters free from
contamination. Recirculating aquaculture system (RAS) technology has been found to provide a
way in solving this problem. This is a technology designed for holding and growing a wide
variety of aquatic species and defined as production units which recycle water by passing it
through filters to remove metabolic and other waste products (Kazmierczak & Caffey, 1995).
The systems can be designed to cater for different capacities and efficiencies. In comparison to
the traditional aquaculture practices, RAS offers more independence from the external
environment (i.e. increased levels of control) which provides a basis for improved risk
management (Rawlinson, 2002). Majority of the worlds tilapia productions are done using the
pond systems, however, in the temperate regions, RAS is employed in the production due to the
cold climatic conditions. This makes the production cost higher since huge capital is expended
on the RAS construction and the running of other production mechanisms such as heating,
pumping and filtering of the water (Alceste & Jory, 2002). A lot of European countries are now
using RAS in fish production; however, production level is very low compared to other forms of
fish culture (Martins et al., 2010). The construction and operation of these facilities require high
capital injection and this sometimes serves as disincentive to prospective investors (Schneider et
al., 2006). To make up for this, high stocking densities are required in the productions to be able
to cover the investment costs and generate profit. However, the need for high stocking densities
also comes with some welfare challenges (Martins et al., 2005). Aquaculture production using
RAS has been the focus of research and developmental efforts of many groups for decades. Most
of the research has been going on outside Norway; whereas here, it has almost exclusively been
aimed at cold water species and there is consequently no data on the economic performance of a
commercial scale recirculating production systems for tilapia in Norway.
1
The purpose of this thesis project was to conduct an economic analysis on the production of
tilapia using recirculating systems and from this deduce the following:
• The operational cost involved in a closed recirculation systems in a temperate region.

• Identify and describe the constraints unique to the closed system culture.
• Conduct sensitivity analysis to highlight the variables that affects profitability
• To perform an economic analysis (financial feasibility) of the systems in a bigger set
up.
• Suggest key areas where more attention should be focused in future researches.
1.1 Species and Production Parameters
Tilapia, commonly, refers to a group cichlids consisting of three economically important genera.
These are taxonomically distinguished from each other according to their reproductive
behaviours: Tilapia, Oreochromis and Sarotherodon, all commonly known as “tilapia” (Mjoun
& Rosentrater, 2010). The Nile tilapia (Oreochromis niloticus) and various hybrids are the most
commonly produced tilapia species (Green, 2006). Other less commonly cultured species include
Blue tilapia (O. aureus), Mozambique tilapia (O. mossambicus), Zanzibar tilapia (O. urolepis
hornorum) and red tilapia (T. rendalli and T. zilli). O. niloticus represents about 75% of the
world production (FAO, 2009a). Tilapia culture can be in either fresh or salt water, in tropical
and subtropical climates, but the culture can be constrained in temperate climates where
production must be carried out in indoor tanks (Lim & Webster, 2006 in Mjoun & Rosentrater,
2010). Optimal growing temperatures are typically between 22°C- 29°C and spawning normally
occurs at temperatures greater than 22°C (Mjoun & Rosentrater, 2010a). Most tilapia species are
unable to survive at temperatures below 10°C, and growth is poor below 20°C (Mjoun and
Rosentrater, 2010b). They can tolerate a pH range of 3.7-11 but optimal growth rates are
achieved between the pH of 7-9 (Ross, 2000).
1.2 Culture Attributes of Tilapia

The tilapias are second to carps in terms of production as farmed table fish and they exhibit some
unique characteristics that serve as a drive for its continual growth and may soon surpass carp
production. The global demand for their products is high, can be cultured in a variety of
2
production systems and in different geographic regions to contribute to the high world
production. They have been identified as a prime species for use in recirculating systems because
of their tolerance to crowding and low water quality (Drennen & Malone 1990). They are known
to have good-tasting, mild flavour flesh and widely accepted as food fish, used in many cuisines.
A range of variant coloration offers consumers different choices. Reproduction wise, they can
breed in captivity without hormonal induction of spawning. They produce large eggs,
culminating in the production of large fry (at hatching) that are hardy and omnivorous at first
feeding. Sexual maturity is reached in less than 6 months, making them good candidates for
selective breeding. They are tolerant of a wide range of environmental conditions (Chervinski,
1982), including low dissolved oxygen levels (1 ppm); high ammonia levels (2.4 to 3.4 mg/L
unionized), and will grow in water ranging from acidic (pH 4) to alkaline-pH 11 (El-Sayed,
2006). Tilapia can tolerate CO₂ up till 20mg/l and high H₂S levels (Halver & Hardy, 2003) and
various strains can be grown in water varying in salinity from fresh water to full strength
seawater (Watanabe et al., 1997).
They feed on a low trophic level with the constituents of the genus Oreochromis being
omnivores, feeding on algae, aquatic plants, small invertebrates, detritus and in addition, a
variety of feeds of animal origin (Watanabe, 2002). The tilapias are able to grow rapidly on
lower protein levels and tolerate higher carbohydrate than many carnivorous species cultured.
They can be fed with prepared feed that includes a high percentage of plant proteins which are
comparatively less expensive than feed containing a high percentage of fish meal and other
animal protein sources.
1.3 World Production and Trade

In 2008, commercial aquaculture production was about 2.8 million tonnes with a corresponding
estimated value of $3.7 billion. The production was forecasted to reach 3.7 million tonnes by the
end of 2010 (FAO, 2009; FAO GLOBEFISH, 2011a). By 2015, world production is expected to
reach between 4.6 million tonnes and 5 million tonnes (FAO, 2010).
China is largest consumer and producer (produces about 50% of global production) of tilapia,
with a production estimated at 1.15 million tonnes in 2009, from 1.13 million tonnes recorded in
2007, from (FAO GLOBEFISH, 2010 and 2011b). In 2011, China’s production was expected to
reach 1.18 million tonnes by the end of the year (FAO, 2012).
3
According to the third quarter markets report for the year 2011, the EU markets imported about
15832 tonnes of tilapia and the figure shows a marginal increase of 4% compared to the
importations for the same period in 2010 (FAO GLOBEFISH, 2012b). The EU markets are
largely supplied by China, Indonesia, and Brazil. Spain has the highest imports of tilapia (3522
tonnes), followed by Poland (2267 tonnes). The report further asserts that, demand for the
product is increasing and this has necessitated the initiation of some innovative projects in other
parts of the world, including in Africa to cater for the shortfalls. However, China’s contribution
to production levels would still rank the highest and it is expected that, prices for the commodity
would stabilize as the consumption grows. But as it stands now, any reduction in production
levels and exports from China would likely have an impact on the market price indices (FAO
GLOBEFISH, 2012c).
World Tilapia production of 3,200,000 China

Egypt
Philippines
Mexico
Thailand
Taiwan
Brazil
Indonesia
Bangladesh
Colombia
Cuba
Ecuador
Vietnam
Costa Rica
Honduras
Malaysia
USA
Saudi Arabia
Others
Figure 1: Major Tilapia producing countries in the world
4
Figure 2: Global Aquaculture production of Nile Tilapia.FAO Fishery Statistic, 2011.
1.4 Recirculatory Aquaculture Systems
Recirculation aquaculture systems (RAS) are new and a unique way to culture fish. In place of
the old conventional methods of growing fish, RAS offers a means to rear fish in indoor tanks
where the environment can be controlled. The system filters and cleans the water for recycling
back through fish culture tanks (Helfrich & Libey, b). In RAS, more than 90% of the water is
recirculated through a series of biological and mechanical filtration systems so that only a
fraction of the water is consumed (Rawlinson & Foster, 2000). “New” water is added to the tanks
only to make up for losses through splash outs; evaporation and for those that is used to flush out
waste materials. Fish cultured using this technology must be provided with a congenial
environment and conditions suitable for growth and to remain healthy. Clean water, dissolved
oxygen, and optimal temperatures are required to ensure better growth. These are achieved by
the filtration system, aerators and heaters incorporated in the technology design. The filtration
system purifies the water and removes or detoxifies products harmful to the culturing media and
species. Organic particles from faeces and uneaten feed are removed by the mechanical particle
filters, whereas the poisonous metabolic waste products TAN and NO2 (total ammonium
nitrogen and nitrite) are oxidized to less toxic compounds (NO3) in nitrification filters. These
5
filters are sometimes referred to as aerobic biofilters or nitrification filters. In the construction of
the RAS facility, proper sizing of all system components is very important. When the RAS plant
is oversized for its application, the system would function but the cost of running the facility
would be high. Undersized RAS, on the other hand, would not be able to maintain proper
environment to sustain fish production.
1.4.1 Advantages of RAS

RAS offer various advantages ranging from reduction water consumption (Verdegem et al., 2006
in Martins et al., 2010), to the provision of improved opportunities for waste management and
nutrient recycling (Piedrahita, 2003 in Martins et al., 2010). The systems environment can be
controlled to achieve better hygiene and disease management (e.g. Summerfelt et al., 2009; Tal
et al., 2009 in Martins et al., 2010). It offers a near complete environmental control to maximize
fish growth year-round, and the flexibility to locate production facilities near large markets
(Masser et al., 1999; Schneider et al., 2010) to deliver a fresher, safer product and lower
transport cost (Timmons et al., 2001). In terms of product security RAS offers a high degree of
product traceability (Smith, 1996; Jahncke & Schwarz, 2000) and biological pollution control
(no escapees, Zohar et al., 2005 in Martins, et al., 2010). They may be used as grow-out systems
to produce food fish or as hatcheries to produce eggs and fingerling, for stocking and ornamental
fish for home aquariums (Helfrich & Libey, c)
1.4.2 Risk Management and General Production techniques

The systems are complex and require personnel with the required expertise to successfully
manage. Regular monitoring and management are required to maintain the complex system
which involves heating, aeration, circulation and biofilter systems. Any electrical or mechanical
breakdown may result in huge mortalities and this is a major concern when culturing fish using
this system. To operate the system at maximum or near maximum carrying capacity, contingency
measures in the form of emergency alarms and backup power and pump systems needs to be
installed. Biological risk factors are very high in the use of this technology and constant attention
is required to swiftly deal with any anomaly which may occur in order to prevent huge losses.
A recirculation system grows two organisms; fish and a culture of bacterial resident in the
biofilter. This requires constant monitoring of the biofilters to ensure optimum fish growth since
the efficiency of the biofilters is very critical to the success of the production (Kazmierczak &
6
Cafey, 1995b). However, these biofilters have their limitations and management of other parts of
the system may not compensate for the risks posed and the system may fail. Thus, technical
competence is required to perform various tasks such as planning, implementation and
measurement of the performance of processes involved in the running of the setup and to
compare it to standards practices. Although production is the main priority, insight about
marketing trends are very important in order to maximize profit. Data collection by the manager
would provide a basis for comparison of the actual outcome of the production process with the
average performance data (Huirne et al., 1992). A successful combination of the different areas
of management would ensure maximum outcome.
1.4.3 Recirculation Systems in Norwegian Aquaculture industry

The production of freshwater fish for consumption is very limited in Norway. Eikebrokk &
Ulgenes, (1997) identified strict environmental regulations introduced to minimize the risk of
eutrophication of fresh water resources, disease transfer to wild fish stocks, and escapees making
a possible genetic impact on wild fish stock, as the reasons for the limited culture of freshwater
species. Recirculation which offers an alternative means is somehow considered uneconomical
due to the availability of good quality fresh and saline water in Norway. However, the trend is
changing and many farmers are now employing the recirculation technology. They further stated
that, the change in trend may be attributed to the demand for reduced water consumption rates,
the increase in biomass production per unit volume of water, and the need for more economically
viable effluent treatment solutions that would tackle the environmental issues related to particle
separation and disinfection requirements.
Almost all the commercial scale recirculating systems are for salmon farming and none is known
to produce tilapia on a commercial scale. About 85 million smolts are produced using RAS in
Norway (Del Campo et al., 2010) and these smolts are very high in quality; with high rate of
survival and growth after sea transfer (Terjesen et al., 2008). The culture of tilapia using RAS in
Norway is expected to receive much attention in the near future due to the growing world
population, high demand for the commodity, pollution of fresh water resources and climatic
changes.
7
2.0 Materials and Methods
2.1 Description of the UMB tilapia laboratory
The tilapia laboratory at the Norwegian University of Life Sciences (UMB) was established in
2006 and the first tilapia cultured (Oreochromis niloticus, Nile tilapia), came from a Genomar
hatchery in Singapore as a yolk sac fry. This population has been reproduced at the laboratory
ever since.
The Tilapia laboratory consists of 3 separate rooms; feeding section, reproduction room and
water treatment section. The feeding room has 10 big tanks each 250L and 10 small tanks each
with a capacity of 100L.In addition 5 bigger tanks of capacity 400L is also incorporated in the
system. All the tanks are connected to the re-use system with automatic feeders installed on each
tank. Feeding and light regimes can be easily adjusted using the automatic feeders and the
lightening system. The total water volume of the system is 7000L and more than 99% of the
water is re-used in normal operations, allowing for addition of only 2L freshwater per minute
(Hansen, pers.com). The flow rate is averagely 150L/min and a water temperature of 26°C is
maintained throughout the system.
The volume of media in the biofilter is 1.1m³ and a 1kg feed input would produce 0.04kg TAN
in the system, with a TAN removal rate of 25deg. The filter media used is 1.2kg/m³ per day in
normal operations. A level sensor in the biofilter tank is also connected to the fish lab alarm
system. Each fish tank has an individual aeration to keep oxygen at an acceptable level for some
hours in case the circulation pump or the central airblower fails.
The facility was constructed by the University for research purposes and various research works
involving growth studies, nutrition and production are conducted here. The facility is manned by
qualified technicians who manage the day to day running and also act as resource persons to
students when the need arises. Actual data on the RAS at this facility and some other data on
commercial scale tilapia productions for this thesis work were collated under the guidance of
Bjorn Reidear, Hansen (a technician at the laboratory).
Figure 3 below, shows the technology design and the main components of the system. The water
is aerated in the biofilter with the use of air blowers.
8
Figure 3: A schematic design of the basic components of the facility.
2.2 Production Setup

The study was carried out for a 20 week period; from November 2010-March
2010 2011 (winter
period in Norway). About 1500 ffingerlings of 0.36g size (1-1.5cm
1.5cm length) were produced using
the hatchery setup at the facility and stocked in the tanks. The
he various pproduction parameters
(such as feeding, heating, and chemical analysis) were managed daily till they were ready for
harvesting.. A total of 1364 market size (average weight of 0.7kg) tilapia and weighing 1091.2kg
were harvested at the end of production for the market. Data on the biological
logical parameters (feed,
(
survival rate, temperature
erature and pH),
pH engineering parameters and economical parameters (cost of
feed, electricity cost, Labour, market price) were recorded, and are summarized in Table 3. The
data obtained were analysed and used in the economic model (budget
budget) estimations for the
production.
9
Figure 4: The hatchery (part) used in the production of fingerlings.
Figure 5: The weaning tanks used in the production.
10
2.3 Production scenarios and models for estimations
Three scenarios of production were developed and presented in this project. The first scenario
deals with the actual production carried out at the prototype (UMB laboratory) facility. A second
scenario) budget was prepared for the same level of production. Some correctional factors (cost
from commercial level production) were introduced in this budget since the running of the
facility and other auxiliary activities carried out are geared towards research goals and may be
unrealistic in normal operations of a commercial RAS facility. In the third scenario, production
was scaled-up by the ratio 1/100. The models for estimations were applied to all three scenarios
of production and the various estimations, made for each scenario are presented in the results
chapter.
The models for estimations are the calculatory models based on which the various estimations
were made. Some of these tools would be described in detail under the various sub-headings.
2.3.1 Biological Model

These tool were used to estimate incomes and production; growth and mortality. The simplest
tool to use is the formulas for biomass, B (t), and biomass value, V (t):
= 1
Where N is the number of fish at time t, and w is the weight of the fish at time t. The sales output
(value of the fish) from the production is calculated by multiplying price with quantity:
= 2
Where V(t) is the biomass value and p(w) is the price pr. kg fish. The kg price is assumed to
increase as the weight of the fish increases (p’ (w) > 0). This formula does not take into
consideration the effect of seasonal variations on the price of fish (Bjørndal 1987).
Feed Conversion Ratio (FCR):

This is another important biological production parameter to consider.
= 3
₂ ₁
11
Where FCR is kg consumed feed per kg growth, FB consumed feed in kg, BM₂ is biomass at
harvest, BM₁ is start biomass, or biomass at stocking, and FT is fish lost to mortality (Einen &
Roem, 1997).
2.3.2 Economic (model) Analysis techniques

These are the theoretical concept that represents the economic processes underlying the set of
production variables and shows quantitatively, the relationship between these variables. The
economic analysis methods employed in this thesis project are:
i. Cost-volume-profit analysis (breakeven analysis and profitability analysis)
ii. Sensitivity analysis
2.3.2.1 Cost-volume-profit (CVP) analysis

The volume of fish sales relative to its expenses has an important influence on financial
feasibility. Understanding the relationship between the volume of production and expenses
involved in the production plays a key role in achieving profitability objectives (O’Rourke,
1996). When sales volume is less than anticipated, expenses as a percent of sales must be much
higher than anticipated. In order to be more profitable, there must be an increase in
production/sales or decrease expenses or both. The relationship between sales and expenses as
well as the nature of the expenses is very important in determining profitability of the venture.
This technique is used to examine changes in profits in response to changes in sales volumes,
costs, and prices. CVP analysis is done to plan future levels of operating activity and provide
information about the products of services to emphasize; volume of sales needed to breakeven
and achieve a targeted level of profit; the amount of revenue required to avoid losses; know
whether to increase fixed costs; determine how much to budget for discretionary expenditures
and to know whether fixed costs expose the organization to an unacceptable level of risk.
Breakeven analysis forms an integral part of this form of analysis.
The net income of the production can be estimated using the following formula:
= ! " # − ! %# & (4)
12
Variable unit cost:
According to Hoff, (1998), Variable unit costs represent the cost involved to produce a kg of the
produce and it’s given by the formula:
" ! ' &&

" ! ' # () & = 5
* !" & % &&
Marginal Contribution:
The marginal contribution is the amount of money needed to cover the fixed costs and an
eventual profit.
, !) ! '# =- ! − ! ' && 6
The marginal contribution per unit represents the profit per unit sale. It is a useful quantity in
carrying out various calculations, and can be used as a measure of production leverage.
The marginal contribution per unit (C) in kg is given by Unit Revenue (Price, P) minus Unit
Variable Cost (V):
C=P−V (7)
The Contribution Margin Ratio is the percentage of Contribution over Total Revenue, which can
be calculated from the unit contribution over unit price or total contribution over Total Revenue:
/− !) ! '#
= × 100 = = × 100% 8
/ / " #
Marginal contribution in kg
This gives the kg required to cover the operational costs and profit equals zero.
, !) ! '# -5
m !) ! '# () = 9
& 6 ! %. ! () -5
13
Breakeven analysis
Breakeven analysis informs producers about the price they need to receive for their product in
order to cover all costs of production. It also indicate to the producer, the kilogram of fish, and
price for the fish needed to cover the variable, fixed, and total costs of production.
Breakeven price and breakeven yield/produce

The breakeven cost/price is the price at which the product must be sold in order for profit to be
zero. It is also the sales level at which the accruing revenue is exactly equal to the cost of making
the output.
& 6 ! %#
! ( " = 10
9# : () ! %# %
. The breakeven per unit yield represents the number of units, or kilograms needed to be sold in
order to break even.
& 6 ! %#
! ( " /# () = 11
< ! ! ()
It should be noted that CVP is a short run, and marginal analysis which assumes that, unit
variable costs and revenues are constant. It also assumes that, fixed cost and variable costs are
separate and different.
2.4 Sensitivity Analysis of identified variables that may affect Profitability

Sensitivity analysis was conducted to compare the effect of some variables on the profitability of
the productions and to know the areas where an improvement in performance may have a
positive impact on the economic performance of the RAS (Losordo & Westerman, 1994). The
simplest form of sensitivity analysis (one-way sensitivity analysis) was employed. This was done
by varying one variable by a (+/-) percentage and the impact on the financial performance of the
production were examined. The analysis was then repeated for the other variables identified in
the operational costs. Table 1, shows the important variables that were included in the analyses
based on the results obtained from the UMB laboratory and the scaled-up (hypothetical)
14
production. Feed, labour, and electricity cost were the main costs involved in the operation of the
prototype (UMB) facility and were used in the sensitivity analysis. Market/sale price was
included in the analysis to cater for the ever-changing pricing level. The identified cost variables
were varied by +/- 20% since such variations usually occur in commercial productions (De Ionno
et al., 2006). The price instability on the market was catered for by comparing the performance at
prices NOK32 and NOK48.
Table 1: Summary of variables used in sensitivity analyses and the corresponding variations
applied to assess the potential impacts on the financial performance of the UMB facility and the
scaled-up production.
Variable Degree of variation
Operational costs
Feed +/-20%
Electricity +/-20%
Labour +-20%
Production +/-20%
Revenue
Sales price NOK32 vs. NOK 48
2.5 Alternative budget and Economies of scale (scaled-up production).

In order to assess and compare the dynamics and effects of the production parameters on the
profitability, an alternative budget for the same level of production at the UMB facility was
developed using data on some operational costs from commercial scale production. Another
economic model (budget) was developed for a scale-up production (hypothetical) based on the
UMB facility design criteria, with a scale-up ratio of 1/100.
15
Table 2: Basic costs and units of economic, engineering and biological parameters monitored at
the UMB facility.
Economic parameters Unit Unit price
Market Price/kg NOK 40NOK
Fingerling cost/g NOK/fing. 0.25NOK
Initial no. of fingerlings # 1500
No. Harvested # 1364
Feed cost NOK/kg 9NOK
Amount of feed used kg 1705kg
Electricity cost NOK/kW/Hr 1NOK
Labour NOK/hr 200NOK
Engineering cost
Production Cycle-days # 140
Production cycle weeks # 20
Number of tanks # 15
System volume liters 7000l
Cost of Water use NOK/1000liters 30NOK/m³
Flow rate l/min 150l/min
Electricity used kW/hr 8.6kW
Biological Parameters
Initial Biomass kg 0.36kg
Final biomass kg 1091.2kg
Survival rate % 90.9%
Feed conversion ratio # 0.8
Harvestable weight kg 0.7kg
Slaughtering cost NOK 3NOK/fish
Water Analysis NOK 10NOK each
Price of 1kW/Hr from Statistics Norway (2011). The price per kg of tilapia was arrived at after a
market survey conduct in Oslo.
16
2.6 Cost estimations of the main operational areas in the production setup
The various costs involved in the operation of the recirculating system for the UMB and scale-up
productions; the amount of feed required in producing a kilogram of tilapia, electricity, labour
and maintenance were estimated individual as shown below:
2.6.1 Fingerlings
The fingerlings used in the production were produced at the laboratory using the hatchery setup.
The eggs were manually striped, fertilized from the broodstock and under careful temperature
regime manipulations, the fingerlings were produced to feed the weaning tanks. A total of 1500
fingerlings, averagely 2.5cm in length and weighing 0.36g were produced for the study. It must
be noted that, the cost of the fingerlings produced was estimated and used in the budget
estimations. The cost of one (1-1.5 inches) fingerling (0.36g) on the market is approximately
0.25NOK depending on the volume being purchased (Hansen, pers. Com, November 4, 2010).
The total cost of the fingerlings was estimated to be NOK 375.
2.6.2 Feed and feeding

A feed containing all the essential minerals and vitamins for a higher growth performance was
used in the production, with an estimated FCR of 0.8. Strict adherence was given to the regular
feeding schedules. Automatic feeders were used to ensure frequent feeding intervals per day to
ensure high conversion rate and feed was evenly distributed on the feeders to ensure even growth
and prevent stunting. Total amount of feed used was estimated to be 1705kg. The price of a kg of
the feed was pegged at NOK9 (Hansen, pers, com, November 4, 2010). Generally, feed
constitutes the highest variable cost in every production and it is expected to vary with an
increase in production level. In the commercial level (scaled up-1/100) production, the quantity
and cost of feed is expected to vary commensurately with scale of production.
2.7.3 Labour Costs

RAS systems are highly sensitive to changes in the normal operations. Changes in flow rate,
accumulation of waste particles and feed may cause high mortalities and poor product quality.
Due to its sensitivity to changes, well trained personnel are required to manage the abnormalities
which may occur daily. The labour cost for the UMB laboratory production was estimated from
17
one hour per day’s work, with an hour’s wage pegged at 200NOK (Hansen, pers, com,
November 4, 2010). Assuming a greater level of automation and economies of scale, an
estimated labour cost of NOK1.5 (Hansen, pers.com, November 5, 2010) was assumed per a kilo
of tilapia produced for both the alternative and hypothetical commercial scale production
budgets. This figure was arrived at after considering the labour cost in producing a kilo of
Atlantic salmon. According to Statistics Norway (2011), the estimated labour cost for producing
a kilo of Atlantic salmon is NOK1.5. Due to the unavailability of data on labour cost on tilapia
production, the labour cost for Atlantic salmon was assumed for the estimation purposes though
it is a known fact that the modes of culturing are different (salmon production is in net pens
whereas the tilapia was in tanks). Since this thesis project is for educational purposes only, the
adopted figure for labour in these budgets was assumed to be within range.
2.6.4 Electricity
The main components of the system that consumes a considerable amount of power are the
heaters, pumps, and the feeders. The system has 2 heaters with 3kW capacity each. Three pumps
were identified namely, pump for drum filter, and pump for circulation and the airblower for
cleaning the drum filter.
Table 3: Shows the various components where electricity usage occurs and the amount
consumed.
Component Number kW consumed Total (kW)
Heater 2 3Kw/each 6
Pumps
Drum filter 1 0.75
Circulation 1 0.75 2.1
Airblower 1 0.6
Hatchery/Feeders 0.5 0.5
TOTAL 8.6
Price of 1kW/Hr of electricity is approximately 1kr. (Statistics Norway, 2011).
18
The heaters are thermostat regulated and are switched on/off after use. The filters, pumps and
airblower are situated in a different room some few meters away from the tanks room. Energy
loss occur in the form of heat through the transfer process, building due to inadequate insulation
system, evaporation from the water surface, waste accumulation and splash out from the tanks.
Notwithstanding, about 75% of the heat generated are recycled (Hansen, pers.com, November 4,
2010). About 80% of total electricity produced is used in the running of the UMB facility
(Hansen, pers. Com, November 4, 2010).The price of 1Kw/Hr of electricity is approximately
NOK1 (Statistics Norway, 2011). The same percentage was used in the electricity estimations for
the alternative budget and the scale-up production budget.
2.6.5 Water analysis

Feeding and subsequent growth leads to the generation of waste products which reduces the
oxygen level in the system. These waste products need to be removed because of their potential
negative impact on fish growth, and mortality. Metabolic waste products take two forms in most
recirculating systems; solids and total ammonia nitrogen (TAN). The toxic portion of TAN,
NH₃-unionized ammonia nitrogen (UAN), is a component of the feedback mechanism that can
inhibit fish growth through loss of appetite and in high levels, may cause fish mortality.
The biofilters control the buildup of UAN in the recirculating system whereas suspended solids
are removed from the system by the mechanical filters. This makes the efficient operations of the
biological and mechanical filters very critical to the growth of the fish and the stability of the
recirculating system. An efficient operation of both filters leads to the absence of growth
reduction or mortality feedbacks (Kazmierczak & Cafey, 1995c).
Three different analyses were conduction during the ‘actual’ production; TAN, NO₂ and NO₃
analysis. A total of 150 analysis each were conducted during the production at an estimated unit
cost of NOK10 (Hansen, pers.com). Cheaper methods were employed in carrying out these tests
during the production. According to Hansen, (pers.com, March 30, 2011), the ‘normal’ number
of chemical analyses conducted at the laboratory was high and thus a reduction in number
(60analysis) was recommended for the alternative budget and the scale-up production.
19
2.6.6 Chemicals (Bicarbonate/Lime)-pH control:
In the RAS technology, the biofilters are incorporated to oxidise the ammonia generated. The
process proceeds in two stages; Nitrosomas bacteria oxidize ammonia to nitrite and the
Nitrobacter bacteria oxidize nitrite to nitrate. For each gram of ammonia nitrogen oxidised, 4.57g
of oxygen and 7.14mg of alkalinity as CaCO3 are required and if the alkalinity is not replaced,
the pH of the water would drop (Hutchison et al., 2004). A way of replacing the alkalinity
consumed is to add sodium bicarbonate to the system at rates up to 250g for every 1kg of food
introduced into the RAS (Wheaton et al. 2002). The estimated cost of lime used at the laboratory
facility was 5000NOK (Hansen, pers.com, March 30, 2011). For the alternative budget,
efficiency of more than 95% was assumed and thus a drastic reduction is expected in the cost of
bicarbonate used. The cost of bicarbonates used for the estimations involving the alternative
budget and the commercial level budget was pegged at NOK1, 000 and NOK10, 000
respectively. The cost of bicarbonates is expected to go up with an increase in scale of
production since the amount of feed usage would increase with an increase in production.
2.6.7 Slaughtering
Tilapia is processed by filleting, gutting or decapitation of the head. The cost of preparing each
tilapia for the market was pegged at approximately 3NOK (Hansen, pers.com, March 30, 2011).
This figure was arrived at relative to the cost of slaughtering a kg salmon in Norway. According
to statistics Norway (2011), the slaughter cost for a kilogram of salmon is NOK3.
Comparatively, the fillet yield from a kg salmon is higher than tilapia. This clearly indicates that
a considerable effort is required in slaughtering tilapia compared to salmon. This figure was used
in all the budget estimations for every kilo of tilapia slaughtered.
2.7 Operational cost Analysis –UMB RAS facility

The units cost of the Economic, Biological and Engineering parameters are shown in Table 1.
The economic aspect deals with the unit cost of fingerlings, market price of a kg of tilapia, cost
of a kg of feed and the amount of feed used during the entire production. It also takes into
consideration the amount and cost of the electricity used and labour cost relative to hours of
work per day. The engineering parameters include the system volume, unit cost of water, the
20
flow rate, as well as the production cycle. Water analysis, FCR, initial biomass, final biomass,
survival rate and slaughtering costs constitute the biological parameters.
2.8 Alternative budget

As indicated earlier, a careful assessment of the high costs involved in the operations of the
UMB laboratory production, necessitated the development of an alternative budget for the same
level of production with the introduction of some correctional factors. This was done by the
introduction of some data (costs) obtained from commercial scale production. Table 6 and 7,
summarizes the various cost estimates involved in the production and the economic model
estimates respectively.
2.9 Scale-up
For the purpose of this thesis projects, the physical model for scaling was employed and some
assumptions were made to support the model. It was assumed that, geometric, dynamic,
kinematic, thermal and biological similarities exist between the prototype (UMB facility) and the
commercial scale (hypothetical) recirculating system. Although some of these assumptions
(dynamic, kinematic and biological) are difficult to fulfill in practical sense, they were assumed
to be achievable in this project.
The production level at the prototype setup was scaled up by the ratio 1/100, with an assumed
survival rate of 91%. The amount of power consumed was assumed to be 80% of the total energy
produced as in the earlier estimations (Hansen, pers.com, November 4, 2010). Cost estimates
were developed using data from industry suppliers, statistics Norway and discussions with the
facility attendant at the UMB laboratory. A budget was prepared for this scale of production and
the various economic analyses were developed.
21
3.0 Results
The operating costs for the various scenarios were developed for comparison purposes between
the different production scales and the results are presented individually below.
Table 4: Summarizes the fixed and variable costs, cost of prod. Kg of tilapia and the % of
parameters to total production cost (UMB laboratory).
Parameters/category Total cost Cost/ kg prod/NOK % of total cost
Fixed cost
Electricity 23116.8 21.2 29.0
Fingerlings 375 - 0.5
Labour 28000 25.7 35.2
Water Analysis 4500 4.1 5.7
Bicarbonates 5000 4.6 6.3
Total fixed cost 60991.8
%of fixed cost to prod. cost 76.6
Variable costs
Feed 15345 14.1 19.3
Slaughtering 3273.6 3.0 4.0
Total variable cost 18618.6
%of variable cost to prod. cost 23.4
Total prod. cost 79610.4
Cost of prod. kg tilapia 73.0
Labour recorded the highest percentage cost involved in the production carried out at the UMB
facility, followed by electricity and feed in that order. In this production, labour was treated as a
fixed cost since the hours of work and cost of work per hour by the facility attendant was fixed
and not subject to any increment regardless of the level of production. Although costs of
fingerlings are sometimes treated as a variable cost, it was not done so in this case. In this
scenario, the level of production was up to the carrying capacity of the facility and there was no
room for an increase in production level.
22
Table 5: Summarizes the estimations from the economic models for the UMB facility.
Economic model Formula No. Amount
Sales/income 2 43648
Net Operating income/PL 4 -359662
Variable unit (kg) cost NOK 5 17.1
Marginal contribution NOK 6 25029.4
Marginal contribution kg 9 343
Marginal contribution pr unit(kg) NOK 7 22.9
Gross margin ratio 8 57
Break even cost/price NOK 10 73.0
Break even yield/produce kg 11 1990.26
The net operating income shown from the table indicates a loss relative to the production cost.
This is due to the high level of fixed costs involved in this production. More was contributed to
overcoming the fixed cost than to profit.
Table 6: Summarizes the operational costs, cost of producing a kg of tilapia and the % impact of
each parameter to total production cost for the alternative budget.
Fixed cost
Electricity 23116.8 21.2 49.7
Fingerlings 375 - 0.8
Total fixed cost 26291.8
%of fixed cost to prod. Cost 56.5
Variable costs
Feed 15345 14.1 33.0
Labour 1636 1.5 3.5
Slaughtering 3273.6 3.0 7.0
23
Total variable cost 20254.6
% of variable cost to prod. cost 43.5
Total prod. cost 46546.4
Cost of prod. kg tilapia 42.7
Electricity recorded the highest percentage cost followed by feed. Labour is the least costs in the
variables and this is due to the assumed unit cost relative to the level of production. As
mentioned earlier, labour shows economies of scale when the scale of production is high and
therefore exhibited this tendency in the scale-up production. Therefore, the labour cost is
expected to increase with any increase in production. Table 7, shown below indicates the various
economic model estimations.
Table 7: Summarizes the results of the economic model estimations for the alternative budget.
Sales/Income 2 43648
Net Operating income/PL 4 -2898.4
Marginal contribution NOK 6 23393.4
Marginal contribution kg 9 657.3
Marginal contribution pr unit (kg) NOK 7 21.4
Gross margin ratio 8 53.5
Break even cost NOK 10 42.7
Breakeven yield/produce kg 11 1163
The net operating income estimated indicates a marginal loss. However, the potential to
breakeven with an increase production is high.
The production would be able to break even, when the kilogram produced from the setup equals
the breakeven yield. Any additional kilogram of fish produced after the breakeven yield would
result in profit.
24
Table 8: Summarizes the fixed and variable costs, total operation costs, cost of producing a kg of
tilapia and the % impact of each parameter on the total production cost for the scaled-up
production.

Fixed cost
Electricity 2311680 21.2 52.7
Total fixed cost 2323480
%of fixed cost to prod. Cost 53.0
Variable costs
Fingerlings 37500 0.34 0.86
Feed 1534500 14.1 35.0
Labour 163680 1.50 3.70
Slaughtering 327360 3.0 7.50
Total variable cost 2063040
% of variable cost to prod. cost 47.0
Total prod. cost 4386520
Cost of prod. Kg tilapia 40.2
Electricity constitutes the highest cost in the production, with cost of fingerlings being the least
among the main variables that affect profitability. Costs of fingerlings, feed, and labour were
treated as variable cost in this scenario, since they are expected to vary with an increase in
production. Total fixed cost in this production setup, was reduced drastically and the potential
for further reduction is high. This can be achieved by the introduction of energy efficient
equipment which would reduce the power consumption level of the system.
25
Table 9: Summarizes the results of economic model estimations for the scaled-up (hypothetical)
production.
Sales/Income 2 4364800
Net Operating income/PL 4 -21720
Marginal contribution NOK 6 2301760
Marginal contribution kg 9 57544
Marginal contribution pr unit (kg) NOK 7 21.1
Gross margin ratio 8 52.7
Break even cost NOK 10 40.2
Breakeven yield/produce kg 11 109663
The PL estimated in this scenario indicates a marginal loss in revenue (negative). However, there
is the possibility of making profit with a further increase in production since the loss recorded is
very marginal and increase in sales would offset the loss incurred.
Table 10: Summarizes the results of the sensitivity analysis performed for the identified
variables.
Production cost
Variable UMB Scaled-up prod.
Electricity costs
+20% -40585.8 -484056
-20% -31339.0 440616
Feed costs
+20% -39031.4 -328620
-20% -32893.4 285180
Labour costs
+20% -41562.4 -54456
26
-20% -30362.4 11016
Production output
+20% -8729.6 -872960
-20% 8729.6 872960
Sales price
NOK48 -8729.6 -872960
NOK32 8729.6 872960
The results from the production output and sales price sensitivity analysis produced identical
results for both scenarios analysed.
27
4.0 Discussion
The operating costs were estimated for the various scenarios and compared. The facility sizes
and the scale of production, labour, electricity, feed and FCR, were found to be the principal
areas that have significant impact on the operations of RAS. These together with the limitations
of the study are discussed individually below.
4.1 Cost of Labour
According to Samples & Leung, (1986), in practical studies, labour expenses are generally
considered as fixed cost since they do not vary in response to an increase in production scale.
Labour (35.2%) in the UMB production estimations, was treated as fixed costs since the cost
would remain the same regardless of an increase in production scale. However, in the alternative
and scaled up production estimates, labour and fingerlings were considered as variables costs.
This is because the assumed cost of labour per kg of tilapia produced is expected to increase with
an increase in production. In the alternative budget, labour formed 3.5% and 3.7% in the scale-up
budget. In commercial scale production, additional labour may be required in areas of marketing,
management and general production. The amount of labour utilized on farms varies widely, but,
with increasing scale of production, specialization of tasks by individuals and the introduction of
labour saving devices (automation of some production components), it is expected that the unit
cost of labour per kg of tilapia produced will decrease.
4.2 Electricity
Electricity constituted 29.0% of the total production costs in the UMB budget. The percentage
increase highlighted in the alternative and scaled-up budget estimations (49.7% and 52.7%
respectively) is attributable to the influence of labour cost reduction in these budgets. A
reduction in energy use is possible by improving the system design and management of airlifts
and biofilters (Roque d’Orbcastel et al., 2009) and the incorporation of denitrification in the
recycling loop (Eding et al., 2009). Decreasing head losses associated with moving water
through the larger pipes, and an increase in pump efficiencies at higher flow rates in the scale-up
productions would further reduce energy cost.
28
4.3 Cost of feed
Feed formed 19.3% in the UMB facility productions. In the alternative and scale-up budgets,
33% and 35% were for electricity estimated respectively. These results highlight that, feed
constitute the highest variable cost and varies with scale of production as shown in the scale-up
budget. An improvement in feed quality is expected to reduce the amount required and impact
positively on the production cost. Poor quality feed usage would add on to the running cost since
more feed would be required to achieve the same weight gain. The feed used for this project was
of high quality (FCR 0.80).
4.4 Fingerlings
The GIFT strains used in the production are genetically superior compared to other strains like
the red tilapia in terms of survival, feed consumption and conversion rate. They are more
efficient in conversion of ingested feed into body mass. According to a study conducted by
Wing-Keong et al (2008), the GIFT tilapia showed up to 33% better feed conversion rate, and
greater potential for growth with a high dietary protein levels and greater feed intake depending
on diet, than that observed in the red tilapia. This makes them good candidates for commercial
scale production using RAS. The costs of fingerlings estimated for the UMB and scale-up
productions, were seen to be low and meet the FAO criteria for buying fingerlings. According to
FAO, (2003), the unit cost must be low to make the on-rearing economically viable, and still
allow a reasonable profit by the producer (FAO, 2003). However, internal production of
fingerlings is widely seen to be the best option for commercial scale productions.
4.5 Economies of Scale
The financial estimations showed that the UMB facility standard and capacity constitute a risk
factor in terms of profit maximization. The budget estimations from the UMB facility production
showed a large loss (NOK-359662) relative to the production cost. This is attributable to the high
fixed cost involved in the operations and the limited carrying capacity of the facility. Labour and
electricity costs were found to be high for such a scale of production. The result from the
estimations is an indication that, the facility is incapable of becoming profitable regardless of any
realistic variations in the identified operational variables which are known to impact on
profitability. This confirms the generally known assertion that, small RAS are more expensive to
29
operate per unit of biomass held than larger units. However, since the facility is for only research
purposes, operations and costs involved are quite unique to the facility.
The alternative budget estimations highlighted how some of the production variables that affect
profitability, behave with an increase in production scale. Electricity, Labour and feed were
found to be the principal parameters that affect profit margins. In small production levels, these
parameters are seen to impact negatively on profit margin but shows varying degree of
economies of scale with an increase in production level. In that budget, labour showed the
highest potential for economies of scale within the variable costs. This was confirmed in the
budget for the scale-up production. Although, this budget estimation also recorded a loss, it
showed that with realistic reductions in labour and feed costs, an increase in production has a
strong potential of breaking-even.
The scale-up budget estimations also recorded a loss. However, this loss was marginal compared
to that obtained for the UMB facility production. The possibility of breaking even and eventually
profit through an increase in production was very high for this production scenario. The
breakeven price estimation in this production was NOK 40.2. This means, a loss of NOK-0.2 is
made on each kg sale. It is therefore projected that, a further 600kg increase in production would
be enough to post some profit. The drastic reduction in production cost shown in the scale-up
production compared to the UMB production, was due to the increase in sales volume from the
scale-up production. The contribution from each sale towards fixed cost coverage became less
relative to the contribution to profit. As a result, more was contributed to profitability in the
scale-up production, than to the coverage of fixed cost since production cost per unit kg
decreased with the increase in production. The Scale-up production therefore showed economies
of scale and the potential to breakeven and eventually make profit was high for this scenario.
According to a NCRAC tilapia report (2002), on a study of the economic analysis of RAS for the
production of tilapia on commercial scale (1814.369 tonnes), the breakeven cost per kg of tilapia
was estimated to be USD2.46 (equivalent to NOK13.78 ), with a production cost of USD
4,461,921 (equivalent to NOK24986757.6). The estimations were based only on the fixed and
variable costs excluding capital costs. These results are in sharp contrast to the results obtained
from the scale-up production of this study, which had a breakeven price of NOK 40.2 compared
to NOK 13.78 obtained for the NCRAC study. These observable contradictions can be attributed
30
to the wide difference in scale of production (109120kg for this study compared to 1814369kg
for the study conducted in the USA at Grayson Hills Farms in Harrisburg, Illinois). The
economic conditions of the country where the study was conducted also influences the
production cost. This is because, costs of electricity, labour, feed etc differ from country to
country. Another difference observed was the inclusion of the costs of oxygen, maintenance and
interest rates in the estimations. These variables were not factored into the estimations involving
this study. The NCRAC study is believed to have benefited from economies of scale due to the
high level of production involved.
4.6 Sensitivity Analysis
From the sensitivity analysis conducted, a decrease in the cost of production variables such as
labour, feed, and electricity, produced marginal effects on profitability. Increase in sales price
and production were found to have the highest impacts on profitability. These findings support
the earlier findings highlighted in Losordo (1991) and Losordo & Westerman (1991). It must be
pointed out that, the findings herein referred to, included gains realized from an increase in FCR
and reduction in overall system cost. A variation of +/-10% was used to analyse the input
variables. However, these two variables (FCR and capital cost) were not factored into the
sensitivity analysis in this study. This due to the high quality feed used for the study (FCR 0.8)
and the uncertainties associated with the cost of the system used for the study. Nonetheless, these
findings show the areas where further improvements may have huge impacts on the profitability
of commercial scale production using RAS.
31
5.0 Conclusion
The results from the thesis project have shown the effect, scale of productions have on per unit
cost of production. Thus, the scale-up facility benefited from economies of scale compared to the
UMB production. It has also shown that, variables such as increases in production, and sales
price, reduction in labour, feed and electricity costs influences profitability. It was gleaned from
the results that, small scale productions are not economically viable compared to large scale
productions.
The study did not firmly establish profitability due to its focus, and the exclusion of capital cost
and interest rates. However, it did show that, potential for economic success with the scale-up
production was high. Thus, amortization of injected capital in the construction of RAS facility
could be achieved within a short period by increasing production. It is important to note that, the
financial estimations in this study reflect only the production conditions in Norway. Therefore,
the potential for profitability in other countries may differ due to differences in environmental
conditions (the need for heating etc), technology design, labour, feed and energy costs.
An in-depth study, should be conducted in future, with a facility that meet the standard for
commercial production in order to obtain credible data that will form the basis for all
assumptions and further research in the production of tilapia using RAS in Norway.
5.1 Limitations of the study

The economic models and some of the cost figures used in the analysis were based on certain
assumptions. While some of these assumptions are educated guesses, others are closer to reality
and thus, may impact on the validity of the costs estimations and economic analyses (Calberg,
2007). Notwithstanding, the potential accuracy of the assumptions can be improved by adopting
conservative approaches to the use of these assumptions. In practice, the scale-up facility may
not provide all the engineering assumptions made and would impact negatively on the
production. However, this can be addressed by selecting and adapting the technology to fit the
scale of production and environmental requirements of the area where the facility is to be sited
(Summerfelt et al., 2001).
32
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39
Appendix
Conversion Rates from DNB, Norway.

Accessed on: https://www.dnb.no/en/fx-rates
1 USD ≡ NOK 5.6
Definitions
Economies of scale refer to the potential reduction in per unit production costs resulting from
increased scale of production, realized through operational efficiencies.
Amortization refers to the act of spreading payments of capital expenses over a period of time
(Investopia, 2012).
40

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AN ECONOMIC ANALYSIS OF THE USE OF

RECIRCULATING SYSTEMS IN THE PRODUCTION

An Economic Analysis of the use of Recirculating Aquaculture

Professor Hans Magnus Gjøen

Department of Animal and Aquaculture Sciences

Norwegian University of Life Sciences

Department of Mathematical Sciences and Technology

Machine, Process, Water, Agriculture and Product Section

Norwegian University of Life Sciences

Ås, May 2012 F. Appiah-Kubi

F. Appiah-Kubi Ås, May 2012

An economic analysis of tilapia production was conducted using a recirculating aquaculture

List of tables……………………………………………………………………………….. VIII

List of figures……………………………………………………………………………..... VIII

1.1 Species and production parameters………………………………………………….. 2

1.2 Culture attributes of Tilapia………………………………………………………….. 2

1.3 World Production and Trade………………………………………………………… 3

1.4 Recirculatory Aquaculture Systems…………………………………………………. 5

1.4.1 Advantages of Recirculating Aquaculture Systems……………………………... 6

1.4.2 Risk Management………………………………………………………………... 6

1.4.3 Recirculating Systems in Norwegian Aquaculture industry……………………... 7

2.0 MATERIALS AND METHODS……………………………………………………. 8

2.1 Description of the UMB fish laboratory……………………………………………... 8

2.2 Production Setup……………………………………………………………………... 9

2.3 Production scenarios and models of estimations…………………………………….. 11

2.3.1 Biological model…………………………………………………………………. 11

2.3.2 Economic (model) analysis techniques………………………………………….. 12

2.4 Sensitivity analysis…………………………………………………………………... 14

2.5 Alternative budget and Economies of scale (scale-up production)………………….. 15

2.6 Cost estimations of the main operational areas in the production…………………… 17

2.6.2 Feed and feeding………………………………………………………………… 17

2.6.3 Labour costs……………………………………………………………………… 17

2.6.5 Water analysis……………………………………………………………………. 19

2.6.6 Chemical analysis (Bicarbonate/lime)-pH control………………………………. 20

2.7 Operational cost analysis-UMB RAS facility……………………………………….. 21

2.8 Alternative Budget…………………………………………………………………… 21

2.9 Scale-up production………………………………………………………………….. 21

4.1 Cost of labour………………………………………………………………………... 28

4.3 Cost of feed………………………………………………………………………….. 29

4.5 Economies of scale…………………………………………………………………... 31

4.6 Sensitivity analysis…………………………………………………………………... 31

Figure 1: Major Tilapia producing countries in the world………………................................. 4

Figure 2: Global Aquaculture production of Nile Tilapia………………………………...…….5

Figure 3: A schematic design of the basic components of the facility...…………………………….9

Figure 4: The hatchery (part) used in the production of fingerlings…………………………….10

Figure 5: The weaning tanks used in the production……………………………………………10

parameters to total production cost (UMB laboratory)………………………………….....22

UMB: Norwegian University of Life Sciences

RAS: Recirculating Aquaculture Systems

FAO: Food and Agriculture Organization of the United Nations

EU: European Union

TAN: Total Ammonia Nitrogen

UAN: Unionized Ammonia Nitrogen

FCR: Feed conversion Ratio

CVP: Cost -Volume –Profit

NOK: Norwegian Kroner

GIFT: Genetically Improved Farmed Tilapia

NCRAC: North Central Regional Aquaculture Center

• The operational cost involved in a closed recirculation systems in a temperate region.