ON THE DRIVERS OF COST CHANGES IN THE NORWEGIAN SALMON AQUACULTURE SECTOR: A DECOMPOSITION OF A FLEXIBLE COST FUNCTION FROM 2001 TO 2014

One of the main success factors behind the growth of salmon aquaculture has been productivity growth and cost reductions (Asche, Guttormnsen, & Rasmus, 2013). However, the industry has now entered a more mature stage where further cost reductions appears to be more difficult to achieve. To investigate to what degree this is the case, this paper investigates cost changes in the Norwegian Salmon aquaculture sector using a panel data set of salmon firms. Particularly, it explores how cost changes can be attributable to scale economies, technical change, production expansion, and input prices. Moreover, technical change can be separated into four different components: Pure technical change, non-neutral technical change, scale augmentation effect, and capital augmentation effect. We aim to decompose the drivers behind cost changes in the industry for the period 2001-2014. We applied a restricted translog cost function with a flexible technical change structure that allow us to estimate technical change on a yearly basis with the objective to identify patterns and trends in cost behavior.

Our estimations identify three main drivers on costs changes: First, feed prices seems to drive the increase in costs. We found that feed demand is highly inelastic and present low substitutability leaving producers with low adjustment possibilities to feed price shocks. Second, there is presence of technical regress with a significative impact on cost behavior. Furthermore, the decomposition of technical regress allow us to estimate that more than 90% of technical regress is explained by its pure component. This result indicates that technical regress is neither affected by availability of inputs or production expansion but by external factors that are not explicitly incorporated in the cost equation. Third, the increase of other costs that are not directly associated with production inputs suggest that that external negative conditions, such disease spreads have become a main source of inefficiency for the industry. This may be an indicator that after all, aquaculture is still a relatively young industry with several challenges to overcome.

References

Asche, F., Guttormnsen, A. G., & Rasmus, N. (2013). Future challenges for the maturing Norwegian salmon aquaculture industry: An analysis of total factor productivity change from 1996 to 2008. Aquaculture, pp. 43-50.