The concept of indoor vertical farming gained significant momentum during the Covid-19 crisis as lockdowns exposed the vulnerabilities of the food supply chain and highlighted the need for more reliable and local sources of food. This context, coupled with the sustainability benefits of indoor farms such as reduced water usage, pesticide elimination, and reduced transportation, attracted billions of investments and sparked many IPOs or SPACs, making indoor farming one of the hottest spaces in agritech.
Two years on, it’s a very different story: all indoor farming companies (to which we have no exposure) are struggling with AeroFarms, an industry pioneer, withdrawing from a proposed SPAC deal due to substantial losses, Infarm shutting down operations in many countries, AppHarvest expressing concerns about its viability in a recent report, Kalera filing for Chapter 11 or Fifth Season ceasing its operations.
This industry downsizing is shedding light on the practical challenges and costs associated with vertical farming, raising questions about its ability to compete with outdoor farming economics (indoor produce prices can be up to 2x higher).
One significant hurdle to the vertical farming sector has been the rise in electricity costs, as it faces substantial expenses due to the high lighting requirements of plants, as well as the energy consumption of air conditioning and other equipment. While incorporating renewable energy sources like solar panels can mitigate expenditures and reduce carbon footprint, the industry’s electricity demand generally exceeds what can be fulfilled by rooftop solar installations.
In addition to rising electricity costs, vertical farms have in many cases been faced with substantial expenditures in developing proprietary technology. This includes the implementation of robotics, computer vision, and artificial intelligence systems for plant optimization. While driven by the aim to attract tech investors, this self-built approach has often led to excessive R&D spending.
Moreover, this approach has frequently entailed significant expenditures on salaries for robotics and software engineers, highlighting the delicate balance between reducing labor costs thanks to technology, and managing expenses associated with specialized talent. These soaring technology costs underscore the inherent financial challenges the vertical farming industry is facing today, where finding sufficient margin to cover soaring costs seems to become increasingly challenging in commodity-type markets like lettuce or tomatoes.
While we remain convinced that indoor farming still makes sense in light of the benefits we mentioned earlier (local source of food, ability to grow plants all year long with no sensitivity to weather conditions, sustainability…), the business models will need to reinvent themselves against a backdrop of increasing capital scarcity.
Notably, the long-term success of the vertical farming sector may necessitate the targeting of higher-margin or niche markets. For example, in Western markets, cultivating plants for lucrative sectors like pharmaceuticals, fragrances, and cosmetics could lead to improved profit margins. And the Middle East, with its challenging outdoor growing conditions and high demand for imported greens, obviously offers comparatively favorable economics for vertical farming.
A long-term success may also require farms to focus on… farming, and to get rid off their proprietary tech and robotics ambitions that have been a major source of cash burn.
Should these initiatives materialize and bear fruits, the whole ecosystem would benefit, with indoor farms becoming more profitable and pure play technology and hydroponic equipment vendors likely to ride a new investment cycle.