Warmer waters pose potential hole in aquaculture returns

While Hurricane Dorian’s path of destruction through the Bahamas caught the media’s attention last week, the impact extreme weather is having on the aquaculture industry has largely escaped the spotlight. That changed last week after Northern Harvest Sea Farms, a Canadian division of Norwegian salmon giant Mowi, admitted to the death of 2.6 million salmon due to unusually warm waters in Newfoundland’s Fortune Bay in early September.

A Dalhousie University marine biologist claimed it was the combination of warmer water and an “unnaturally high density” of fish in confined conditions that caused the large die-off.

Media reports suggest the weight of the dead fish was so great it pulled cages underwater, allowing surviving fish to escape. And with a layer of “rotten fish sludge” more than 15 metres thick at the bottom of Fortune Bay, scientists and fisheries unions are worried about the impact on the local wild stock of thousands of tonnes of decomposed fish[1].

As Northern Harvest failed to report the full scale of the disaster in good time, Newfoundland’s fisheries minister has now suspended all its salmon aquaculture licenses.

The losses suffered by Mowi are significant. The 2.6 million Atlantic salmon represent 5,000 metric tonnes of salmon lost – nearly half of all Northern Harvest’s fish at sea. This week, Mowi revealed that it suffered losses of US$5.5 million as a result of the mass die-off. The company reported its Q3 operational EBIT in Canada was wiped out to zero, and the group’s operational EBIT plunged to EUR 146 million – a 29% drop compared with Q3 2018.

An industry-wide problem

Climate risk is a relatively underexplored issue in aquaculture, highlighted by FAIRR’s ‘Shallow Returns?’ report on the sector earlier this year.

What is perhaps of most concern to investors with exposure to the aquaculture industry is that Mowi is a strong performer on disease and ecosystem issues. According to research by the Coller FAIRR Index – the world’s leading assessment of how meat, dairy and farmed fish producers are managing material environmental, social and governance risks, the company uses a number of preventative measures against established issues such as sea lice infestation. But few producers are comprehensively reporting on how they are adapting to climate risk.

Mowi’s travails, despite its relatively high ranking against peers on sustainability impacts, suggest that other producers are likely to be at even greater risk from this industry-wide problem.

Last year for example, unusually warm water temperatures of above 16°C until the unusually late date of April 2019 were cited by Tasmanian salmon farmer Huon Aquaculture as a factor in a 64% drop in profits for the financial year.

Equally concerning for the sector is the issue of transparency. Northern Harvest initially refused to provide any numbers from the mass die-off first discovered on 3 September, and would not even share how many fish it had in the area before the incident. Company employees then told Canadian media that around 1.8 million salmon had been lost. It waited weeks before informing the provincial government of the discovery that an additional 600,000 fish had died, which was the trigger for its license suspensions.[2] The company is now waiting to receive a list of conditions to meet before it can resume operations.[3]

Looming regulation threatens returns

 In addition to the concerns surrounding a warmer climate, the potential for regulatory change presents another risk on the horizon for the aquaculture industry. The ruling Canadian Liberal Party has pledged to phase out salmon farming in open net-pen systems within British Columbia by 2025. Party leader Justin Trudeau has just won a second term but without securing a parliamentary majority, muddying the waters around the proposal’s future.

In Norway, the world’s largest salmon producer, proposals are being discussed to impose stricter requirements for companies to manage the risk of escapees. The US state of Washington has already banned farming of non-native fish following the escape of hundreds of thousands of farmed salmon from a Cooke Aquaculture farm.

While salmon is often touted as a more environmentally-friendly protein, the latest science suggests its climate impacts are similar to chicken and pork production.

This uncertainty is creating concerns among investors. The rapid spread of the aquaculture industry is an alluring growth story, but only if it tackles the environmental and social issues that underpin its long-term viability. This is a theme that is explored in detail in our recent report, ‘Shallow Returns?’ – available freely online to FAIRR’s Investor Members.

Investors can also explore how individual aquaculture companies such as Mowi are performing in the Coller FAIRR Index.



[1]Globe and Mail