Biophysical factors, environmental regulations, and profit deviations: The case of salmon farming companies

The biological production process of farmed salmon is highly vulnerable due to biophysical shocks, including sea temperature changes, fish diseases (especially sea lice infection), and toxic algae. Meanwhile, environmental externalities of salmon farming trigger stringent regulations, influencing production costs and profitability. This paper first reviews studies on the economic impact of biophysical factors on salmon farming companies. Then, we evaluate the impact of biophysical factors and capacity utilization under output restriction-based regulations on the deviations of the gross profit from the industry benchmark. In particular, we examine the differences in the impacts of biophysical factors on profit deviations for small and large firms, considering their varying capacities and financial resources available to address biophysical shocks and environmental challenges. Our empirical results indicate that diseases and capacity utilization influence profit deviations but with differing impacts on small and large firms. While capacity utilization causes a positive deviation of large firms' gross profit from the industry norm, its impact is ignorable for small firms. From the empirical results, we formulate managerial and policy-relevant recommendations for the salmon farming industry to raise profitability and pursue sustainable development.