Indoor farming - what are the prospects for profitability?
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Indoor farming and the prospects for profitability

By Simon Harvey 29 Jun 2021 (Last Updated June 29th, 2021 12:04)

Concerns over climate change and food security have fuelled optimism over controlled-environment farming but operators face questions over their forecasts for profitability.

Indoor farming and the prospects for profitability

Growing fresh produce in a controlled indoor environment using technology inputs has, in some cases, been around for almost two decades. But it has only recently started to gain traction linked to climate change and sustainability concerns. However, what is the path to profitability for indoor farming? And can it be competitive?

Indoor or controlled-environment farming is a niche yet expanding sector, but questions have been raised over whether these operations are profitable, and are able to compete with traditional field-grown crops, given the capital-intensive nature of the industry.

Much, however, depends on individual operations, and the objectives in terms of scale – whether it be targeting mass-market consumers or local buyers, the geographical location, etc – whether the farm is in a hot or cold climate, along with the types of crops grown and, most importantly, the technologies employed to replicate the natural environment at the lowest cost possible.

Vertical farming, per se, is the most popular system where crops are grown on stacked units in a warehouse, underground tunnel, or even in shipping containers, requiring artificial lighting, usually through expensive LEDs to mimic sunlight. But some operators, particularly in hot countries such as the Middle East and Asia, are growing crops in high-tech greenhouses using mostly natural light.

Nonetheless, even the companies in those hot climates need LED lighting to supplement the daylight hours, and, generally speaking, all operators within controlled-environment farming are similar in terms of the inputs such as labour, ventilation, irrigation, and cooling. And all require huge capital investment to purchase land, build the farm, put in the appropriate technology, and run it.

Despite the costs, indoor farming is viewed through a longer-term lens to address environmental concerns like the decreasing availability of land, unpredictable weather patterns and climate change, and the limited resources on hand to feed the world’s growing population.

Securing future harvests

Fraser Black, the CEO of UK-based Crop Health and Protection (CHAP), one of the country’s agri-tech centres and funded by Innovate UK, a government-backed agency, gives his interpretation of the current landscape.

“I think it is going to be a while before you see millionaires in vertical farming,” Black says. “It’s still at that point where you are justifying the costs and developing the market.

“I think there are enough people around now that are breaking even and starting to become profitable, but we are not there yet. Look at electric cars, we are sort of following that same trajectory.”

Controlled-environment farming comes with advantages: less water than regular agriculture and without the need for pesticides, and higher yields linked to year-round production. And, from the consumer perspective, better-quality produce because the nutrient inputs can be controlled, and freshness, because the crops tend to be grown close to source.

For food importers like those in the Middle East and some parts of Asia, the technology offers food security, too.

All those benefits stack up through the eyes of private-equity and venture-capital funds, which are ploughing vast sums of money into the sector.

This is no doubt in the hope of reaping profits when indoor farming has reached scale and matured beyond the current leafy greens and herbs – although soft fruits such as strawberries and blueberries, and tomatoes, cucumbers, and mushrooms, are starting to emerge.

Black also addresses the consumer angle and how controlled-environment farming is likely to develop over the coming years.

“The first decades are going to see people getting involved, learning how to do it, and leading the charge, and it will be niche. But, as they learn and as they build, and they learn how to get the costs down, and control the costs, the more mainstream it will become, and then more people pile in and the bigger the scale.

“There are other points of differentiation people are picking up on, which I think will project it forward until such time that the volume is big enough and people recognise all of the benefits that it will become profitable like other systems.

“Trying to compete with the major growers and put it all in the major supermarkets right now is more difficult because they don’t have the volume. But I think those sort of trends are starting to shift.’”

Sky Greens in Singapore is one of the oldest vertical-farming businesses in Asia, founded in 2012 by Jack Ng to grow leafy greens under glasshouses using hydroponic systems and natural light. While Ng points out that labour is the biggest operational cost, he also says that Sky Greens saves money by not employing LEDs, enabling the business to focus on yield and productivity.

“Our energy use is similar to traditional farming, so we can save about 75% on labour,” Ng says. “Our running costs are cheaper than traditional farming, the only thing is the investment cost. Because our output is ten times higher than traditional farming, the investment costs average out.”

He adds: “We have proven in Singapore that we can grow and sell mass-market vegetables. The reason many vertical farms aren’t competitive is because they are using artificial lighting, which is a high energy cost, so your payback is high and your overheads are high, plus you have the replacement costs because LED lights only have a two to three-year lifespan.”

Ng says that the price of locally-grown crops is important given that Singapore is an import-dependent economy when it comes to food, having to contend with cheap products coming in from Malaysia, Indonesia, and China, but its optimum yield gives Sky Greens the ability to compete.

“Our farm operation is profitable. Using our system, based on studies, the payback is about five years but your crop price has to be at a certain level. Therefore, what we produce is usually the higher-end vegetables like pak choi, which is, in a sense, a smaller market.”

Indicative of the costs, Plenty Unlimited in California, a vertical-farming business set up in 2014, has raised $500m to date from investors as it seeks to scale up production of leafy greens such as lettuce, kale, and rocket, along with tomatoes and strawberries.

Others, like AeroFarms, established in 2004 in New Jersey, and Infarm in Berlin founded in 2013, are turning to special purpose acquisition companies, or SPACs, to raise funds and gain public listings.

AeroFarms, which grows leafy greens, herbs, blueberries, and raspberries using aeroponic systems, recently entered a SPAC deal with Spring Valley Acquisition Company valued at $1.2bn, which will give the business access to more than $300m in cash to invest.

Infarm is also proposing a SPAC, said to be valued at $1bn, to expand from herbs and greens into chillies, mushrooms, and tomatoes, all grown using hydroponic technology. The company has so far raised around $400m.

Expensive seeds to sow

Nonetheless, the chief executive of Intelligent Growth Solutions (IGS) in Scotland, a tech-firm that designs and patents controlled-environment platforms using artificial intelligence and robotics, with a particular focus on productivity and efficiencies, is critical of the sums being raised relative to the individual revenues generated, and the technologies employed.

IGS CEO David Farquhar says many of the vertical-farm operators “are still a long way from being profitable”.

“The first important thing is to get our positioning in the market right. There are a lot of very big and noisy companies that have had to raise a huge amount of money because they are trying to reinvent the wheel,” he explains.

“There is no one magic bullet that makes these things economically competitive. It is a combination of about six subsystems. There are two major costs in commercial agriculture in an enclosed environment.

“One is energy and the other one is labour. If you can take the labour out, and we’ve managed to reduce it by about 80%, that is a major cost-saving and will make you much more economically efficient.”

Farquhar argues that there is no need to have numerous people tending to these farms, as is depicted on many a website, if AI technology and robotics are employed, which reduce costs and ultimately helps with the profitability of indoor farming.

He continues: “We give recipes of weather to the AI and the computer does all that work and the mechanical handling system does all that work. Once you have put the seed into the substrate, in the inserts that go into the growth trays, there is really no need for human intervention at all.

“And if you don’t put humans in, you are not going to introduce bugs and disease and things, and therefore you don’t need to use fungicides and herbicides, whatever. That means you don’t need to wash the crop, which means that you are saving more money but also you are going to increase the shelf life by about 50%-100% and you are also going to reduce waste.”

Dr. Nate Storey, a co-founder of Plenty, says it’s surprising how quickly a vertical-farm operator can become profitable, compared to those in field crops, but it’s more difficult for a “company that’s raised a couple of hundred million dollars – it takes time for them to grow into that investment than it does for a farm that you just stood up”.

“Agriculture has historically been a low-margin industry, especially field production. And one thing we want to correct as we move into a new era of agriculture is to make it much more profitable. Having a better margin also makes you more investable.

“If we can get the flywheel spinning, we can drive costs out of the business faster and pull capital into the business in a way that allows us to expand much more quickly than you could probably imagine today,” Storey suggests.

“We are on a cost curve, more so than some of the other folks in the space, because we have invested very heavily in R&D. That builds our own internal cost curve, which allows us to drive yield up by seven times and costs out by 50% over the course of two years. So we have this kind of crazy economic curve that we get to ride towards higher profitability.”

Storey says that Plenty is competitive with field crops: “I know that’s not true for everyone but again, people have some catch up to play. People are just waiting for these external cost curves to drive their costs down.”

Jonathan Webb, the CEO who founded US vertical-farming business AppHarvest in 2017, says that scale is key to profitability.

The company, based in Kentucky, grows a wide range of tomatoes in glass houses and has recently invested $60m to buy artificial intelligence and robotics firm Root AI, which has the technology to predict yields and evaluate crop health.

While Webb admits that one of its farms in the city of Morehead is a user of LED lighting, it mainly uses natural sunlight, and it also recycles rainwater to save on costs.

“If you are just in a warehouse then you can’t use sunlight. So, for us, the two free inputs would be sunlight and rainwater. We are only adding in technology when we need it,” Webb says.

“If you package all that and go at scale, which ends up getting our construction costs down and our operating costs down, we can compete with conventional pricing today. If you are not using sunlight and you are not using rainwater how are you possibly going to compete with conventional crops and keep your costs low? It doesn’t make sense.”

Webb adds AppHarvest’s new Morehead facility is going through the ramp-up stage and costs usually level out in year two. “Year three on is where you really start to drive profitability,” he concedes.

“As the industry matures and scales, we are going to see our costs for lighting come down, you’ll see costs for steel and glass come down, and then it becomes that self-fulfilling prophecy because, as the industry scales, your material costs are going to be lower and the business models themselves will be fine-tuned to better perform.”

Smart applications of technology

In the Middle East, Pure Harvest is growing tomatoes and strawberries in high-tech glasshouses using natural sunlight and only uses LEDs to a small degree because they have more daylight hours and more intense sunlight than other parts of the world.

The business, founded in 2016 in Abu Dhabi, is about to move into leafy greens, with capsicums, cucumbers, and other berry fruits in the pipeline.

Majed Halawi, the vice president for growth at Pure Harvest, says that “it’s completely uneconomical” to use artificial lighting, although LEDs are used for “control and steering… but only to supplement the natural light”.

However, Pure Harvest doesn’t use stacked units like vertical-farm operators, and the company is very different in its objective, which is mainly to address food security and reduce the Emirates’ reliance on food imports.

“Where we compete and where we position ourselves is that we are this local, very high-quality product that is at a discounted price to what comes from Europe and outside of the market,” Halawi explains.

“We have a lot of similarities to a vertical farm in terms of climate management, however, our operating strategy and our set up of the greenhouses and the facilities is different. We find we have a more efficient set-up.

“Vertical farms bank on selling their produce at a very high cost, assuming the customers would pay them a premium for the fact they are grown on a vertical farm.

“However, what we find in this market in the Middle East is it doesn’t make any sense to be growing using vertical farms because firstly, the consumer is very price-conscious, so you need to be able to compete with your traditional farms and imports, and, secondly, we have such an abundance of natural light.”

AppHarvest’s Webb believes that controlled-environment farming has a bright future, given the unpredictability of the weather and climate change, and will eventually become a necessity to ensure the long-term supply of fresh produce. As the sector expands and scales, the cost of borrowing is likely to come down too, he says.

“We feel we are really at that tipping point. Over the next ten years, our estimation is you will see tens of billions of dollars flood into controlled-environment agriculture globally, and it’s because of the need. You will see scale and you will see profitability immediately because the industry can be profitable if you design the right facility in the right region.”

This feature was initially published in the June 2021 issue of Just Food magazine.