7 Reasons Why Aquaculture Could Be A Big Opportunity

| About: Intrexon Corp (XON)

Summary

Raising fish (aquaculture) is about seven times more efficient than raising cattle. Yet the aquaculture industry in the U.S. lags far behind the rest of the world.

Farmed fish and shellfish production is set to soar between 2010 and 2050 in order to meet projected fish demand worldwide.

As maintaining ocean health and wild fish stocks is a major concern, aquaculture will likely play a significant role in mitigating this concern.

Wild capture has been stagnant for 30 years. With population expected to grow to 9.6 billion people by 2050, aquaculture will play a vital role in meeting demand for food.

Offshore aquaculture in this country is the next frontier.

It is anticipated that worldwide population will reach 9.6 billion people by 2050. As a result, food security is becoming a major issue.

With a growing number of mouths to feed, we must find a way to produce more food with a limited amount of agricultural resources.

What's the answer? Aquaculture.

At least it's one of the answers. Aquaculture, also known as fish farming or aquafarming, is the practice of farming aquatic organisms such as fish, shellfish, and aquatic plants. This practice is not a new idea and, in fact, has been around for thousands of years, with the first historical accounts of aquaculture dating back to 2500 BC. (To read more about aquaculture, click here.)

Aquaculture is a very viable method of food (protein) production, about seven times more efficient than cattle production.

We raise animals for human consumption but what we often don't think about is the food that these animals must eat and, subsequently, the resulting demands on natural resources. Farmers measure these demands by using a food conversion ratio (FCR), which is the estimated amount of feed required to gain one pound of body mass in the animal being raised. You might be surprised to learn that it takes around 6.8 pounds of feed to produce 1 pound of cattle body mass. Fish, on the other hand, only need 1.1 pounds of feed to produce 1 pound of body mass. To meet rising demand for food with limited land (and water), we are going to have to produce more efficiently. Raising fish is about seven times more efficient than raising cattle, about three times more efficient than raising pigs, and about one and a half times more efficient than raising chickens.

See the chart below, taken from National Geographic's "How to Farm a Better Fish":

Given the above, you might think that the practice of farming fish is already thriving in this nation. But it's not. Surprisingly, aquaculture production in the U.S. is far behind the rest of the world. From the National Oceanic and Atmospheric Administration (NOAA):

"U.S. aquatic farmers produced 594 million pounds (269,433 tons) of seafood in 2012, valued at $1.2 billion, according to the most recent Fisheries of the United States (FUS) report."

View the infographic below of US aquaculture production, courtesy of NOAA:

Compare this to the world aquaculture production of 66.6 million tons. Data courtesy of the Food and Agriculture Organization of the United Nations (FAO):

The aquaculture production in the United States, 269,433 tons (2012), represents only 0.405% of the total world aquaculture production of 66.6 million tons (2012). Compare this to the population in the United States, which represents about 4.4% of the entire world population.

These figures are staggering and, as you can guess, account for a significant seafood trade deficit in this country. Though the U.S. aquaculture industry contributes $1.37 (in 2013) billion to our nation's economy, we still face a seafood trade deficit of $14 billion per year.

Put another way, the U.S. must produce more fish to decrease this deficit and, above all, help to meet the increasing demand for food and seafood worldwide.

Hearing this, many, as they have done in the past, look to wild-caught fish to solve this trade deficit and looming food security problem. This solution, however, no longer works as it has previously. Our oceans' {wild} fisheries, also referred to as capture production, began stagnating in the mid-1980's and have since remained plateaued.

To detail briefly, wild caught fish are fish that spawn, grow, and are harvested (caught) fully in the wild. A good example of wild caught fish (or shellfish) would be the crab caught in Discovery's "Deadliest Catch". The crab caught in this fishery spawn and grow to adult (harvest) size completely in the wild.

But if you are a viewer of this show, you likely have been privy to the decreasing catch limits allowed for fishermen over the years. This is a result of an attempt to protect these crab fisheries, or crab populations, in the region.

This, of course, is just one example of fish population protection in a single region. But the same is happening worldwide. From the U.N. Food and Agriculture Organization (FAO) and the Worldwatch Institute,"The world's fisheries have remained relatively stable over the last 15 years: about 50 percent are being fished at full capacity, 25 percent are underfished, and the remainder are overex­ploited, depleted, or recovering. As a result, the U.N. Food and Agriculture Organization predicts that maximum wild fish capture has already been reached. Most of the stocks of the top 10 fished species are being fully fished or are overexploited, and studies have indicated that even in the most stable fisheries there have been declines in the most valuable species, such as tuna".

In short, our oceans are tapped out.

This plateau of capture production can be seen below in the graph from FAO's "The State of World Fisheries and Aquaculture":

Worldwide aquaculture production, on the other hand, has begun making up this difference with significant and continued growth since the 1990s. As you can see in the graph above, worldwide aquaculture production has grown from just 8.5 million tons in 1990 to 66.6 million tons in 2012. That's a 683.5% growth in worldwide aquaculture production in 22 years, which equates to an average annual growth rate, from 1990 to 2012, of 9.81%.

Now, this is a worldwide production growth rate and, as mentioned, the U.S. lags far behind. But as any privy investor may point out, the opportunity for aquaculture growth in the U.S. and, subsequently, the opportunity for investment in U.S. aquaculture, is significant.

There are two primary segments of aquaculture: inland (freshwater) and marine (saltwater). Fish that grow in freshwater are usually farmed inland in ponds, rivers, or tanks (bass, trout, catfish, sturgeon/caviar) and fish that are grown in salt water are generally grown in a marine environment (examples include shellfish, farmed on the coastline, and offshore aquaculture, or mariculture, where fish are grown in large net pens in the open ocean).

I live in California and work with aquaculturists and aquaculture regulatory agencies throughout the state. The U.S., like California, has healthy and promising inland and shellfish aquaculture industries. These industries aren't yet as prosperous as they could be but they are strong nonetheless and have significant growth potential.

The offshore aquaculture industry in the U.S., on the other hand, leaves much to be desired and is all but dormant. California, which holds the key to the majority of the U.S.'s access to the Pacific Ocean, only recently (2014) approved its first aquaculture venture in Federal waters. Following this approval, earlier this year (2016) NOAA significantly expanded offshore aquaculture opportunities by implementing the U.S.'s first regional regulatory program that allows for offshore aquaculture production in the Gulf of Mexico. The tide that once kept offshore aquaculture at bay in this country is turning. This shift is providing a major opportunity for investment as well as a better ability to meet increasing demand for food.

If interested, here is a brief, very insightful video from the Aquarium of the Pacific that recaps and expands upon the points above and the opportunity for aquaculture development in the U.S.:

In my opinion, aquaculture is to the agriculture industry as clean (solar, wind) energy is to the energy industry. The big players of these industries (e.g. cattle/poultry in the agriculture industry and oil/coal in energy sector) run the show. But this is beginning to change. Once public perception, regulatory concerns, and investor interest changes in favor of aquaculture, it, like clean energy, could become the next big thing.

Continuing the arguments for U.S. aquaculture, below I have listed seven reasons why you should care about aquaculture and why an investment in the industry may be worth considering:

  1. " Global demand sees farmed fish production soar": As demand for fish increases, so must supply. As explained in a World Fishing & Aquaculture article, "Farmed fish and shellfish production is set to soar between 2010 and 2050 in order to meet projected fish demand worldwide..." This is a worldwide opportunity. And as the U.S. is currently well behind many others nations with regard to aquaculture production (see U.S. aquaculture trade deficit explained above), this opportunity is particularly significant for our nation.
  2. Raising fish is about seven times more efficient than raising cattle: Beef is a very popular protein source in the average American's diet. But producing beef takes a heavy toll on our natural resources. As I detailed above, raising fish is more efficient than raising beef, using only about 1.1 pounds of feed to produce 1 pound of body mass as opposed to beef, which requires about 6.8 pounds of feed to produce 1 pound of body mass.
  3. Offshore aquaculture in this country is the next frontier: As mentioned above, the permitting of offshore aquaculture in the federal waters of the U.S. has been nonexistent until only recently. This door has finally been opened and the pioneers of a new industry are emerging. In many cases, money follows a business-friendly regulatory environment. But in some cases (especially in a heavily regulated business environment like California's) money must lead in order to pave the way for a looser regulatory, more business-friendly environment. In other words, if investor interest becomes great enough, producing enough financial viability and power, this power can be used to influence regulatory agencies to blaze the needed trail. What follows is a loosened regulatory grip, allowing for an industry to spawn, grow, and thrive. This is happening right now off the coast of southern California. The state's first offshore aquaculture venture, which is backed by strong investment interest, has been approved and is finally breaking ground (or in this case, water). It will likely be at least another few years before this venture is completed and begins to see a return on its investment, but nonetheless, the pioneering has begun. A new industry will follow.
  4. Love it or hate it, genetically modified {GM} fish have strong investment potential: AquaBounty, a subsidy of Intrexon Corporation (NYSE:XON), developed a genetically modified strain of salmon, called AquAdvantage Salmon, that grows at the twice the rate of normal salmon. The opinions surrounding this genetic modification, the first of its kind, are many and have led to a fervent debate about ethical responsibilities and the potentially negative environmental impacts of this new fish. But no matter which side of the fence you or I stand on with regard to this debate, GM salmon has officially arrived and must be considered in the aquaculture investment arena. The sale of this GM salmon was recently approved by the FDA. (It should be noted that this is the first genetically modified food animal approved for sale in the world.) This, of course, has opened many doors for the company and its flagship product. Carrying this approval's momentum, GM salmon was also recently accepted for production by Canada. So what's the big deal about GM salmon? Well, simply put, it allows farmers to produce a fish that grows to adult (market) size on much less feed due to the faster growth rate mentioned above. This shorter growth cycle means a faster and greater (due to less money spent on feed) return on investment for the producer. The picture below shows the differing growth rates of normal salmon versus AquaBounty's AquAdvantage Salmon (fish are the same age in the picture): And with GM salmon now approved and accepted, we are likely to see similar genetic modification developments with other farmed fish and shellfish. With the ability to produce larger fish on less feed, this, of course, could change the financial outlook and viability of aquaculture ventures of all types of fish.
  5. Aquaculture can help to restore wild fish stocks, better ensuring the future health of our oceans: As the depletion of wild fish stocks in our oceans has been, and continues to be a major concern, aquaculture will likely play a significant role in mitigating this concern. As an example of aquaculture's potential role in counteracting the depletion of marine fish stocks, in California, HSWRI has been performing research, via their Ocean Resources Enhancement and Hatchery Program (OREHP), for over 30 years. This program researches the viability of supplementing wild fish with fish grown in a hatchery (which are then released into the wild). OREHP and other programs like it will likely serve as a vital resource to assist in replenishing and maintaining our oceans' fish stocks.
  6. Fish consumption is an extremely important part of our diet, more important that we previously realized: From the U.S. Food and Drug Administration: "Fish and shellfish are an important part of a healthy diet. Fish and shellfish contain high-quality protein and other essential nutrients, are low in saturated fat, and contain omega-3 fatty acids. A well-balanced diet that includes a variety of fish and shellfish can contribute to heart health and children's proper growth and development." Adding to this, the FDA and EPA recently changed their suggestions of fish consumption for pregnant women, stating that pregnant women should eat least four to six times the amount of fish as they are currently eating (based on the average American diet). As most know, the presence of mercury in fish has previously been a concern, especially for pregnant women. But this concern was seemingly exaggerated in previous years as the FDA has recently ruled that " for most people, the risk from mercury by eating fish and shellfish is not a health concern." And when it comes to aquaculture, mercury levels found in fish are generally even lower than wild fish. In addition to all of this, research suggests that the consumption of fish played a vital role in human evolution. From Live Science's "Ancient Brain Food Helped Humans Get Smart", " Between 1.9 and 2 million years ago, the brain size of our human ancestors increased dramatically. Now a trove of 1.95-million-year-old bone fragments from various animals adds evidence to a theory that these pre-humans owed this brainpower boost to fish." The health benefits of eating fish are indisputable.
  7. Public perception about farmed seafood is changing for the better: I am an investor of a local restaurant in Chico, California. I often talk with other restaurant owners, purveyors, and, most importantly, customers. In addition, my wife is a chef and has been working as a chef for over five years. The general public opinion just a few years ago about seafood was that wild caught seafood was superior and preferred over farmed seafood. This has been a result of misconceptions about farmed fish that have plagued the aquaculture industry and its producers for decades. But the public opinion has been changing as these misconceptions are being addressed. One such misconception has been sustainability. As detailed above, wild fisheries are no longer considered sustainable as many are depleted and, without supplementation, cannot meet current or future demand for seafood. The public is becoming aware of this. And though the sustainability of aquaculture has been questioned due to the fact that fish feed often contains high amounts of fishmeal, feed manufactures have begun focusing on producing new fish feeds from soy, algae, and other non-fish ingredients. In addition to this, fish farmers like Passmore Ranch, Skuna Bay, and many other like them, who often deal direct with chefs and the public, have instilled a sense of transparency in their farming practices, allowing for a better understanding and appreciation of aquaculture and its role in providing food for the public. As a result of these and similar outreach efforts of producers, chefs, and advocates for healthy oceans like Monterey Bay Aquarium's Seafood Watch, the public has begun to understand the importance and benefit of farmed fish. Customers are now well-informed. Customers know that our oceans are a limited resource. And they have begun accepting and understanding that farmed seafood is often a good, more sustainable option than wild seafood. The next time you're out to eat, look at the seafood options on the menu. You might be surprised to find primarily farmed seafood choices. The Seafood Watch program mentioned above offers a very useful tool for finding the best options for sustainable seafood. The best choices for sustainable seafood in this tool are often farm raised. Try it for yourself.

With all research, arguments, and opinions above taken into consideration, the opportunity for aquaculture growth in this country is undeniable. And investors are beginning to take notice.

So how can you invest in aquaculture? Like most emerging industries (though the U.S. aquaculture isn't exactly "emerging"), there is much investment opportunity in private investments. But publicly traded investments are also available. Marine Harvest USA (NYSE:MHG) is a publicly traded company that is helping to pioneer further aquaculture production worldwide. In addition, companies like Intrexon Corporation , mentioned above, Omega Protein Corp. (NYSE:OME), Ingredion Inc. (NYSE:INGR), and Marrone Bio Innovations Inc. (NASDAQ:MBII) are beginning to focus and invest more in aquaculture. Click here to view my custom built portfolio of publicly traded companies in the aquaculture industry.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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