The Stock Market Discovers Indoor Ag In A Big Way

Robinhood antics aside, there’s no hotter topic in finance right now than SPACs (special purpose acquisition companies), and even indoor agriculture has become caught up in the buzz.

SPACs, or special purpose acquisition corporations, are a shell company that lists itself on a stock exchange and then uses the listing proceeds to acquire or merge with another company. It’s an attractive route to raising funds for companies looking for a faster and cheaper way to list than the rigours of the traditional IPO process. 

Though SPACs have been around since the 1990s, they have had a reputation for being “the buyer of last resort”, primarily owing to a spate of failures in the early 2000s. The approach has once more taken off in recent years. There was nearly 8x as much raised in 2020 as in 2018, and 2021’s total has already surpassed last year’s[1]. The approach has become so hot that even Goldman Sachs junior investment bankers recently complained that they were burned out by the sheer volume of SPACs they’re working on[2]. 

This newfound enthusiasm is generally traced to a combination of tighter SEC regulations, efforts by cash-rich private equity companies to exit portfolio companies and fewer traditional IPO listings. Higher quality sponsors, such as 40-year old private equity firm Thoma Bravo, lead some to believe that things are different this time around.  The lustre of famous SPAC participants – such as baseball player A-Rod and basketball legend Shaquille O’Neal – has helped things along.  

Detractors point to post-listing underperformance by SPACs, high fees to sponsors and opaqueness around the acquisition of companies.  SPAC rules mean that institutional investors sometimes get to see information on potential acquisitions ahead of retail investors.[3] On a recent Clubhouse chat, one investor compared SPACs to the risky no-revenue internet listings of the late 1990s. Another questioned whether retail investors’ appetite for such vehicles would cause greater market volatility[4].

Dan Bienvenue, the interim CEO of mega public pension fund CALPERs, recently described SPACs as “fraught with potential misalignment, potential governance issues”.[5] That said, similar dire warnings have accompanied the rise of many a new approach in finance, most recently equity crowdfunding, and have proven wrong as often as right.

As is so often the case in indoor agriculture, cannabis companies have led the way when it comes to SPACs, generally listing in Canada owing to the US federal prohibition on the crop. One example is Choice Consolidation Corp, which raised $150mm in February, and says that it plans to acquire “existing strong single-state operators”[6].

Historically, food-focused indoor agriculture companies have sourced little of their capital from public markets, preferring instead to work with private equity and strategic investors. To be sure, there is a small cadre of listed CEA firms, such as Canadian greenhouse operator Village Farms (TSE: VFF) and Canadian grow system tech company CubicFarm Systems Corp (TSXV: CUB) are exceptions to this rule.

All of that changed last month when Kentucky-based greenhouse company AppHarvest raised $475mm through NASDAQ listed SPAC Novus Capital. The funds will fuel the expansion of up to a dozen new farms through 2025.

Naturally, the move has led to speculation that vertical farms and greenhouses will follow suit, though it’s worth noting that the rules that govern SPACs aren’t necessarily friendly to CEA companies. They favour large, highly valued companies that easily capture the attention of retail investors, and those are not plentiful in CEA.  

Regardless of whether the SPAC trend becomes a permanent feature of the indoor farm fundraising landscape, one more method of accessing capital for CEA can only be a good thing. For the moment at least.

For more information:
Contain
www.contain.ag

Note: None of the above constitutes investment advice.

Sources:
[1] SPACInsider figures
[2] “Goldman’s junior bankers complain of crushing workload amid SPAC-fueled boom in Wall Street deals”, CNBC, March 18, 2021
[3] For instance, where a PIPE is being considered by the SPAC
[4] “SPACS: IPO 2.0 & Agrifoodtech Exits”, March 4, 2021
[5] “CalPERS’ Bienvenue: SPACs are fraught with potential misalignment”, Private Equity International, March 16, 2021
[6] “New cannabis SPAC raises $150 million in IPO for US acquisitions”, Marijuana Business Daily, February 19, 2021

Publication date: Wed 24 Mar 2021
Author: Rebekka Boekhout
© VerticalFarmDaily.com

Warehouse Becoming Vertical Farms — And They’re Feeding New Jersey

Image from: New Jersey 101.5

New Jersey's vertical farms are transforming agriculture by helping farmers meet growing food demand.

New Jersey Agriculture Secretary Doug Fisher said that while conventional farming in outdoor fields remains critical, vertical farming has its advantages because of its efficiency and resistance to pests and thus less need for chemicals.

Vertical farming is the process of growing food vertically in stacked layers indoors under artificial light and temperature, mainly in buildings. These plants receive the same nutrients and all the elements needed to grow plants for food.

Vertical farms are also versatile. Plants may be growing in containers, in old warehouses, in shipping containers, in abandoned buildings.

"That's one of the great advantages — that we can put agriculture in the midst of many landscapes that have lost their vitality," said Fisher.

ResearchandMarkets.com says the U.S. vertical farming market is projected to reach values of around $3 billion by the year 2024.

The one drawback is that its operational and labor costs make it expensive to get up and running.

Image from: AeroFarms

In the past decade, however, vertical farming has become more popular, creating significant crop yields all over the state.

AeroFarms in Newark is the world's largest indoor vertical farm. The farm converted a 75-year-old 70,000-square-foot steel mill into a vertical farming operation. AeroFarms' key products include Dream Greens, its retail brand of baby and micro-greens, available year-round in several ShopRite supermarkets.

Kula Urban Farm in Asbury Park opened in 2014. Vacant lots are transformed into urban farms and there's a hydroponic greenhouse on site. That produce is sold to local restaurants.

Beyond Organic Growers in Freehold uses no pesticides and all seeds and nutrients are organic. There's a minimum of 12,000 plants growing on 144 vertical towers. On its website, it says the greenhouse utilizes a new growing technique called aeroponics, which involves vertical towers where the plant roots hang in the air while a nutrient solution is delivered with a fine mist. It also boasts that by using this method, plants can grow with less land and water while yielding up to 30% more three times faster than traditional soil farming.

Vertical farms in New Jersey help feed local communities. Many are in urban areas and are a form of urban farming.

Fisher predicts that vertical farms will be operational in stores and supermarkets around the state.

"It's continued to expand. There's going to be many, many ways and almost any area in the state has the opportunity to have a vertical farm," Fisher said.

AppHarvest’s Mega-Indoor Farm Offers Economic Alternative To Coal Mining For Appalachia

Inside AppHarvest's 60 acre state-of-the art indoor farm in Morehead, KY.

In the first year of business, Jonathan Webb and his growing team at AppHarvest are riding high on what he calls the “third wave” of sustainable development: high-tech agriculture, following the waves of solar energy and electric vehicles. Since launching the concept in 2017, Webb and AppHarvest have raised more than $150 million in funding while building and opening one of the largest indoor farms in the world on more than 60 acres near the Central Appalachian town of Morehead, Kentucky.

For Webb, who grew up in the area and has a background in solar energy and other large-scale sustainable projects, AppHarvest is both a homecoming and a high-profile, purpose-driven venture that addresses the need for additional production to feed a growing population and reduce imported produce. 

Webb’s vision for AppHarvest was inspired in part by a National Geographic article on sustainable farming in the Netherlands, where indoor growing is part of a national agriculture network that relies on irrigation canals and other innovations. He traveled across the Atlantic Ocean to see the farmers in action, then decided it was a venture he wanted to pursue — in his home state of Kentucky, where the coal industry is in decline and unemployment levels are on the rise. 

“Seeing that the world needs 50% to 70% more food by 2050, plus seeing that we’ve shifted most of our production for fruits and vegetables down to Mexico — produce imports were tripled in the last 10 to 15 years,” he says. “I would go to a grocery store, pick up a tomato, and it could be hard, discolored. That’s because it’s been sitting for two weeks on a semi truck, being bred for transportation. So first it was seeing the problem, then asking, ‘How do we solve the problem?’”

As part of my research on purpose-driven businesses and stakeholder capitalism, I recently talked with Webb about AppHarvest’s whirlwind initial year in business, successful investor fundraise, plans to go public, and B Corp Certification.

Good for Business, Good for Community

Jonathan Webb, founder and CEO of AppHarvest

“Where we’re doing what we’re doing is incredibly important. One of our biggest competitive advantages, frankly, is doing it here,” he says. “Some of the hardest-working men and women are the people in this region that power the coal mines, and all we’re trying to do is tap into that and harness that passion. It’s good for our business, but it's good for communities.”

The location has been central to AppHarvest’s benefit in another way, Webb says, as local enthusiasm for the project enabled swift construction that likely would’ve been a challenge in some other regions.

“It's all about economies of scale. We have to build a really big facility to get our costs on materials down so that we can compete with products that are being imported into the country from Mexico,” he says. “We built one of the largest facilities in about a year, so speed and scale are definitely advantages for the company, and a lot of that’s possible based on where we’re operating here in this region.”

While the Bluegrass State has been a good home for AppHarvest, Webb wants the business to be a resource for nearby communities and a beneficial workplace for residents.   

“A fundamental part of the way we’re building and growing this company is that every entry-level employee gets full health care, full benefits, living wage, paid time off. So we’re not just creating jobs, we’re creating a lifestyle for your career path,” he says. “We want to see people with high school degrees in this region grow with the company and be assistant growers and head growers three, four years from now. I know this region, and I know what people can do here. Those are the success stories that I look forward to having happen.”

Creating Positive Stakeholder Impact

Producing needed food and building a stronger workforce aren’t the only goals at AppHarvest; Webb says growing produce sustainably, with minimal impact on the environment, also is paramount. 

“We’re land constrained in the world, and water constrained. And we have to grow a lot more food and use fewer resources,” he says. “It’s simple in theory; it’s complex in scale. Just the fact that the place is so big is what makes this challenging. But we’re collecting rainwater on the roof and using it directly on the root of the plants. We’re growing hydroponically, and as a result we can use 90% less water than open field agriculture.

“The way we treat water and handle water and how we use rainwater efficiently is the really biggest driver of resiliency long term for us.” 

In building a business to have a positive impact on workers, community, and environment, Webb also created a company that is a natural fit for the B Corporation community made up of businesses that achieve a certification based on how well they incorporate all stakeholders into their policies and practices. 

“The impact side of this is incredibly important. We didn’t chase certifications,” he says. “We just did the right things: We’re paying a living wage, we're offering health care. It’s the right way to do business. And as a result, we get a huge ROI on our dollar.”

Thanks to its bottom-line success and future promise, AppHarvest has found favor with investors, including Martha Stewart and venture capitalists; and is part of a growing cohort of businesses with a social purpose that are finding traction in the public markets. The company announced in September that it’s going public through a combination with special purpose acquisition company Novus Capital Corp. (Nasdaq: NOVS).

“Why are we going public now? Because full transparency in agriculture is desperately needed,” Webb says. “We want the people who buy our fruits and vegetables to also have the ability to buy into our company. We want the record. We want the institutional rigor. It’s hard to have this spotlight this early, but it’s making us stronger.”

Christopher Marquis, Contributor

Purdue Study Addresses Environmental, Economic Impacts of Hydroponic, Aquaponics Systems

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October 22, 2020

Story by Brian Wallheimer

Hydroponics and aquaponics offer promise for growing produce and raising fish. But some may be wary of entering the industries because of perceptions about high capital and operational costs and environmental impacts.

Purdue University scientists compared the environmental performances of both systems and calculated their economic efficiencies in Indiana. Their findings, published in the Journal of Cleaner Production, inform those interested in entering hydroponic or aquaponic industries on how to get the most for their investment with the least environmental footprint.

Hydroponics and aquaponics are soilless systems. Hydroponic plants are grown in water containing chemical fertilizers as nutrients. Aquaponics adds the raising of fish and uses fish waste to replace chemical fertilizers. These indoor operations come with upfront capital costs and require use of significant amounts of energy for lighting, heating and water pumping, as well as fish feed and fertilizers.

For one month, graduate students Peng Chen and Gaotian Zhu raised six vegetables in a hydroponic system and those same vegetables with tilapia in an aquaponic system. Experiments were conducted in the lab of Hye-Ji Kim, a Purdue assistant professor of horticulture and landscape architecture, and in collaboration with Paul Brown, a Purdue professor of forestry and natural resources. Jen-Yi Huang, a Purdue assistant professor of food science and the leader of the project, worked with the students to conduct a life cycle assessment using the data they collected.

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Purdue University researchers conducted a life cycle assessment of hydroponic and aquaponic growing systems in Indiana to measure their environmental and economic impacts. (Photo provided by Peng Chen)

The researchers found that the aquaponic system led to 45 percent less environmental impact when considering fossil fuel use, global warming, water acidification and eutrophication created by resources used as well as waste and emissions released. Twice as much food is grown in the aquaponic systems with little added environmental cost.

“The aquaponic system is more environmentally friendly when you look at the total environmental footprint per US dollar of economic value of the products,” Huang said. “But that is based on using Indiana’s current energy mix. If we consider using more renewable energy sources, things start to change.”

Indiana currently gets almost 60 percent of its energy from coal-fired power plants, according to the U.S. Energy Information Administration, with about one-third coming from natural gas. The less electricity hydroponic and aquaponic growers source from fossil fuels, the more environmentally friendly their operations become.

Chen said that changing the mix and getting one-third of power from coal, natural gas and wind would reduce the environmental impacts of hydroponics by up to 48 percent. If an operation sourced its electricity solely from wind energy, hydroponic operations would be considered slightly more environmentally friendly than aquaponics.

“By using wind energy, which is largely produced in Indiana, farmers can reduce their environmental footprint enough to make these two systems essentially equal in terms of the economic output gained for the environmental cost,” Chen said. “By choosing more plant-based fish feed, the environmental impacts can be further reduced in aquaponic systems.”

MALAYSIA: Econ 4.0: Why Focus on Farming?

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Raju Chellam/The Edge Malaysia

September 29, 2020

This article first appeared in Enterprise, The Edge Malaysia Weekly, on September 14, 2020 - September 20, 2020

Here’s a funny farming fable: An officer from the income tax department pays a visit to an old farmer in a rural community. “Show me the list of all your employees and how much you pay them,” he demands.“There are four employees,” the farmer says. “One is a plant picker and cleaner; he gets RM4,000 plus free room and food. Another is a sorter and packer who gets RM3,000 and free food. The third is a cook who gets RM2,000 and all the food he can eat. The fourth is an idiot who works 15 hours a day, does all the other work around here, gets paid only RM1,000, and has to pay for the room and food.”The officer is incensed. “Who’s this idiot and why is he paid so much less? I want to meet him right now.”

The farmer sighs. “You’re talking to him.”

If that joke sounds far-fetched, it isn’t. Our farmers and farm laborers work long hours, in blistering heat and mushy farms, earn low wages, and have uncertain, if not bleak, prospects. Yet, we expect them to deliver good-quality produce every time at low prices on set schedules.

The poor farmer faces a multitude of risks, including climate change, conflicts, pests, infectious crop diseases, a broken supply chain, and unreliable access to quality seeds and environment-friendly fertilizers. Yet, agriculture is crucial for economic growth. In 2014, it accounted for 33% of global gross domestic product (GDP).

“Agricultural development is one of the most powerful tools to end extreme poverty, boost shared prosperity and feed a projected 9.7 billion people by 2050,” says a World Bank report published in April. “Growth in the agriculture sector is two to four times more effective in raising incomes among the poorest compared to other industries. Our 2016 analysis found that 65% of poor working adults made a living through agriculture.”

On the flip side, the current food system threatens the health of people and the planet. Farming accounts for 70% of water use and generates unsustainable levels of pollution and waste. “Millions of people are either not eating enough or eating the wrong types of food, resulting in a double burden of malnutrition that can lead to illnesses and health crises,” the World Bank reports. “The absolute number of hungry and undernourished people increased to a little over 820 million in 2018, equivalent to around one in nine people. In 2018, an estimated 40 million children under five were overweight.” 

MALAYSIAN AGRICULTURE

Agriculture is vital to Malaysia’s economy. It contributes 7% to 12% to the nation’s GDP and employs about 16% of the workforce. Large-scale plantations were introduced for cash crops — rubber in 1876, palm oil in 1917, and cocoa beans in 1950. Malaysia is also a significant producer of bananas, coconuts, durians, pineapples, rice, and rambutans.

In 2018, the agriculture sector contributed 7.3% (RM99.5 billion) to Malaysia’s GDP, with oil palm accounting for 38% of that. On the other hand, most farmers do not own mechanical equipment, so they need to hire an army of contractual seasonal labor.“

Due to the shariah law on inheritance, land holdings continue to be broken up between families, making padi farming even more difficult,” the Asia Sentinel reported last December. “Large belts of idle land, estimated at 119,273ha, can be seen across the country partly due to family land disputes. Farmers have no involvement through the supply chain, so opportunities to add value to rice are non-existent. Under the present padi farming system, there is no way farmers will be able to improve their incomes.

”The problem is insidious. “The local agriculture sector is too convoluted owing to bureaucracy,” Tun Daim Zainuddin, Malaysia’s former finance minister, wrote in an article in The Edge on Jan 11, 2020. “It is hard to break into the sector unless you have experience and contacts, which holds back many aspiring young farmers. I hope the relevant authorities will review their practices to ensure a simpler and more efficient process. Sometimes, people tend to forget that time is also a resource, and agriculture in Malaysia currently demands far too much time to jump through various hoops.”

The market for food is enormous, even within Asia. Asia’s current expenditure on food is set to more than double to US$8 trillion by 2030. “It is estimated that US$800 billion cumulative investment above existing levels will be required over the next decade to meet the region’s agri-needs for the future,” Tun Daim wrote. “New and emerging technologies will be needed to increase agricultural yields and nutritional value while addressing the effects of climate change.”

This burgeoning market has enticed the corporate sector. Many conglomerates have stepped in to revolutionize agriculture quietly. The Sunway Group, for example, is building a 50,000 sq ft urban farming innovation hub at Sunway City Kuala Lumpur. Called “Sunway FutureX”, it will bring together urban farming enthusiasts, tech firms, researchers, and young talent to create solutions for food and agritech.

“We hope to build innovations, which will contribute to improved long-term food security and sustainability in our nation,” says Matt Van Leeuwen, Sunway Group’s chief innovation officer, and Sunway iLabs director. “We aim to nourish our communities with the fresh produce grown at our farms and educate them on sustainable living and urban farming.”

The farming bug has also bitten companies in farm-free Singapore. “Singapore is a hymn to concrete and metal. But look closely, and you can see farms mushrooming across the city-state: on the roofs of malls and car parks, in schools, warehouses and even the site of a former prison,” The Economist reported on July 4. “This is new. Commercial farming in the land-scarce city was phased out in the 1970s and 1980s.”

Unlike virtually any other country on earth, Singapore has lost a generation of farmers, the magazine quoted Bradley Busetto, head of the Global Centre for Technology, Innovation and Sustainable Agriculture, a United Nations unit based in Singapore, as saying. “Less than 1% of Singapore’s 720 sq km landmass is set aside for farms,” the article noted. “But a new crop of entrepreneurs are betting on rewards from finding idle spaces where lettuces may be coaxed to life. Since 2014, 31 commercial urban farms have sprouted.” 

FOOD TECH

Food production and distribution are undergoing tectonic shifts, thanks to technology. The most significant changes are in the meat market. More people are turning towards healthy diets, owing to a growing outrage over how animals are treated and the negative effect of livestock on climate change.

Dubbed “meat 2.0”, it includes, for example, “cultured meats” or lab-grown meat, the price of which dropped 99% from 2013 to 2017. “Before cultured meats hit the market, an even more significant piece of the meat-consumption market is rapidly growing: meat-replacement products made of, for example, soybean protein, potatoes, sunflower oil, and pea protein,” says a McKinsey study. “Surveys suggest that a majority of the population would be inclined to try meat-replacement products or ‘vegetal’ meat. This fast-growing segment is attracting funding from VC (venture capital) firms as well as established companies, and IPOs of alternative-meat companies have begun.”

The most prominent is California-based Impossible Foods, founded in 2011. It reverse-engineers animal products at the molecular level, then selects proteins and nutrients from plants to recreate the experience and nutrition of meat products. Its signature product, the “Impossible Burger”, was launched in July 2016. It now also makes plant-based sausages, and early this year debuted its plant-based pork.

In March 2020, Impossible raised US$500 million (RM2.1 billion) in its latest series F funding round, led by South Korea’s Mirae Asset Global Investments. The company has so far raised US$1.3 billion; other investors include Khosla Ventures, Horizons Ventures, and Singapore’s Temasek Holdings.“We designed our supply chain to be scaled globally,” David Lee, Impossible’s chief financial officer, told Forbes. “Unlike many companies, our technology can be dropped into any factory and can scale because we don’t have a lot of the problems the meat industry struggles with. We don’t grow animals over the years; we don’t ship cows and pigs to slaughterhouses and then process the meat. We make our product from plants, and it’s given us an advantage to quickly scale with co-manufacturers as well as with our own plant.”

The plant-based meat trend has caught on. Nuggs, a plant-based chicken nugget firm, began operations last year with a US$7 million investment round led by McCain Foods; it calls itself the “Tesla of chicken”.

Rebellyous Foods focuses on plant-based chicken nuggets, patties, and strips. Founder Christie Lagally is a mechanical engineer with 15 years’ experience and holds five patents in manufacturing technology.

Kellogg’s MorningStar Farms will launch vegan “Incogmeato Chik’n” nuggets and tenders this year. “Burgers to bacon, pulled pork to corn dogs, vegetarian to vegan, MorningStar Farms is plant-based goodness made for everyone,” the firm advertises.

Beyond Meat makes burgers, sausages, and beef products — all without animal protein. “Our quarter-pound beef burger uses 99% less water, 93% less land, 46% less energy and emits 90% less carbon dioxide compared to animal-based beef products,” the company claims.

So where is the future of food? Literally underground. South Korean start-up Farm8 has built a thriving underground farm next to the Sangdo metro underground station. The farm has been in operation since last September and grows an array of vegetables under bright LED lights.

Called the Metro Farm, it uses high-tech hydroponics to produces 30kg of vegetables a day and is 40 times more efficient than traditional farming. “Farm8 is hoping to expand its flagship farm to three more Seoul metro stations later this year,” the BBC reported on July 24. “If successful, the innovative venture may not only offer a more sustainable solution to urban farming but also has the potential to be rolled out in environments where traditional farming isn’t feasible, such as deserts and Arctic climates.”

The bottom line: The future of humanity depends on our ability to grow enough food to feed a surging global population. The future of food depends on sharpening our focus on farming, whether we use technology or not, whether we farm on horizontal acres of land or on vertical concrete farms. In the future, it is likely that every high-tech engineer will be proud also to call himself or herself a farmer. 

Raju Chellam is vice-president of new technologies at Fusionex International, Asia’s leading big data analytics company

The Second Generation of Vertical Farming Is Approaching. Here’s Why It’s Important

November 4, 2019

Boaz Toledano

Editor’s Note: Boaz Toledano is a business consultant specializing in vertical farming and other agtech markets. His website is: www.EconoMind.co. Here he writes about how vertical farming is progressing into its next stage. Disclosure: Toledano independently included mention of one of the AgFunder’s portfolio companies IGS (Intelligent Growth Solutions).

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Vertical farming practitioners claim to be pioneering the third agricultural revolution.

Vertical farming is the practice of growing produce in vertical stacks using soil, hydroponics or aeroponics to deliver water and nutrients to the plants.

With seemingly higher-quality produce that is grown efficiently, locally and with a potentially lower environmental footprint, the industry appears to be a promising answer to the rising need for sustainable farming methods. 

The market was valued at $2.3 billion in 2018 and investments grew significantly from $60 million in 2015 & 2016 to $414 million in 2017 & 2018. What’s less commonly known, however, are the challenges vertical farming companies face and the prospects of overcoming them in order to establish the viability of this industry.

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Not surprisingly, capital expenditure (CAPEX) is high. A smallscale, low-tech vertical farm employing 1st generation technology (more on this later) can cost around $280 thousand to start. However, when we consider the more complex operations, those that employ 2nd generation technologies, the setup costs may surpass $15 million. 

In order to understand why these figures are so high, we must first understand the difference between the two generations of vertical farming technologies, and why the transition between the 1st and the 2nd is the most important process in this industry’s short history.

First-generation technology enables the basic functions of a vertical farm to occur without the constant intervention of human operators. Second-generation technology enables the growing process to not only be automated but also be continuously optimized to the requirements of the plants being grown. These two generations can be further divided into five levels, detailed below. Generally, the more a company has advanced down these levels, the better its competitive advantage.

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When vertical farms were being established around the world about a decade ago, they employed 1st generation technology. These operations showed it was possible to grow food — and other plants — in vertical structures, thus enabling a more efficient use of land. On average, 2nd generation vertical farms yield 55 times more produce per unit of area compared with conventional farms. For the first time in modern history, food could be grown in cities, where it is eaten.

It has also become possible to remove problematic sections of our food supply chain, for instance, transportation and the pollution that goes with it, excessive packaging and preservatives. Also, we could finally reconnect to the source of (some) of our food, a privilege that was removed from our lives around the 17th century, when the Second Agricultural Revolution — also known as the British Agricultural Revolution — sparked the industrial revolution that led to mass urbanization.

Next, vertical farms had to prove their economic viability. Virtually the only way companies were able to become profitable is by using technology to cut down on the high operating expenses (OPEX), which mainly consist of lighting and labor (~30% of OPEX each).

Enter 2nd generation technology.

In a vertical farm, LEDs (light-emitting diodes), which provide light to the plants, are more efficient than other forms of artificial lighting that were used in the past (fluorescent and incandescent), resulting in lower operating costs. According to the International Energy Agency (IEA), LED lighting efficiency is expected to increase by an extra 70% by 2030. The pricepoint also continues to drop.

Labor expenses will be tackled by automation. Many startups and some capital-backed growers are developing technologies to help vertical farms reduce their dependence on human labor, with remarkable achievements. A noteworthy example is IGS (Intelligent Growth Solutions), which has developed an automated system that enables highly efficient production using modular structures. The company claims to have reduced labor by up to 80% and power by up to 50%. Its plan is to sell its technology to companies that want to improve the efficiency of their vertical farms’ operations.

Another example is Plenty, an industry leader and one of the best-funded vertical farming groups globally, which was able to improve the energetic efficiency of its newest facility, Tigris Farm, fivefold, compared with its previous facility. Though quite secretive, we now know that the company uses plant management automation to transfer its growing towers around the warehouse, as well as harvesting automation.

These are examples of the OPEX reduction trends the industry is seeing. Lighting improvements should reduce OPEX by 12%, and automation should cut OPEX by a further 20%+.

Since vertical farms have thus far introduced mediocre returns on investment (ROIs), these reductions in OPEX are crucial for the industry to prove itself to investors, governments, and companies considering entering the market. Although CAPEX will remain high compared with conventional and organic farming, the 30%+ expected reduction in OPEX makes a compelling case for vertical farming.

Current market prices for 1 kg of leafy greens are around $33 for vertically-grown produce and $23 for organic produce. As vertical farms invest and employ higher levels of technology, they will be able to increase their competitive advantage by driving down costs and prices. Eventually, I believe, they will be able to compete with organic producers, who last year operated in a $100 billion market.

Can Vertical Farms Be Profitable?

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By David Kuack, UrbanAgNews.com

March 15, 2019

Although vertical farms producing leafy greens are receiving most of the press coverage, there are a variety of other crops being being grown and innovative growers are finding these crops to be profitable.

When you think about a vertical farm what picture comes to mind? Ricardo Hernandez, horticulture professor at North Carolina State University, said most people think of vertical farms as indoor growing operations that produce leafy greens, primarily lettuce.

“There are both small and large leafy greens vertical farms,” Hernandez said. “Some of them are going out of business and some new ones are opening up. All of them have similar challenges.

“The main challenge is that even though they can produce a lot of leafy greens because they are able to stack the plants, there is a bottleneck in terms of how fast they can produce the crops. The bottleneck is tied to the plant genetics. With the current plant genetics and cultivars that most vertical farm entrepreneurs are using, it is very hard to outperform the lettuce crops coming out of the field. This is especially the case if the field conditions are suitable to grow lettuce such as in California and the southern part of Arizona during the winter.”

For many of the cultivars being grown in the field, including butterhead, red leaf lettuce and baby greens, the same seed is being used in vertical farms.

“In order for the leafy greens produced in vertical farms to actually gain significant market share, the genetics have to be changed in those plants,” Hernandez said. “This can come through conventional breeding or gene editing or through targeted breeding using molecular tools. A new set of cultivars is needed, a new set of genetics that are specific for indoor farms. Right now we are using the genetics that are good for field production. These field cultivars have high plant uniformity in terms of growth under a large variability of environmental conditions. The field genetics enable plants to look the same even if there is a lot of variability in the environment.”

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Ricardo Hernandez, horticulture professor at North Carolina State University, said one of the biggest challenges facing vertical farms growing leafy greens is the lack of cultivars bred specifically for these production facilities. Photos courtesy of Ricardo Hernandez, N.C. St. Univ.

Because vertical farms provide a stable environment, Hernandez said the types of genetics that are needed are specifically for an environment that can be controlled. The genetics for field crops of maintaining high uniformity and minimizing large variability are not a concern with vertical farms.

“Unfortunately, the market for breeding companies to develop varieties specifically for vertical farms is small,” Hernandez said. “There is not an established market for vertical farm growers. There hasn’t been a significant effort by established breeding companies to start developing cultivars specifically for vertical farms. Maybe some startups will be able to develop new cultivars or university researchers may be able to give those efforts a boost.”

Cost of production

One of the major hurdles with vertical farms is cost of production.

“There is a lot of technology and utilities associated with producing leafy greens in vertical farms,” Hernandez said. “That cost of production is very high compared to the leafy greens grown on the West Coast even when the shipping costs are added on.

“There actually are some vertical farms making money. Some of those are in boutique markets. These growers are able to get more money for a head of lettuce than the competing product that comes from the field. However, it is going to be difficult for growers who are selling to boutique markets and who receive a premium price for a head of lettuce to break into the mass market. Most consumers are not willing to pay the higher boutique prices.”

Hernandez said in order for vertical farms to acquire a significant share of the market, they are going to have to bring down the price of lettuce so more people will be willing to pay for the product.

Making money with transplants

One area of vertical farm production that Hernandez said growers can be profitable is producing transplants or starter plants.

“I’m convinced based on economic studies that we have done in my lab, using vertical farms or indoor growing is economically viable for growing transplants or starter plants,” he said. “Growing transplants is a very economical way to successfully adopt vertical farm production. These starter plants are a high value product and they can be grown under very high density in vertical farms, even higher than they can be grown in a greenhouse. These transplants are inserted into the current supply chain and will be sold to greenhouse and field growers who will produce the end products.”

Hernandez has started a transplant vertical farm, Grafted Growers, with his business partner John Jackson. Hernandez said growers looking to produce transplants in vertical farms should choose crops considered to have the highest value.

“These would be transplants that benefit the most from being grown indoors,” he said. “The clean controlled environment of a vertical farm can ensure a very high germination rate and a lot of plants can be produced in a small area. The controlled environment of vertical farms also provides a desirable outcome including finished plants that flower sooner or plants that have more dry mass.”

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The controlled environment of a vertical farm used to produce transplants can ensure a high germination rate and can produce a lot of transplants in a small area.

Hernandez said the uniformity and quality of transplants grown in a greenhouse may not always match transplants grown in vertical farms.

“If there is good solar radiation levels, greenhouse growers can produce very good transplants,” he said. “If growers are trying to produce those transplants in greenhouses during the fall or winter, they may have to supplement the natural light levels or the quality of the transplants may not be as good. There may be a difference in quality and uniformity between seasons.

“Growing transplants in a vertical farm the quality of the transplants is consistent no matter what the outdoor conditions are. Comparing transplants grown in a vertical farm with transplants grown in a greenhouse during the winter, which is when many transplants are grown, the vertical farm transplants usually have a higher dry mass and are more uniform.”

Hernandez said a grower producing transplants during the winter may be able to match the quality of vertical farm transplants if a lot of supplemental light is used.

“It’s not only the amount of light that is important, but also the quality of light,” he said. “Even though transplants grown in a greenhouse may be receiving enough light with the use of supplemental light, depending on the light spectrum the transplants could end up stretching because they are planted at a high density.

“In a vertical farm the transplants can be kept from stretching by controlling the light spectrum so that they can be grown compact in a very high density. By taking the sun out of the equation and controlling the plant growth with artificial light eliminates the potential for stretching.”

Having the right vertical farm setup

Hernandez is quick to caution growers considering starting a vertical farm that different crops require different production setups. 

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Different crops require different vertical farm setups. The production setup that is optimum for for transplants may not work for leafy greens.

“Growers can create a lot of microclimates and have poor uniformity when they have the wrong vertical farm setup,” he said. “The vertical farm that works for leafy greens may not work for transplants because the requirements for transplants uniformity are different from those for leafy greens. If growers don’t have the right vertical farm to grow transplants, it’s not going to be easy and it could become a bigger problem.

“Growers need to listen to the plants and know what the plants need. Growers can incorporate a lot of technology, including robotics and sensor control, but if they are not listening to what the plants need, the technology will only deliver marginal improvements. The most important thing in a vertical farm is the plants. Everything else is just details.”

For more: Ricardo Hernandez, North Carolina State University, Department of Horticultural Science, Raleigh, NC 27695-7609; rhernan4@ncsu.edu; https://hortenergy.cals.ncsu.edu.

This article is property of Urban Ag News and was written by David Kuack, a freelance technical writer from Fort Worth, TX.

• TAGS Business Growers Leafy Greens Plants Research Ricardo Hernandez science

• Vertical Farming