August 10th, 2018

MARIYA KHANDROS

As part of the Anchor Procurement Initiative, Economy League staff investigate new and emerging industries that could yield opportunities to localize institutional spend. Over the last 4 months, Mariya Khandros, Economy League’s Director of Shared Solutions, has been investigating the current state and future promise of the indoor, vertical farming industry. Conceptually, vertical farming can meet the institutional demand for produce via high-tech, indoor, commercial-scale urban farms. Mariya attended the Aglanta Conference, Indoor AgTech Innovation convening, and participated in working sessions at USDA’s Innovation and Design in Vertical Agriculture & Sustainable Urban Ecosystems conference to help define USDA's research agenda on the subject of indoor agriculture.  The following article is a summary of her findings. 

The indoor agriculture industry spans centuries-old growing methodologies and high-tech, computerized urban farms.

For most people, the concept of indoor farming typically conjures images of neat rows of greens in futuristic self-contained boxes under violet LED lights. But indoor farming – known as Controlled Environment Agriculture (CEA) among those in the industry – has been a reality in Pennsylvania since 1885. Kennett Square mushroom farms produce half of America’s mushrooms, primarily indoors. CEA encompasses a wide range of farms, ranging from lower-tech plastic hoop houses to greenhouses, to high-tech vertical farms. While great advances have been made across the spectrum, significant media and investor attention have homed in on high-tech vertical farms – large plant factories that grow vegetation indoors primarily using LED lights, and relying on sophisticated computer systems to track, measure and, often, harvest crops.

The rest of this article investigates the newest addition to the CEA family - the vertical farm.

As the population grows, arable land shrinks and water becomes scarce, the world faces a looming food crisis.

The growth of the global population, combined with a looming water crisis is moving the Earth towards a global food crisis. Feeding the projected population of 2050 (9.7B) requires an additional 109 million arable hectares, a landmass larger than Brazil. Given that 80% of arable land is already in use, absent major changes to traditional agriculture practices the world faces a significant food shortage.

Water scarcity, likely to be made worse by climate change, is another threat to the global food system. According to the United Nations, by 2025, two-thirds of the world's population will live in water-stressed regions as a result of use, growth, and climate change. Currently, 70% of the world’s freshwater is used for traditional agriculture, so a water crisis will inevitably reinforce the food crisis. 

The impact of climate change will be variable and unpredictable, which will also add pressure on the food system. For example, higher CO2 levels will increase some plant yields, but will reduce their nutritional values. Warmer temperatures may lead to the growth of many new pests and weeds. Extreme temperatures may lead to droughts or extreme rainfall, both of which can prevent crops from growing. 

Vertical farming could be part of the solution because it uses less water and allows farmers to control the growing climate

Dr. Dickson Despommier, who popularized the idea of vertical farming in the US, has estimated that a 30-story building covering one city block (5 acres) could have the productivity of a 2,400 acre traditional farm, because of the year-round growing season and the ability to use vertical space to stack vegetables. Because a controlled environment allows easier water recapture and reduces evaporation, vertical farming is estimated to use 70-95% less water than traditional agriculture. For this reason, areas with limited water supplies are early adopters of vertical farming. The United Arab Emirates is building the world's largest indoor farm, as the country's arid climate, poor soil quality and occasional locust plagues make indoor farming a more financially viable alternative.

However, the industry is young and grappling with many open questions.

The vertical farming industry today can be compared to the home video industry when VHS was still competing with Betamax. There are no standards around technology or growing processes. Data on growing efficiency and financial sustainability is just starting to emerge.

Most vertical farms are struggling financially. According to an Agrilyst survey, only 27% of indoor vertical farms are profitable, as compared to 67% of greenhouse farms and 50% of container farms. Despite a year-round growing cycle, vertical farms can only profitably grow a limited number of crops. Excluding cannabis, the most lucrative crops in 2016 were reported to be tomatoes and other vine crops, strawberries, herbs, and microgreens, salad greens and edible flowers. The single biggest reason for low profitability are the massive start-up costs – an estimated $4 million of up-front investment is needed for a 30,000 square-foot farm, and that does not include the sizeable electricity bills associated with farm operations. 

Critics are also concerned with the environmental impact of indoor farms, pointing to the inefficiency of replacing natural light with fossil fuel-powered lights. A study completed by Cornell suggested that vertical farms have a much higher carbon footprint than greenhouses. Critics see vertical farming as an over-engineered solution to the problems plaguing the food system and suggest that improving crop diversity, reducing food waste and maintaining soil integrity in traditional agriculture will address the long-term nutritional needs of the planet.

As a city, Philadelphia has seen first-hand the ‘over-promise and under-deliver’ downside of the indoor farming industry, with the recent revelations about the legal and operating troubles of the much-hyped Metropolis Farms. It also saw the rise and fall of a once-promising aquaponics endeavor in the early 2000s.

Despite early struggles, the industry may be reaching a tipping point; rapidly falling cost of LEDs, artificial intelligence and the global water crisis may tilt the scale in favor of vertical farms.

In the United States, there are an estimated 40,000 CEA farms producing $14.1B of market value each year; when compared to 2.1 million farms overall, with $395 billion in agricultural products, the number of vertical farms seems negligible. However, despite comprising a small portion of farming, indoor farms seem to take the lion’s share of investor attention. In 2016, investment in vertical farming grew from $36 million to $271 million (+653%), driven primarily by Plenty Farms. Several technological and environmental developments are driving this trend.

Despite murky profitability prospects associated with vertical farms, investors see potential because of rapid development in two technologies – LED lights and artificial intelligence. Many companies made their fortunes on the falling cost of a technology: Google on the cost of data storage, CRISPR on the reduced price in DNA sequencing. This is what ultimately convinced prominent investors, including Amazon’s Jeff Bezos, to give $200M to Plenty, a fledgling, but ambitious vertical farm company.

The second development driving down the cost of indoor farms is the leaps and bounds being made in the realm of artificial intelligence. Labor is one of a cost that indoor farmers are open about seeking to minimize. A familiar debate tends to emerge around the question of job destruction; with vertical farmers saying that they are replacing hard, back-breaking labor of harvesting with family-sustaining technician jobs, while critics allege that the new jobs will not benefit individuals who are losing the low-end job. However, by and large, vertical farmers are not aiming to replace traditional farming, but capture untapped demand generated by a growing population and an increased appetite for greens and other produce. Anecdotal evidence demonstrates that so far, the job creation story aligns with this vision. Vertical farming is creating entirely new jobs and drawing from a young, urban, highly-educated population that would be unlikely to pursue traditional farming jobs. 

The third economic lever is related to environmental change. Historically, water has been highly subsidized in the US. However, as water becomes scarce, and in regions such as the Middle East, where it already has, the cost of traditional agriculture will rise, compared to the more-water efficient vertical farms.

In the US, vertical farming has the potential to provide numerous benefits to cities, including the revitalization of vacant spaces, job training programs and an innovative approach to nutritional education.

Around the country, cities have employed vertical agriculture as a tool for education, food system resiliency, job training, and community-building by incorporating vertical farms into broader community initiatives and building deep connections with neighborhoods in which farms are located. 

For example, in Washington DC, Urban Food Hubs are small scale systems centered on high-efficiency urban food production (traditional urban farming methods combined with hydroponic and aquaponic systems), co-located with commercial kitchens and community spaces for education. These centers provide nutritional education, vocational training in vertical farming and food processing, and help address nutritional deficiencies in neighborhoods by growing food for local distribution. 

In 2017, a Baltimore company, Urban Pastoral, partnered with workforce training organization Humanim, a nonprofit that creates sustainable social enterprises, to build a vertical farm that will train workers in “new generation farming.” This year they are slated to open another farm on the grounds of a high school to teach students about farming and running a business.

In Chicago, Plant Chicago is a collective of businesses with a mission to cultivate ‘circular economies’ (systems where waste from one process is repurposed as inputs for another to create a closed-loop model of material reuse). An aquaponic vertical farm is one of the components of the system, interchanging CO2 and oxygen with a co-located kombucha producer and beer brewer.

Atlanta sees vertical farming as a puzzle piece in their urban agriculture landscape and another way of increasing the resiliency of their food system, under the Smart Cities initiative. Additionally, their policymakers work to attract farms to vacant lots and buildings in order to help increase surrounding property values. 

It should be noted that although the initial pitch of a vertical farmer to a city typically starts with the promise of job creation, this is not a benefit most cities seek from vertical farms. By design, vertical farms are not very labor-intensive. One of the most successful indoor growing operations, Gotham Greens, is building the world’s largest rooftop farm (140,000 sf) in Chicago’s 9th Ward. It will create 60 permanent jobs. Despite this limited workforce development potential, policy makers see value in vertical farms as a tool for community engagement and education, at least while the industry is in its early stages.

Philadelphia should be positioning itself to capitalize on the vertical farming opportunity while implementing policies to mitigate risks associated with the industry.

Vertical farming can benefit Philadelphia’s economy in a variety of ways: indoor farms can help improve the utilization of abandoned warehouses and buildings, provide another means of nutritional education and help a new generation become enthusiastic about farming through workforce development initiatives. At the same time, vertical farming is an industry in flux, making it difficult for policymakers to predict the success or failure of any given venture. In order to mitigate risk, rather than picking winners for large tax incentives, policymakers should create an ecosystem that allows many vertical farms to thrive.

The following are policy areas that Philadelphia should consider to encourage the growth of vertical farming while limiting the city's exposure to the industry's downside.

 Including Vertical Agriculture in City Planning Efforts

Rather than seeing vertical farming as a stand-alone industry, policymakers should consider it in the broader context of the regional food system. Not only does Pennsylvania have a robust farming industry, Philadelphia’s traditional urban farms have been a vehicles for lot beautification, food justice, and income generation for decades. Consequently, any urban farming plans or zoning policies should take existing urban and regional farms into account. Atlanta offers a great example of comprehensive planning. Atlanta included urban food policy into its Resilient Atlanta Strategy and promotes every type of agriculture, from lot farming to high tech indoor farming through Aglanta, a program under the umbrella of the Mayor’s Office of Resilience. Aglanta, in turn, cooperates with the state-wide Georgia Grown program.

Tax Incentives

Both Philadelphia and the Commonwealth of Pennsylvania offer extensive tax incentives and grants to new companies for job creation, investment in disinvested neighborhoods, property renovation, and environmental sustainability. Additionally, there are programs at the state and federal levels specifically targeted to farmers. Rather than adding new incentives, Philadelphia policymakers should assemble relevant tax breaks into a package that entrepreneurs can use to identify applicable incentives and navigate the process of applying for each program.

Defining the Market

A market study that quantifies the demand for locally grown produce, identifies distribution centers, institutional buyers and other potential clients can catalyze the creation or expansion of farms by demonstrating the opportunities available in the Philadelphia market. The Economy League’s assessment of the Philadelphia food economy can serve as the foundation for such a study. Beyond a report, actively making connections between farmers and institutional food buyers can support fledgling ventures by providing a stable source of revenue. 

Due Diligence

Because vertical agriculture is a new and evolving industry, few investors and clients have the skillset to assess the technological capabilities, revenue projections and growth forecasts of vertical farms. Policymakers can help build credibility with both set of parties by identifying organizations or companies that provide due diligence. For example, Eric Stein is developing a Center of Excellence for Indoor Agriculture in Pennsylvania. Nationally, Agrictecture specializes in helping municipalities develop policies and foster the creation of vertical farming economies. By identifying a skilled and neutral party to help investors and buyers distinguish between promising and floundering ventures, policymakers will help build a local knowledge base and reduce risk.

Industry Networking Opportunities 

Many entrepreneurs in the vertical farming space are not focused on building and managing farms, but on producing different parts of a whole (lighting, fertilizer, irrigation system). For this reason, creating a space to bring together technology companies, farmers, customers and funders will be critical to the success of the industry. However, limiting these events to vertical farmers would be a mistake. Rather, these events should provide an opportunity to create linkages between urban and rural farmers, as well as Philadelphia's traditional and high-tech farms, to facilitate knowledge and technology transfer.

Education and Workforce Training 

Building out a workforce requires breaking down siloes between technology and agriculture, working with universities (such as Philadelphia’s two nearest land grant universities – Rutgers and Penn State) to create opportunities for training and knowledge transfer. When it comes to equity, vertical farming is in danger of repeating the mistakes of Silicon Valley – creating opportunities almost exclusively for an ethnically homogenous group of wealthy individuals. Placing growing towers in public schools and community centers, creating multi-functional food hubs and developing job training program are ways that cities have worked to distribute opportunities more equitably. Working with vertical farms to ensure they are growing culturally appropriate products for their neighborhoods will deepen linkages to surrounding neighborhoods and, consequently, a more diverse workforce.

The Economy League's Anchor Procurement Initiative team will remain attentive to developments within the industry. 

Vertical farming alone will not solve food deserts, nor eliminate unemployment. However, it is an exciting new industry that promises to revolutionize many aspects of agriculture, while redefining local by bringing farming into our most intimate spaces: homes, offices, and schools. If Philadelphia approaches this new industry with discipline and intention, our city will be poised to reap the benefits for many years to come.

Although the vertical farming industry is currently in too early of a stage to be able to provide a stable supply of produce to anchor institutions, it is developing very rapidly.  The API team will keep track of the developments within the industry, in order to identify viable opportunities as they appear in our city.