Financing the growth cycle: working capital in aquaculture

An aquaculture producer carries its inventory in the water for most of a production cycle. For salmonids the cycle from smolt to harvest runs 18 to 24 months. For warm-water finfish such as barramundi it runs nine to 14 months. For shrimp it runs four to six months. During that period the producer pays for feed, which accounts for 50 to 60 per cent of production cost, and receives nothing. The working capital need is therefore long, front-loaded and exposed to biological risk in a way that grain or cattle finance is not.

The firm lends against biomass, not against fish. The distinction matters. Biomass is measured monthly by the producer's own sampling and verified quarterly by an independent survey that the firm commissions. The facility advances against biomass at cost until the stock reaches 60 per cent of harvest weight, and against a discounted market value thereafter. The advance rate is 55 to 65 per cent. A producer with US$20 million of verified biomass at cost can draw US$11 million to US$13 million, and no more until the next survey.

Mortality is the risk that decides the structure. A single disease event, algal bloom or temperature excursion can remove 20 to 40 per cent of a site's biomass in a fortnight. The firm requires stock mortality insurance on every site financed, with the facility named as loss payee, and it limits exposure to any single site to 30 per cent of the facility. The remaining risk is priced. Facilities written by the division since 2021 carry margins of 475 to 700 basis points over the reference rate, depending on species and site count.

Covenants follow biology. The facility tests feed conversion ratio, monthly mortality and harvest weight against the producer's own plan, not against an industry average. A feed conversion ratio drifting above 1.35 for salmonids, or monthly mortality above 1.5 per cent for two consecutive months, triggers a review before it triggers a default. The firm's site visits are scheduled against the stocking calendar, so that a visit coincides with the sampling that sets the next month's borrowing base.

Welfare is a credit factor as well as a Charter requirement. Stocking density, water quality monitoring and slaughter method are reviewed at origination under the principle of welfare in biological capital. The firm declines producers who cannot show continuous dissolved oxygen records for each pen. The commercial reason is simple. Sites with poor welfare records show higher mortality, and higher mortality shows up in the borrowing base within a quarter. The welfare review and the credit review reach the same answer by different routes.

The division's aquaculture book at 31 December 2023 comprised five facilities totalling US$47 million, spread across Australia, New Zealand and southern Brazil, with no losses since the first facility in 2021. The pipeline in 2024 adds East Africa through the planned Nairobi desk and warm-water species in the Indian Ocean. Each new geography brings a new set of biological parameters, and each facility is sized to the cycle of the species it finances rather than to a template.

Published 2024-03-05 by the Commercial Finance division. Research is prepared for eligible counterparties and does not constitute advice.