Kuterra Responds

Brad Hicks’ article [Land-based salmon not investor-ready] summarizes selected points from public reports on Kuterra’s first four cohorts of Atlantic salmon production. (The full reports are 140 pages in two documents, available here: http://tidescanada.org/media/raising-salmon-land-makes-business-environmental-sense/

                  Given the considerable work that was likely involved, it’s regrettable that Mr. Hicks produced a summary with crucial gaps, framed in an ineffective apples-and-oranges comparison.  Mr. Hicks compares the early-stage challenges of a three-year-old business with the eventual achievements of a 50-year-old industry. Investors seeking to identify sunrise and sunset industries, and comparing RAS and open-net salmon farming, need other information for useful analysis.

                  Open-net farms’ own early-stage challenges included massive losses from furunculosis, seal predation and plankton blooms, with poor product quality and high labour costs. Achievements over the decades included vaccines to prevent some other diseases, and scale-up to reduce operating costs; 500-tonne farms run by eight people have become 3000-tonne farms run by four people.

                  Despite those hard-fought achievements, the open-net industry continues to struggle with biological and business risk and catastrophic loss. In the top three salmon-producing countries, Norway’s production has been severely limited by sea lice; Chile has a devastating ISA outbreak, very high antibiotic use which restricts access to markets, and recent extensive mortality from algal blooms; Scotland struggles with sealice, storm-induced escapes and mammal interactions.

                  Total global open-net salmon production is forecast to decline in 2016 and 2017. The impacts of climate change and increasing regulation of farm wastes require innovative new production methods. Companies are moving more of their operations to land, or experimenting with high-cost, high-risk offshore pilot projects. Some of the problem-solving efforts are funded by governments and institutions.

                  By comparison, the challenges of RAS are being overcome remarkably quickly. The current application of RAS to Atlantic salmon seafood production is roughly five years old. Kuterra, which is three years into production and two years into steady sales, is among the global leaders. Historic land-based projects are not relevant; the technology and knowledge used then aren’t comparable to those available today.

                  Mr. Hicks rightly recognizes Kuterra operation team’s efforts. It’s not clear why he doesn’t recognize their accomplishments also. The team has resolved a long list of commissioning and operational issues, and has reduced the challenges to a handful of key questions.

                  The team has overcome many of the problems Mr. Hicks noted. The early frozen inventory of pale fish has been sold; it was deliberately held to give the distributor time to identify the best markets for fish that was good value in all aspects except colour. Fungal issues have been resolved by salt treatment and managing system salinity. Production increased after the first two deliberately small commissioning cohorts were harvested. Production this year is expected to be at least 375 metric tonnes and may be more as a result of newly built harvest tanks.

                  The information Mr. Hicks used was from cohorts 1-4, which were completely harvested by September 2015. The current harvest is cohort 6, which started with 45,000 smolts and had a mortality of 6 percent. Its average weight is more than 3 kg live, FCRe is 1.03 and FCRb 0.97. To date, cohorts 7 and 8 have comparable indicators, which may be better if trends continue. Cohort 9 will arrive shortly. Not only are current indicators far better than initial ones, they also meet Kuterra’s breakeven targets and, except for weight, are better than for open-net operations.

                  Kuterra applies rigorous business discipline to operations, directed by an expert board. It has achieved a positive quarterly gross margin and is moving toward breaking even. Achieving the breakeven milestone is taking longer than expected because of expenses related to meeting market need, such as building extra harvest tanks, and overcoming engineering challenges, such as retrofitting more gas exchange capacity.

                  Kuterra’s operating costs are comparable to open-net farming. Kuterra’s capital costs were far higher. With knowledge gained to date, however, we estimate the unit cost at commercial scale would be 40 percent less than the current one, with further potential savings through ongoing innovation.

                  In order to accurately assess Kuterra’s costs, it’s essential to recognize that Kuterra is both a conventional business and a vehicle for accelerating business development. It has activities, costs and returns associated with each function, with some overlap.

                  As a vehicle for industry development, Kuterra received philanthropic and government funding from two major funders. One funder, Sustainable Development Technology Canada, is an arms-length foundation created by the federal government to promote sustainable development and support projects that demonstrate new technologies to address issues related to climate change, and air, water and soil quality. It funds projects that have “the potential to meet market demand and to achieve Canada’s environmental and economic goals.” Another funder, Tides Canada, made possible the data collection and reporting that Mr. Hicks used.

                  Kuterra would not have been possible without funding, but that brought associated direct and indirect costs. Direct costs cover the exhaustive data gathering, analysis, reporting, open information exchange, global information consolidation, and specific deliverables such as tools for new producers. Indirect costs come from being at the frontier, solving frontier issues.

                  Business innovators usually sustain initial losses before achieving scale, for example Tesla vehicles or Silk soy and almond milks.  It’s recognized that innovation requires funding to cover those early losses to allow companies to engineer the innovation down the cost curve. Because of Kuterra’s knowledge-transfer obligations, the payback on funding such costs also benefits other producers, potential producers, researchers and investors.

                  There are strong pointers to solutions to remaining challenges in the work at Kuterra and at research facilities and RAS farms in Norway, Denmark, Switzerland and elsewhere. A second RAS salmon farm in Canada, Sustainable Blue, which uses its own technology, has already addressed some of these issues. It started selling fish in 2015 and is already expanding.

                  The most significant outcome of the Kuterra project to date has been to define what is essential for establishing a full, viable, environmentally benign RAS salmon seafood industry. This includes an on-site hatchery, operations scaled to a minimum 2000 metric tonnes, reduced capital costs, and answers to key biological questions, most notably, how to minimize early maturation. Kuterra has not yet benefitted from any of the above factors. When it does, its costs will drop dramatically.

                  In the end, of course, it is investors who will make the decisions on the future of salmon farming, as they compare the business and environmental risks and limitations of open-net technology with the greater control, reduced risk and rapid development of RAS technology.

                  Kuterra has taken the lead in paring down a massive number of unknowns to some specific questions, and shared what it learned. This has moved the economic bar for RAS salmon farming. It’s incomprehensible to see these developments as anything other than positive momentum behind a new industry that promises to bypass the problem of the old.

— Eric Hobson, Chair ​, Kuterra LP