Organization: A Case Study from Canadian Aquaculture
1James R. Wilsona et Thierry Chopinb
a Professeur d’économie, Université du Québec à Rimouski James.wilson@uqar.ca
b Professeur de biologie marine, University of New Brunswick (St John) tchopin@unbsj.ca
Résumé
Cette contribution est consacrée à l’industrie de la salmoniculture du Nouveau-Brunswick en Baie de Fundy. Elle comprend un bref historique de cette industrie et une discussion des règles d’attribution des sites et de gestion de la production, ainsi que des impacts potentiels de ces règles sur l’évolution de l’organisation du secteur. L’examen de l’histoire du secteur suggère que les caractéristiques d’éligibilité à de nouveaux programmes de développement de l’aquaculture peuvent avoir un impact sur les coûts de développement et sur la rapidité des changements observés dans la structure de l’industrie. Nous discutons également les changements de politique que les législateurs et les gestionnaires publics canadiens pourraient mener afin de rendre l’industrie plus compétitive, et les contreparties que cela pourrait impliquer.
Abstract
A description of the New Brunswick Bay of Fundy salmon aquaculture industry is presented. This will include a brief history of the industry, and a discussion that focuses on the rules of site attribution and regulation of production, as well as their likely impacts on the industrial organization of the sector over time. A review of the sector's history suggests that who is eligible for new aquaculture development programs may have an impact on both the costs of sector development and the rapidity of changes seen in industry structure. We also discuss likely policy changes that Canadian law-makers and public managers may consider for making the industry more competitive, and the trade-offs that these changes may engender
Mots-clés
Salmoniculture, concessions aquacoles, droits ce propriété, innovation, rente, concentration industrielle.
Keywords
Salmon farming industry, aquaculture permits, property rights, innovation, rent, industrial concentration.
1 The authors would like to thank without implicating Pamela Parker, Atlantic Canada Fish Farmers Association;
Peter Cashin and Andrew Sullivan, both of the New Brunswick Department of Agriculture, Aquaculture, and Fisheries; and Robert Sweeney, Sweeney International Marine Corp.
J.R. Wilson et T. Chopin La propriété à l’épreuve de la mer Colloque international, Brest, 2-3 juillet 2015
Introduction
During our interviews to produce this paper, it was often claimed that the New Brunswick (NB) salmon aquaculture industry in the Bay of Fundy today is a “mature” industry. In the late 1970s, the industry was largely experimental. In the late 1980s, it began to develop rapidly and continued over the following decade, leading to agglomeration and consolidation in the industry. In the first decade of the 2000s, it became even more concentrated, partially in response to new policies aimed at reducing disease risk externalities. These developments all occurred as real world prices of salmon, compared against other sources of proteins, progressively declined until finally beginning to rise after 2001 (Figure 1).
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Figure 1. Relative world price development of different protein sources from 1980 to 2013 Source: Salmon Farming Industry Handbook, 2014
http://www.marineharvest.com/globalassets/investors/handbook/handbook-2014.pdf
Change in NB's industry structure occurred relatively rapidly compared to other industries, such as the one found in Norway2. In NB, the number of firms producing salmon is down from 45 companies in the early 1990s to 3, with one independent firm that sells exclusively to one of the remaining companies. So the conventional view of the industry is that once the rules of use were set, competitive forces in the industry drove it to what it is today; a mature industry.
According to this narrative, the search for economic advantage among the remaining companies and the maximization of resource rent from the sites in production drove the search for economies of scale. This, in turn, led to increased knowledge about the different environmental services used in aquaculture that are important for the sustainable production of pen-reared salmon. In the last 10 years, there have been 18 applications for boundary
2 See for example the public summary statistics of Norway:
J.R. Wilson et T. Chopin La propriété à l’épreuve de la mer Colloque international, Brest, 2-3 juillet 2015
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amendments to site plans in order to allow for technological changes in production, to avoid areas of bays that are less productive, and to reconfigure production in ways which promote better health of the livestock while minimizing environmental impacts. A standard economic explanation for this behavior is that as world-wide competition intensified, these changes were made to avoid the extensive margin, where profits at the margin were compressed. In studying resource rent in an industry, we often present it as an historical narrative to explain the march towards the competitive equilibrium. The assumption is usually made that land, a fixed factor, has unique qualities in production. Site quality certainly played a role in the development of New Brunswick salmon aquaculture. However, these narratives also suppose that firms are homogeneous, all sharing the same abilities and technologies, to make the role of the fixed factor clearer. The firm at the extensive margin obtains no land rent because land quality is marginal, whereas the firms that are not at that margin retain land rent, and are thereby advantaged in the industry. This makes the analytical isolation of land rent more tractable.
However, an alternative narrative is that the simplifying assumptions of the classical economic analysis abstracts from reality in two important respects. First, most fixed factors used in an enterprise, entrepreneurship for example, are likely heterogeneous. Not only might land be unique, but human resources may be unique as well, with some having a high degree of entrepreneurial endowment and others having less. However, it is possible for policy makers to structure access rules that attract fixed factors which are relatively homogeneous, e.g. human resources from stable industries such as fishing that experience low levels of entrepreneurship. Favouring these factors for a nascent industry will speed up the process of agglomeration and industry concentration, making the industry “mature” rapidly. The rules that are put in place to attract human resources to an industry may have an impact on the dynamics of industrial competition. Also, the emergence of an industry, and the generation of knowledge capital and social capital that takes place as the industry evolves will generate both positive and negative network or agglomeration externalities. The positive externalities will accentuate the abilities of all enterprises. These effects have been measured in the development of the Norwegian aquaculture industry by Teveteras (2002). There, he found that increased regional concentration of salmon production can provide benefits in the form of thicker input markets, increased localized knowledge spillovers, and complementarities due to better alignment of production activities. In the case of Norway, these outweighed price externalities, and possibly other negative externalities such as disease.
Third, the classical approach to teasing out land rent from all other sources of rent depends critically on malleability and path non-dependence of fixed productive factors. An alternative view is that technologies evolve alongside the fixed factors, to the point where the conceptual tools used to imagine resource rent3, a key policy variable used for taxation, seem increasingly less clear and satisfying.
This may mean that the identification of land rent, and of resource rent in general, cannot be untangled so easily from rents arising from other unique factors. Attempts to do this ignore the other plausible narrative that rent is simply a social phenomenon tied up in the history of an industry and a market, rather than intrinsic to one or another fixed factor. The uniqueness of certain fixed factors, such as entrepreneurship, may also be a function of the rules that attract these factors to the industry in the first place. Although the role of lobbying by industry leaders for rules that reinforce their positions in the industry has been explored by
3 Getting at resource rent involves asking (and responding to) the question: 'What could capital and
entrepreneurship earn in a next best employment without the land?' and then comparing the two earnings. However, this usually abstracts from the transactions costs involved in actually making such a detour.
J.R. Wilson et T. Chopin La propriété à l’épreuve de la mer Colloque international, Brest, 2-3 juillet 2015 economists, it may also be that a number of rules an industry works under are arbitrary, having no particular foundation in science or industry practice. They may also be ad-hoc or punctual, in order to solve a specific problem encountered along the way. All of these, along with luck, determines the structure of the industry – who stays in, and who leaves. In the case of salmon aquaculture for example, producers in most countries have confronted the problem of "disease risk externalities" (Weitzman, 2000; Di Falco and Perrings, 2005). The evolution of rules to deal with these risks, taken together, may have had unforeseen consequences on the industry structure in NB.
The way property rights are attributed by government, and the way that government intervenes in the management of these rights, may have an accelerating or decelerating effect on the evolution of industry structure. This case study of the NB salmon aquaculture describes a rule structure that may have accelerated industry expansion in the early years, leading to a rapid shake-out of the industry in the late 1990s. This shake out, caused in part by the emergence of disease risk externalities4, resulted in a major rule change in 2006 called the Bay Management Area Policy (BMAP). The industry was actively involved with the government in researching the problem of disease-risk externalities as well as searching for a solution. This rule change provoked a second wave of consolidation, because it favored companies who were already spatially diversified, and who were large enough to accommodate the new rules based upon a three-year spatial rotation from the time the smolt were put into the pens after age 1. We conclude the paper by explaining why the rules put in place by the government of New Brunswick’s Department of Agriculture, Aquaculture, and Fisheries (NBDAAF) and Fisheries and Oceans Canada (DFO) have likely resulted in a precocious maturation of the industry. This maturity may be due to the relatively costly public management mechanisms pertaining to innovation in aquaculture production. Prohibiting more cost effective means of innovation and change may ultimately result in increasing costs in the industry in NB, forcing firms to diversify elsewhere. For these reasons, a better understanding of the economic history of this sector, including the present rules and regulations, is key to determining, at least qualitatively, the performance of the industry and the notion of rent.