On the Impact of Feeding Cost Risk in Aquaculture Valuation and Decision Making

TL;DR

This paper examines how stochastic feeding costs influence aquaculture valuation and decision-making, demonstrating that accounting for feeding cost risk improves harvesting strategies with minimal computational overhead.

Contribution

It introduces a novel approach using deep neural networks to incorporate feeding cost risk into aquaculture decision models, outperforming traditional methods.

Findings

Accounting for feeding cost risk can significantly improve harvesting decisions.

Deep neural networks effectively infer decision boundaries in complex aquaculture models.

Inclusion of stochastic feeding costs yields better performance with negligible additional computational costs.

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 behaviour 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, i.e. including feeding cost risk. 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 these cases, the newly derived rules show superior performance, while the additional computational costs are negligible. From a methodological point of view, we demonstrate how to use Deep-Neural-Networks to infer on the decision boundary that determines harvesting or continuation, improving on more classical regression-based and curve-fitting methods. To achieve this we use a deep classifier, which not only improves on previous results but also scales well for higher dimensional problems, and in addition mitigates effects due to model uncertainty, which we identify in this article. effects due to model uncertainty, which we identify in this article.