The land-based salmon farming sector is making some tangible headway, with the latest step being Atlantic Sapphire's first harvest from its Miami facilities at the end of last month.

But for now, production volumes are low and success in the longer term is still very much a concern.

Farming fully grown Atlantic salmon in tanks on land only began in earnest five years ago when increasingly limited growth in netpen farming across major salmon producing countries began to push up prices and leave an opening for innovation.

It was also a time of strong development of recirculating aquaculture systems (RAS), which had seen significant technological advancements for smolt production on land.

"But all these projects have very long lead times,” said Pareto Securities Analyst Carl-Emil Kjolas Johannessen.

Among many things, projects have to obtain permits to build on-land facilities and also find suitable access to water as well as the proper means for its disposal.

“In the last five years these projects have come further along, while the cost of farming licenses at sea have increased,” said Johannessen. “Couple this with the technological improvements and that is why there are so many projects being announced lately.”

Good prices, low growth opportunity

“Supply growth is limited for traditional producers in Norway, mainly due to biological challenges, such as sea lice, but also because of various regulations,” agreed Christopher Robin Vinter, an equity analyst at SpareBank 1 Markets.

Also, the salmon price has been high in recent years and the industry has been making some healthy profits.

“So the low supply growth combined with high prices means investment in new technologies is now possible.”

In terms of new land-based projects, the growth has been “really quick”, and doubled or more over the past year.

“But these are still a long way out, and there will be limited volumes produced from land-based facilities for the next year or so,” said Vinter.

Separating the wheat from the chaff

There will be a number of factors that will dictate whether or not a proposed project will succeed, but analysts agree location and knowhow will be crucial, as will access to financing.

“A good spot is important to succeed,” said Johannessen. “It is also crucial the project is undertaken by people who know what they are doing both in terms of the technology being used and the concept of farming salmon. It is not plug and play in that regard.”

The beauty of land-based and RAS systems is they can be pitched up anywhere in the world. A key consideration for these companies will be reducing transport costs and finding a location close to their main markets such as in the United States or China.

But most importantly, in order for these plans to succeed, they need to achieve financing. And in the first stages it will have to be equity financing as it is too early for banks to enter the industry, said Vinter.

“Atlantic Sapphire will be harvesting from the first phase next year and if they show decent cost control, it will make it easier to get financing.”

However, there is no actual data yet to work with, “just Excel models and investor presentations.”

The unknowns on operating costs

“In terms of plans, financing is key,” said Vinter. “But you also need a solid team behind you that knows what it’s doing and will convince people to invest equity.”

According to Vinter, success will likely come down to the individual company’s operating expenses (OPEX) and capital expenditures (CAPEX).

“While we already have quite a realistic range on CAPEX, OPEX is still relatively unknown,” he said.

“OPEX will be impacted by sudden mass mortality events that happen out of the blue. If this happens often it will be difficult to be profitable in the long term – some will succeed but some will struggle.”

According to Johannessen, more land-based salmon projects will come along, and many of the ones we hear about today will never happen, or will be built on a much smaller scale than initial plans outline.

“In some cases there is also a lack of knowhow, but there are also bottlenecks now from the side of the equipment suppliers, meaning some projects will take longer to get off the ground than they are currently imagining,” said Vinter.

Sea versus land

On top of all these factors, it will also be important to see what happens in the sea, specifically the new technologies that are being developed in that sector, such as offshore and closed containment systems.

“These are cheaper technologies than land-based, so we will need to look at the benefits of farming onshore versus at sea,” said Johannessen.

If you look at OPEX , this is slightly higher on sea-based farming using traditional equipment, while prices achieved are typically in line with those farmed on land or lower.

But if you look at CAPEX this is much higher on land than at sea, when you don’t include the license costs.

“Equipment will always be cheaper for sea farming than on land farming, but profitability is a key consideration,” said Johannessen.

The salmon industry as a whole though, will not just see growth in land-based systems, but also with offshore and closed containment systems, said Vinter.

“It is not a case of either/or but both."

How much do consumers care?

According to Johannessen, consumer uptake of land-based salmon product is “the biggest uncertainty.”

For now, it is just small volumes of land-based salmon hitting the market which can be sold for a premium.

The concept is even bringing in new consumers who have issues with traditional sea-farmed salmon.

“But when the volumes increase it is the biggest uncertainty and it is yet to be seen if this is something the traditional consumer really wants,” said Johannessen.

Nevertheless, in the current environment, there are a lot of ESG-friendly stocks were investors are willing to pay more and this ESG premium will probably also be transferred to the product price too, said Vinter.

Atlantic Sapphire needs to reveal what prices they are able to achieve and this will be the first real data point to work from.

“It is too early to know what the consumer uptake will be, but the story makes sense, there is just the need to optimise fish, and market it differently,” said Vinter.

“With all these projects, the technology is not yet fully proven and only a few have received financing, so to get up and running there is still a lot of convincing to be done.”

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