Economies of Scale

Traditionally a mom-and-pop industry, aquaculture reeled in record revenues last year.

October, 2001

Hawaii-based aquaculture firm Cyanotech Corp. (NASDAQ: CYAN) recommends that you do not eat between five and seven servings of vegetables every day. Eat Spirulina, instead. It’s a microscopic blue-green algae full of amino acids, protein, vitamin B and beta-carotene.

Thanks to consumers who are listening, aquaculture companies anticipate pools of green cash over the next few years. Cyanotech in fiscal year 2000 sold 331 tons of Spirulina products under the brand name Spirulina Pacifica. The result: gross revenues of $8.04 million for the 12 months ended March 31, 2001, compared with $7.4 million the previous fiscal year.

Cyanotech this year anticipates more than $10 million in revenues, generated from sales of Spirulina Pacifica and a second microalgae byproduct called BioAstin. Researchers are conducting clinical trials to determine if BioAstin aids sunburn, carpal tunnel syndrome and other health problems.

“We’ve been telemarketing BioAstin and Spirulina to health-food stores and increasing our nationwide coverage through health publications,” says Gerald Cysewski, president of Cyanotech Corp. “Internally, we’ve also hired two sales people and are working with a marketing group that directly represents us.” Cyanotech operates its patented Ocean-Chill drying system in a 90-acre farm on the Kona Coast of Hawaii. “Hawaii is one of the best places in the world for growing microalgae,” he says.

Algae (mainly Spirulina) constituted 38 percent of total revenues in 2000. Shellfish and finfish constituted 10 percent and 35 percent, while ornamental species (such as seahorse), brood stock and seed constituted the remaining 17 percent of overall revenues. They were used for a variety of products, from specialty chemicals and ornamental displays to jewelry, food and pharmaceutical products.That, plus more than 30 different underwater species, thanks to year-round sunlight and deep oceans. In 2000, aquaculture in Hawaii generated gross revenues of $22.2 million, up from $18.1 million in 1999, according to the state’s Aquaculture Development Program. That dollar amount comprised the total wholesale value of farm-cultivated finfish, algae, shellfish, ornamentals and other species grown in Hawaii.

Some companies involved in the industry are:
CEATECH USA, (Controlled Environment Aquaculture Technology Inc.), the Kauai-based bio-tech company that produces Hawaiian Plantation Shrimp (more commonly known as Kauai Shrimp), last year was awarded the American Taste Award of Excellence by the American Tasting Institute. The company produces between 13,000 to 15,000 pounds of shrimp each week for restaurants and supermarkets in Hawaii and on the West Coast. CEATECH also is recognized as a distributor of Specific Pathogen Free products.

Cates International last year submerged a sea cage 100 feet below the Leeward Coast of Oahu as part of an open-ocean, farming project. The $90,000 cage is Hawaii’s first. In the project’s first six months, more than $50,000 worth of moi (Pacific threadfin) was produced.

There are other companies that have made significant strides. But all told, Hawaii is home to between 105 and 140 aquaculture farms, a ballpark figure based on a statewide survey. The number however, doesn’t reflect the scope of the industry because “a significant number of those are ornamental, backyard, small-scale farms,” says John Corbin, manager of the Aquaculture Development Program. “There are a lot of mom-and-pop type of operations, selling between $30,000 to $60,000 annually in backyard operations.”

Even so, aquaculture farms – large or small – don’t produce enough to feed Hawaii, where annual seafood consumption is 45 pounds per person, approximately triple the average of the U.S. mainland. Even if local farmers were to sustain local palates, however, the cost of producing seafood in Hawaii isn’t cheap. “We have the high cost of bringing in supplies our shrimp and fish farmers need,” says Ron Weidenbach, president of the Hawaii Aquaculture Association. “They have to import the feed.” Fish feed and other supplies are flown in from British Columbia, Idaho, Utah and even as far away as Pennsylvania.

Weidenbach adds: “That is why microalgae is competitive. All it needs is sunlight and nutrient-rich water – you simply pay the cost of pumping it (algae) in from the ocean.”

One company that recently joined Hawaii’s microalgae market is Micro Gaia Inc., located in the Maui Research & Technology Park in Kihei. Last October, the biotechnology group began growing microalgae, using a Bio-Dome System (enclosed bioreactors), which is supposed to be patented by the end of this year. Meanwhile, 1,000 liquid-filled domes sit on five acres of land; the company is finalizing plans to add 1,400 more domes on four more acres.

“We’re the only company in Hawaii that cultures microalgae in a totally enclosed environment throughout the entire cultivation process,” says Mark Day, chief financial officer for Micro Gaia Inc. “We strongly believe that this closed-environment has a great effect in keeping the cultures clean.”

The company’s microalgae products are being used for food and beverages, infant formula, cosmetics, aquaculture feed, medicine and elderly-care products. Micro Gaiai’s Japanese parent company, Fuji Chemicals Industry Co. Ltd., has sent bulk samples to more than 150 companies worldwide as part of an aggressive marketing strategy. By the end of this year, bulk sales are expected to reach at least $3 million.

“Fuji’s bulk products will be purchased by companies that will come out with end products that can be found at drugstores and thru direct-marketing channels,” Day says.

Partnering with other groups to import aquaculture products out of Hawaii is one of the keys to a successful business. “You cannot thrive if you only provide to the local market,” adds Ivan Lui-Kwan, president of Kona Bay Marine Resources. “You need to go outside Hawaii.”

Kona Bay Marine Resources uses a unique land-based method to grow clam seeds (juvenile clams), oysters and large shrimp. Its facilities include four shrimp tanks and four clam seed tanks in a two-acre area in the National Energy Laboratory of Hawaii on the Big Island. Kona Bay’s initial strategy was to produce the species for commercial production, but high labor costs forced the company to re-focus. Now, it grows shrimp for food products and cultivates juvenile clams to sell to other farms that would harvest the clams to maturity.

Palau-based Micronesia Investment and Development Corp. this year formed a partnership to do just that. Company executives in late July also were talking to a Japanese company, which would then export the full-grown clams from Palau to Japan. But as of press time, Kona Bay’s managers were not in a position to identify the group from Japan.

“Our contribution will be to provide the marine-bio expertise,” Lui-Kwan says. “We would sell to the Palau venture, they grow it (clams) there, then the Japanese partner would buy the full-grown clams for the Japanese market.” On an unrelated project, Kona Bay Marine has been talking to a Panamanian company about another business venture.

The company is ambitious about its global expansion. Today, as many as 24 million juvenile clams can be grown annually in Kona Bay’s farm. Once plans to add 10 more acres are approved, the company will be able to grow as many as 300 million clams and 60,000 pounds of shrimp each year.

Lui-Kwan is a former partner in the law firm Carlsmith Ball and a former chairman and chief executive officer for the healthcare provider Queen’s Development Corp. Lui-Kwan’s move in 1999 to Kona Bay Marine Resources not only was a major career shift, but it also reflected the confidence he and other industry members have in the aquaculture business.

“There’s a huge demand for aquatic products as food, and I think Hawaii is posed to take advantage of that,” he says.


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