The farmed shrimp industry is massive and growing quickly. Such growth attracts affordable capital as they see the opportunity to return nice profits through extending loans. This drives down the interest rates of loans, which allows industry players to invest in long term projects that will further increase the growth and health of the industry.
All parts of the farmed shrimp industry can get loans and have access to affordable capital, except those that produce the shrimp themselves. Hatcheries, feed companies, genetics companies, packers, processors, exporters, importers, and retailers can all get access to capital, but farmers today, outside of a tiny handful of the most advanced and well-connected, cannot. In this post we want to explore why that is the case and where farmers can get access to capital today.
Why Shrimp Farmers Need Access to Affordable Capital
The importance of affordable capital is that it fuels growth. Period. If a farmer can get a loan, either long term or short term, it allows them to deploy that capital to increase the efficiency of their operation. They can hire more qualified people to run their ponds. They can invest in better technology or services. They can pay for higher quality feed that will lead to higher growth rates, etc.
How Farmers Get By Without Major Capital
Without this, farmers are generally stuck relying upon their own profits to fuel their own growth. With the volatility in the industry, both in production (survival rates, FCR, etc.) and global price volatility, they need to hold onto some cash reserves to be able to weather these ups and downs. This limits the amount of working capital they can deploy to improve the farm and make it more productive and less risky.
Farmers do get some access to short term capital through feed companies. Depending upon the deal with the feed company and the performance of the farm, farmers can get a 30-120 day window to repay feed, which can give them enough time to harvest a crop, make their profit and then pay for the feed. This frees up more working capital for the farm.
Why Shrimp Farmers Can’t Get Loans from Banks
But better payment terms from feed companies is about all of the credit that farms can get in terms of financial services. Banks will not grant loans to shrimp farmers for a couple of reasons. First is that they see the production industry as not mature enough to make a bet on. Different regions have risen and fallen in terms of global importance. Think of Thailand pre-EMS. Because the locations of where shrimp farming will be most prevalent are not set (such as they are in Salmon), banks are not yet ready to take that risk.
The other major factor is production risk. But offering a farm a loan, they are betting on the fact that the farmer will not default on that loan, which is betting on the stability of their production. Until the risk of production is better quantified and lowered, it is unlikely that banks will be open to offering capital products to farmers.