On the impact of feeding cost risk in aquaculture valuation and decision making

Abstract

We study the effect of stochastic feeding costs on animal-based commodities with particular focus on aquaculture. More specifically, we use soybean futures to infer on the stochastic behavior of salmon feed, which we assume to follow a Schwartz 2-factor model. We compare the decision of harvesting salmon using a decision rule assuming either deterministic or stochastic feeding costs. We identify cases, where accounting for stochastic feeding costs leads to significant improvements as well as cases where deterministic feeding costs are a good enough proxy. Nevertheless, in all of the cases, the newly derived rules show superior performance, while the additional computational costs are negligible. In conclusion, we recommend to use decision rules taking stochastic feeding costs into account.