Faced with a seemingly failed endeavour, one of the most difficult decisions to make is whether to persevere at all cost or simply throw in the towel. I was in that position a year ago and I opted for the latter. This time round, the decision was made with much better judgements in my opinion.

I ended my aquaponic and integrated farming venture due to a few reasons, to wit:

1. Problems with scalability

The original idea was to create a model based on a fish production of 30 tonne per cycle and then eventually scale it up to 10x of output. However, there are a lot of production variables that make it hard to control even before scaling up. For things to work out, I would need the following:

• Skilled labour (preferably with no emotion)
• Decent weather without natural disaster
• No major equipment failure
• Good genetic makeup of fingerlings
• Water parameters well controlled
• Energy efficiency
• No disease attack
• Optimal growth rate of fish stock
• Good control on food conversion ratio

Suffice to say that I underestimated the above challenges, especially when problem with any ONE of the above areas will make the model collapse immediately. Due to the labour intensive nature of the business, the bigger the scale of the operation, the more incremental effort is needed. This effectively violates the law of scalability.

In my feverish haste to “revolutionalize” the industry, I’ve listened to the wrong person who masked himself as an expert. The result was a wrong production pond design that further impede the scalability of the model.   

2. Risks significantly outweigh return

For each production cycle, the cost of production is invested over approximately six month and the return is reaped in one lump sum upon harvest. However, the lump sum return can very well be zero instead of a reduced amount. That’s simply because the nature of biological assets suggests that all the inventory can get wiped out in one go if you fuck up the oxygen level, water quality, or any of the bio-security measures. Disasters are quite common especially in an outdoor environment. Very often, you almost certainly need divine intervention just to survive one cycle and I have lost count of how many times I prayed.

The cash flow of the business suggests that I could make around RM2-3 for every RM1 invested which is more or less the same as what middlemen make in trading the same products. However the turnaround time for the middlemen is just a few days compared to my turnaround time of six months. The internal rate of return and the risk profile suggest that I’m in the wrong part of the food chain.

3. Commodity with extreme competition

In reality, the products of aquaponics are healthy and environmentally friendly because there is no harmful chemical used. The system also does not allow the use of low cost animal carcasses as feed. However, it’s incredibly difficult to market it differently unless the fish come in different appearance. Creating a brand over agricultural product is not impossible but that’s out of my league because it’s expensive, time consuming and can easily succumb to copycats.

In other words, I’m in direct competition with low cost producers who will almost certainly win no matter how unethical is their production method. For example, I’ve seen fish farms that illegally channel water from highland river (gravity is free!) and mix their fish feed with free (rotten) animal carcass. That’s a significant saving in electricity and feed, two or the largest components in the production cost. To compete with them is just ludicrous.

4. Unfavourable industry economics

Most farmers suffer from a transgenerational spell no matter how well they manage their farm. They spend so much their waking hours battling against natural forces that they become oblivious to the market intelligence in relation to their commodity. How can they get a fair treatment when it comes to selling their products to agriculture distributors who have real time supply and demand data at their fingertips? Bear in mind that it’s costly and risky for farmers to hold livestock and everybody is aware of this. The asymmetric information is further exacerbated by the following phenomenon:

• A buyer who walks into a farm can have a pretty good idea of how much livestock needs to be desperately sold but a farmer would have no idea how much the buyer desperately needs to buy.

• Fish distributors behave like a cartel and practise information sharing among themselves in relation to farm gate price and transaction volume. Some even trade among themselves when there is surplus stock. Farmers generally operate in silo.

• Distributors with cold storage facility can choose when to stockpile and control their buying pattern but farmers have no such flexibility. For example, a distributor can choose to stockpile or run down its inventory based on change of market price but it’s nearly impossible for a farmer to control the growth of their fish stock based on market condition.

5. Ultra low barriers of entry

In Dec 2021, several major fish farms in the Klang Valley were destroyed by a disastrous flood, causing a big drop in freshwater fish supply in key markets. A few months later, the increase in global commodity price for corn and soybean significantly pushed up feed cost by well over 20% (price was adjusted upwards on weekly basis by the supplier). The result was a 40-50% jump in farm gate price of Tilapia fish.

What happened next was an avalanche of new players to capitalise on the high selling price. Meanwhile, distributors started smuggling in the same but cheaper product from Thailand through our northern border. This effectively capped any further rise in selling price.

A margin squeeze on farmer is inevitable when you have ever increasing production cost coupled with limited upside on selling price. This stinks so badly that no wonder I hardly see smart money flowing into this industry.

6. Funding issue

I ran out of money at some point and got into a catch-22 situation. Without further capital infusion, I would not be able to improve the operating model but without an improved model nobody would invest a single cent. Faced with such unsavoury business economics, I simply didn’t have any confidence to raise a single cent of additional capital.

7. Not the best use of my time and energy

I’ve learned that it’s imperative to consider our opportunity cost whenever an option is made. I more or less knew what needed to be done if I were to salvage the farm but I’ll have to work full time and stay in the farm. My family with three young children simply did not allow me to make that option. This was even more so judging from the bad economics of the business that I’ve plunged myself into.

With an honest assessment of my own strength and weaknesses, I know very well that I’m better off sticking to capital allocation rather than getting into the nitty-gritty part of fixing a broken system. You can spend many months teaching a dog count from one to ten – that would turn it into a great dog, but it will never become a mathematician.

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Do I regret throwing in the towel? Absolutely not. Any lessons learned? Plenty of that to write about in another post.