Part two in our “Lean manufacturing for indoor agriculture” series

Johnny Bowman

Nov 26, 2017

In our previous blog post, we made the case that aquaponics enables better capacity management for indoor agriculture than hydroponics. The basis of our argument is that aquaponics is a “just-in-time” manufacturing system — multiple SKUs with different nutrient requirements can be produced in the same aquaponic system simultaneously without sacrificing quality or yield, whereas multiple hydroponic systems with different nutrient recipes would be required to achieve similar quality and yield.

This is one of the key reasons that we believe aquaponics is the future of indoor farming.

But what if you stripped away all the benefits of aquaponics? Is aquaponics still competitive with hydroponics on cost if you assumed the same yield, quality, and breadth of product with no fish sales? Unwinding this is the purpose of this blog post, and we find that aquaponics is slightly more expensive with costs 2% higher than those in hydroponics as a percentage of revenue. To compensate for this, aquaponic operators will need to utilize the capacity management methods discussed in our previous blog post to achieve throughputs ~2% higher than their hydroponic counterparts. Below, we break down how we got to these numbers.

But first, there are trade offs besides cost in choosing aquaponics over hydroponics. Let’s start with aquaponics’ unique barriers to entry.

Nonstarters

The first two tradeoffs with aquaponics are existential. The inability to overcome these first two tradeoffs will make it highly unlikely the aquaponic farm will get off the ground.

Lack of off-the-shelf systems and expertise. If you want to be a commercial hydroponics operator, there are dozens of top-notch hydroponic design and consulting firms who can construct turnkey, state-of-the-art hydroponic farms anywhere in the world and even bring in an experienced grower to run the operation. If you’re a hobbyist, you can buy an off the shelf hydroponic system, along with the hydroponic bible, Howard Resh’s Hydroponic Food Production, and get yourself 80% of the way there (it’s great — aquaponic hobbyists should buy it too and get themselves 50% of the way there). In short, hydroponic education and expertise is accessible.

In aquaponics, while there are experts who have designed large scale commercial operations, these experts are few and far between. Scaling an aquaponic farm relies on finding these people, most of whom are not in the US. On the education front, while there are books on aquaponics, the true leaders of the movement are PhD-level researchers who have published narrowly focused academic papers as opposed to accessible, comprehensive, authoritative guidebooks. It’s on operators to find the right people, design a stable system, and implement a comprehensive operating plan.

Keeping the fish and plants healthy, at the same time. This is a big one. Each piece of the aquaponic ecosystem — the fish that supply manure, the bacteria that break down the manure into nutrients that are bioavailable to the plants, and the plants that absorb those nutrients and drive revenue — requires slightly different environmental conditions. Optimizing for plant health, as a result, requires monitoring three different systems as opposed to one.

Even if you were to install a well-designed aquaponic system and manage the operational tradeoffs, black swan events happen. If the fish develop an infection, if you develop a fly infestation, or if pythium (a common fungus that wreaks havoc on plants) takes root, the standard remedies of antibiotics for fish or toxic pesticides for crops won’t cut it in a traditional aquaponic design.

Your production is entirely dependent on maintaining a healthy ecosystem and plant microbiome. When you kill the bad microbes through antibiotics or pesticides, they tend to kill the good microbes too. Most pesticides, even organic ones, are not “fish safe” — fish are particularly chemical sensitive. For aquaponic farmers, the ecological approach to farming doesn’t just apply when yields are steady. It applies 24/7, 365 days a year, barring traditional, toxic, pesticidal approaches to solving these problems.

All that said, hydroponic and aquaponic operations are converging towards similar operating constraints due to technology improvements and consumer demand. One of the most sought after labels in produce is “pesticide free”. As a result, many of the latest generation of hydroponic operators have taken up the label, limiting themselves to the same biological and ecological remedies aquaponic operators are inherently restricted too. At the same time, “decoupled” aquaponic systems, where water only flows in one direction — from the fish to the plants (and not back again) — are growing in popularity due to their ability to treat the plants without worrying about the effect on fish. The result is the ability to use the same plant treatments as a traditional hydroponic facility.

Luckily for all camps, there are plenty of ways to remedy these issues in pesticide free facilities that are more cost effective than traditional approaches. In indoor farms especially, the incidence of most issues can be reduced through rigorous standard operating procedures for both day to day practices and early detection of and response to ecological stress.

If you’re confident that you have the expertise to design a stable aquaponic system and to handle both the operating basics and ecological considerations during black swan events, then it’s worth digging into the operating costs of aquaponics and hydroponics.

Comparing operating costs

There are certain added costs associated with aquaponics — there’s no free lunch, so growing all those fish has to be accounted for somewhere. For aquaponics to be a better business than hydroponics, the added costs must be compensated for by either higher throughput of salad greens or fish. In our previous blog post, we showed how aquaponics can achieve higher throughput than hydroponics. In this analysis, assuming fish are never sold, we show that throughput needs to be ~2% higher in order for aquaponics to beat hydroponics on cost, which is well within aquaponics’ potential.

We have put these tradeoffs in a spreadsheet for a more convenient comparison. You can see the spreadsheet here, while reading below for context. The numbers here are not reflective of Edenworks’ designs and projections. We’re basically asking “if we ran our competitor’s farms aquaponically instead of hydroponically, what would the business look like?” For example, Gotham Greens projected an EBITDA for their first facility at “greater than 15%,” and so we’ve targeted a 15% EBITDA margin for the hydroponic facility, then made a few changes based on industry-standard assumptions to back out the aquaponic cost analysis.

source: Edenworks spreadsheet analysis

The following line items are the largest cost differences:

Added expense of fish feed. While hydroponic fertilizer is most often composed of mined mineral salts, fish feed for aquaponics has the fat and protein that the fish need along with the minerals that both plants and fish need. For aquaponics in a recirculating shallow water culture system, we calculate¹ the expense of fish feed to be about 9 cents per pound of harvested greens, a 7 cent premium over synthetic hydroponic fertilizer. Assuming best in class yields for both systems, this comes out to a 1.4% difference in nutrient costs between the two systems, as a percentage of revenue. However, with the world farming more fish than ever before, new technologies are coming online that are expected to substantially lower the price of fish feed, while also making the feed more sustainable.

Added labor. Most indoor farming facilities have a long way to go until they can be considered highly automated. Despite incorporating automation and machine learning techniques for things like climate control and disease detection, modern indoor farms still complete many tasks, such as harvesting, by hand. The biggest labor efficiency gains are fertilizer (i.e. hydroponic / aquaponic) agnostic. Those gains come from automating the movement of plants through the production system, along with the unit tasks of seeding, transplanting, harvesting, packaging, and cleaning. This is where Edenworks has invested substantially in IP, but that’s a story for another post.

All that said, raising fish does require someone who knows how to spot potential health issues, how to harvest fish, and how to maintain aquaculture equipment. None of this is time intensive, but it does require hiring an aquaculture specialist at each facility.

Space for the fish. Aquaponic fish tanks and hydroponic nutrient reservoirs require similar space. However, aquaponic systems require a bit more space overall for the extra pumps, sumps, and biofilters for converting fish waste into nutrition for the plants — an additional 1.7% more space in our analysis of an approximately 70,000 square foot hydroponic facility. Assuming rent for warehouse space is $10 per square foot, this comes out to a difference of 0.1% of revenue.

Quantifying the total trade-off.

Assumptions are based on commonly used designs, equipment, and raw material suppliers, which are noted in the spreadsheet. Furthermore, in order to get close to an apples to apples comparison, we assumed the following:

• Both systems sell baby greens for the same price.

• Revenue from fish, and the associated costs of selling fish are not included.

• Both systems are vertically stacked, indoor farms.

• Yields for both hydroponic and aquaponic systems are the same. For the purpose of this study, we use our yield estimate for AeroFarms. AeroFarms has projected yields of 2 million lbs of greens at their Newark facility. Looking at the size of their facility (69,000 s.f.) and their geometry, we estimate their growing space is ~160,000 s.f.² in vertically stacked beds. This gives AeroFarms 12.5 lbs yield / s.f. / year, which is in line with other best-in-class yields for hydroponic and aquaponic indoor leafy greens farm.

• Both systems have similar needs, and therefore costs, for the following line items: energy, packaging, growing medium, seeds, delivery, rent, cleaning and other general farm supplies, and merchandising.

• This leaves just three significant differences between the costs of the two systems: nutrients (fish feed vs synthetic fertilizer), labor (employing an aquaculture specialist vs. having one less employee), and rent (extra space needed to break down organic nutrients vs. not needing extra space).

Given the assumptions behind these hypothetical facilities, we estimate aquaponic systems’ costs as a percentage of revenue are 2 percentage points higher than hydroponics’. In order to compensate for these added costs, aquaponic facilities need to sell 2% more of their capacity than hydroponic facilities. As explained in our previous post, with typical per-SKU sales swings in packaged salad of up to 20% week on week, hydroponic farms that cannot grow different crops in the same production system suffer from significant capacity constraints. Aquaponics, on the other hand, can grow wide varieties of crops in the same production system, enabling them to sell higher percentage of their capacity (certainly higher than 2% more).

To top it all off, enhanced flavor and higher consumer preference for ecologically grown products make aquaponics better aligned with consumer and operator interests. It is for these reasons, in addition to its competitiveness with hydroponics on cost, that we believe aquaponics will become the primary fertilization technology for indoor operators as the market continues to grow.

¹ This calculation is based on standard aquaponic feed ratios from Dr. James Rakocy and hydroponic feed ratios from Howard Resh’s book Hydroponic Food Production. These calculations are in the third tab of the spreadsheet and are what we used in this analysis. Comparing one “standard” feed rate to another “standard” feed rate seemed apples to oranges to us though, so we also compared feed costs based on nitrogen content of each feed, and came up with very similar cost ratios. These are presented in the fourth tab of the spreadsheet.

² Aerofarms’ bedspace estimation comes from public websites. For bed width and length, see (a) and (b). For number of beds, see (b) and (c). 
(a) https://patentimages.storage.googleapis.com/pdfs/US8533992.pdf 
(b) http://www.foxbusiness.com/features/2015/07/28/farming-in-sky-inside-wall-street-backed-vertical-farm.html
(c) https://www.nytimes.com/2015/04/08/realestate/commercial/in-newark-a-vertical-indoor-farm-helps-anchor-an-areas-revival.html