The Current State of Indoor Farm Economics
THE CURRENT STATE OF INDOOR FARM ECONOMICS
Our sibling company, Contain Inc, is providing the white paper that will be provided in hard copy exclusively to participants in this week’s Indoor Ag-Con. Ahead of that, they have provided us with a sneak peak of its contents:
Contain Inc is an alternate finance company focused on the indoor agriculture market. It solves one of indoor farmers’ most pressing issues as it cuts initial farm build costs by 80% by utilizing 3-5 year equipment leases. As a provider of capital to the industry, Contain Inc has a keen interest in better understanding how and why indoor farms are successful. Its team spends a good deal of time attempting to understand the drivers of farm economics, and it is this theme that we cover in the white paper that will be released at Indoor Ag-Con this week.
What’s the Current State of Indoor Farm Economics?
THIS BLOG POSTING PROVIDES AN EXCERPT FROM THE CONTAIN INC WHITE PAPER THAT WILL BE RELEASED AT INDOOR AG-CON ON MAY 2-3, 2018
The greatest criticism of indoor farms has long been that they are not economically viable, and – in the view of some – never will be. Professor Albright of Cornell University created the most often cited criticism of industry economics, arguing in 2014, that widespread adoption of controlled environment agriculture would increase the cost of certain foods beyond market acceptance. The failure of some of the first generation of North America’s indoor farms seemed to confirm this skepticism, even though most fast-growing young industries are characterized by high startup failure rates.
Yet, software firm Agrilyst found that just over half of respondents to their survey of indoor farms said they operated profitably, and market forces are driving more towards this benchmark. New technologies, falling costs for existing technologies, economies of scale, and better access to capital, along with time itself, all have a part to play.
What do we Know so Far?
As it is young as a commercial industry, we are only beginning to see trends in indoor farm economics. For example, there is some evidence that longer standing farms are more likely to be profitable than newer ones, though there is likely to be some survivorship bias in the data. All else being equal, larger farms are more profitable than smaller ones.
One of the long-observed aspects of agriculture is that it’s a cyclical industry, contributing to booms and busts throughout history. From an economist’s perspective, one of the attractions of indoor agriculture is that it offers the possibility of a less cyclical way of farming. Though the industry is too young for any trend to have developed, theoretically, the steady income stream from indoor farms – which harvest daily rather than periodically – should aid in smoothing long-observed farm business cycles.
To inform our work at Contain Inc, we have developed a proprietary model of the exogenous factors – influences that are not in the control of the grower – that impact indoor farm economics. In this multivariate model, the two indicators proving the greatest significance with p-values < .05 are industrial rents and population density, each of which are location-dependent variables. Consequently, our current “top ten most favorable” indoor farm locations are biased towards larger urban conurbations. We note that this model is dynamic and that we moderate it frequently as we capture new data.
What Trends are Driving Farm Economics?
We see indoor farm economics continuing to improve as:
Moore’s Law is at work in the industry – Indoor farming is benefiting from falling capital expenditure costs, particularly for LED lighting. As LED prices have fallen by 85% in the last five years, they are forecast to fall from over 60% of capex costs in 2011 to under 15% by 2026.[1]
Automation & AI – Growers are increasingly adapting automation to improve nursery, harvesting and post-harvesting operations, improving yields and cutting costs as a consequence.
Plant Genomics – Indoor farmers are turning their attention to breeding seeds that are designed to work better in indoor systems to provide higher yields, better taste and better nutrition.
Lower Cost of Capital – As funding options like lease financing from Contain Inc become more prevalent, growers can afford larger, more efficient farms. As indoor agriculture becomes more mainstream, we anticipate that average interest rates will fall as lenders recognize the lower risk inherent in the practice. Better insurance rates, such as those offered by Contain Inc’s collaboration with InterWest Insurance will also help to reassure lenders that indoor agriculture is bankable.
Beyond the technical and scientific barriers that indoor growers, academics and equipment suppliers break each day, better and more nuanced understanding of the economic factors that underpin indoor agriculture can help to drive the industry further towards profitability. This remains an important aspect of Contain Inc’s mission to support indoor growers.