Profit / Cost Analysis

1. Background

Suncoast Systems, Inc., the makers of the ‘Oscar’ pond monitoring system and a large catfish farm located in Schlater, Miss., have jointly worked together to analyze and evaluate the cost benefits associated with using automated pond monitoring equipment. The primary objectives of this analysis are to:

A) Identify the cost factors related to using an automated pond monitoring system. B) Accurately estimate the cost benefits resulting from using this new technology.

There are a number of factors that go into the cost of raising a crop of fish. Some of the cost factors examined in this report are:

A) Aerator Operation and Cost
B) Labor Costs
C) Support Equipment Costs
D) Risk Management (Cost Due To Fish Kill)

2. Theory of Data Collection and Analysis

In order to come up with an accurate comparison of an automated operation with a manual one, it is necessary to measure the same activity conducted both ways and to then compare the results. To do this, an ordinary group of three 10 acre production ponds was chosen for the analysis. These ponds were monitored in the normal way using professional night persons to monitor the ponds’ D.O. every two hours and to turn aerators on and off as needed. At the same time, pond monitoring (D.O.) buoys were placed into these same three ponds as well as aerator monitoring and control equipment, although this equipment was not allowed to actually turn the aerators on or off. Using this set up, the actual times the aerators were manually turned on and off was recorded as well as the pond’s actual D.O. values. With this kind of basic information, it is easy to determine when the aerators would have been turned on and off if the automated system were in control and to compare these times and costs with the manual aerator operation that was performed in the usual way.

3. Pond Monitoring Data & Aerator Costs

Using the above described procedure of monitoring the actual dissolved oxygen and aerator operation for the three ponds, the data as shown on figure A was observed and recorded by Oscar.

The data shown above was collected from mid June to mid August, 2001. These three ponds were monitored for a total of 8,676 hours of which 3,336 hours were actual aerator running hours. If, however, Oscar were turning the aerators on and off, the aerators would have run only 1,575 hours which would have saved 1,761 hours of aerator operation. At a cost of 75 cents per hour for aerator operation, Oscar would have saved $1,321 for these three ponds for the monitored two month period. This virtually cuts the aerator operating cost in half (53%). Lastly, assuming that the two month period that these ponds were monitored constitutes half of the annual aerator usage, then we can easily calculate an estimated yearly savings of $881 per pond in electric costs.

The criteria used to determine the Oscar aerator run time is to turn aerator #1 on at 4.0 PPM, and aerator #2 on at 3.5 PPM and to turn aerators off at 2.6 PPM in the morning. If the aerators were turned on at 3.5 & 3.0 PPM, which is perhaps more do able with a real time system, then the cost savings jumps to from 53% to 65% or $1,650.

A good question to be asked is why is there such a dramatic difference between the automated monitoring system and the manual approach. When we looked at the observed data, the answer to this question is easily observed. In general, the aerators were turned on too early and in some cases, were turned on when they didn’t need to be turned on at all. This conservative approach of running aerators when they are not needed is perhaps the result of wishing to reduce the risk of loosing fish when the D.O. monitoring interval is 2 hours.

Another important cost factor associated with aerator usage is the cost to purchase and maintain the aerator equipment. If aerator usage can be cut in half, as is indicated by the above chart, then it stands to reason that the life of the equipment would be greatly extended. Assuming that the life of an aerator is about 7 years and that automation can extend it by 30 per cent, then the life of the aerator would be increased to about 10 years. If an aerator costs about $3,500 and its current life is 7 years, then the annual cost of an aerator ($500) would be reduced by 30 % or the annual cost savings would be about $150 per year per aerator. Since an average pond has two aerators in it, then the annual cost savings for aerator wear & tear would be about $300 per year per pond.

Our analysis shows then that you can expect to save $1,181 ($881 + $300) per pond per year in aerator costs alone by utilizing the Oscar pond monitoring system.

4. Labor Factor

An important factor when considering the cost of producing goods, is the cost of labor. Automation classically not only increases accuracy, quality and productivity but it also decreases product losses and labor costs. To be sure, people and their services will continue to be needed. However, through automation, fewer labor hours will be needed and the productivity, reliability and quality of the work will improve.

Our study farm was a large one that used the services of 15 night pond monitoring personnel along with their vehicles and equipment. Assuming they were monitoring approximately 750 ponds every two hours, this translates into one person needed to monitor every 50 ponds. Considering further that even if all of the ponds on the farm were automated and half of the night monitoring people were retained, this means that the cost of one person per 100 ponds would be saved. Assuming that the cost for an employee, including benefits, is about $20,000 per year, then a savings of about $200 per year in labor cost per pond will be gained by automating pond monitoring and power management at the ponds.

Our study was not conducted on a small farm, but the labor savings on even a small farm will be substantial. Why is this, you ask? Because, even on a small farm, the farmer has to get up and go out to check his ponds every two hours or he will substantially risk losing his ponds. This takes valuable ‘sleep’ time away from the farmer and the next day, when it is time to do normal daily work, the farmer will be slower and will be more irritable. The wife and kids can’t stand to live with him at this time and take a long and costly vacation. Its expensive no matter how you look at it.

5. Vehicle Costs

In addition to labor costs, each of the night monitoring people require a vehicle to do their job and this vehicle incurs significant operating costs including fuel, insurance and maintenance. Assuming that a vehicle must be purchased every 5 years at a cost of $20,000 yields a yearly acquisition cost of $4,000. Add to this the cost of insurance of $350 per year and the annual cost increases even more. Next, assuming that 20,000 miles are put on these vehicles every year and that they get 20 miles per gallon of fuel, 1,000 gallons of fuel is use each year. A cost of $1.25 per gallon for fuel, gives us a fuel cost of $1,250 per year. Lastly, we need to add in the cost of maintenance for the vehicle. A conservative estimate (includes tires, oil, etc.) is $150 per year. Adding all of these vehicular costs together gives us an estimated annual cost of $5,750 per pond monitoring employee. Again, assuming that a savings of one employee per 100 ponds can be achieved by pond monitoring automation, gives us a vehicular savings of over $55 per pond per year.

Again, on a smaller operation, you may not have to buy and maintain a vehicle specifically to monitor your fish operation, but you will still need to use your vehicle and it costs you money.

6. Cost From Fish Kills

A hard to find yet real cost associated with fish farming is the cost resulting from losing a pond of fish. It doesn't happen very often, but when it does, a lot of money is lost very quickly. Crop insurance is available for other agricultural products but is virtually unavailable for catfish farming and even if it were available, it would be prohibitively expensive.

One of the many advantages offered by the Oscar pond monitoring system is that it greatly reduces the chances of losing a pond due to oxygen depletion, power loss or unavailability or equipment failure.. If the Oscar system is properly monitored and maintained, it is estimated that it will reduce the risk of a fish kill by a factor of at least four. This is accomplished due to the fact that the Oscar system is constantly checking not only the ponds but it is also cross checking itself. If Oscar says a pond is ok, you have a high degree of certainty that everything is ok, otherwise a problem will be reported via an alarm. So long as there is someone around to respond to Oscar’s alarms, then the integrity and safety of a pond is greatly improved.

Realizing that there is little data to go on but also knowing that this is a significant cost factor, the following is at best a 'guesstimate' and is useful to give some estimate of the cost resulting from losing a pond of fish. Assuming that 1 pond out of 40 is lost to a fish kill each year and that the average monetary loss of this pond is about $20,000 gives us an estimated cost per pond for fish kill losses of about $500 per year. Now, if Oscar can save 75% of these losses (3 out of 4) then the savings per year per pond resulting from using Oscar is $375. Although Oscar is not in the insurance business, it is in effect providing $375 a year insurance premium per pond for crop insurance.

7. Conclusions

The four main cost factors discussed above are summarized below.

The above table also includes the estimated costs associated with the purchase and maintenance of the Oscar system. It is estimated that the purchase cost of Oscar to be about $2,800 per pond which translates into about $650 per year for lease / purchase or about $55 per month and the maintenance cost is about $150 per pond per year. This give an estimated total cost for Oscar of about $800 per pond per year for the first five years and $150 per year thereafter.. The net annual profit increase is now easily estimated and is $1,011 per pond per year which we have rounded down to $1,000. Another way of looking at this is to invest $2,800 per pond now will increase profits by $1,000 per pond per year for the first 5 years and then to $1,650 per pond per year thereafter.