Vertical Farming: A High-Growth Trend

by Samuel Taube, Investment U Research TeamFriday, February 3, 2017

 Market Trends

Every year, Americans care more about where our food comes from. Organic food sales are growing by double-digit percentages annually. And the “eat local” movement is still picking up steam.

But if you live in a big metro area, how local or natural can you really eat? For years, the answer was “not very.” Then vertical farming started to enter the commercial mainstream.

As the name implies, vertical farming means using hydroponic technology, grow lights and other agricultural innovations to build multilevel indoor farms. It allows farmers to grow fresh organic produce in the middle of our ever-growing cities. And in many cases, it’s more efficient than traditional farming.

As demand for locally grown organic food continues to outstrip supply, vertical farming is poised to become a tremendous investment opportunity. In this piece, we’re looking at why - and how to get in early.

Why Vertical Farming Matters

There are two almost unstoppable trends propelling the growth of vertical farming. First, local organic food is getting more popular every year. Second, more people are moving to cities, suburbs and other areas that can’t support traditional agriculture.

As our Editor-in-Chief wrote over the holidays, organic food is quite scarce in our country. That’s not some kind of environmentalist statement. It’s a simple fact. We want more naturally grown stuff than we can produce right now.

That’s why the organic food business has experienced such consistent growth recently. Last year, for the first time ever, a solid 5% of the total food sales in America were organic.

Now, the above graph just shows the growing market for organic food. It wouldn’t be relevant to organic farming... if most people lived near farmland. But they don’t. Four out of five Americans live in an urban area... and that number is constantly going up.

As you can see from the graph below, the U.S. as a whole has never experienced de-urbanization in recent memory. The pace of migration to cities has slowed at times, but it’s never gone below zero.

Plus, American cities are geographically huge compared to those elsewhere in the world. Most major U.S. cities are surrounded by huge rings of suburbs. These can sprawl out for dozens or hundreds of miles.

That means that our city dwellers can get their food in one of two ways. They can load it up with preservatives and truck it in from faraway rural areas. Or they can grow it in the city with vertical farming.

At the moment, the former option still feeds most of America’s urban population. But the demand for fresh, local and organic produce is still growing. So will the necessity of vertical farming.

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How to Invest

It’s tough to find pure plays on vertical farming. That’s a common problem among emerging technologies. Not many S&P 500 companies are willing to bet everything on a new industry.

Fortunately, several food retailers and gardening companies have made big investments in urban agriculture. These companies offer investors indirect plays on vertical farming.

Whole Foods (Nasdaq: WFM) is a major buyer and financer of vertically farmed produce. Its Local Producer Loan Program has lent tens of millions of dollars to local farming projects. And for the last few years, many of those projects have been urban and indoors.

Then there’s Scotts Miracle-Gro (NYSE: SMG), perhaps the nation’s most prominent gardening supply company. Almost 10% of Scotts’ revenue comes from its hydroponic equipment division. That has given the company an important stake in two investing trends: marijuana production and vertical farming.

As you can see, these two vertical farming “brokers” have done quite well for themselves in the past year.

If you live in a city today, chances are that you’re eating food grown in a place you’ve never been - by people you’ll never meet. And if you’re into organic food, then you’re likely paying a pretty penny for the logistical cost of getting it into the city without preservatives.

But that may soon be changing. As the trends of urbanization and organic food continue to grow, city dwellers need a new way to feed themselves. In a few years, your apples might be grown a few blocks from your apartment. And if you invest in the right grocers and gardening companies today, then you can profit from this futuristic transition.