Farming indoors to avoid environmental challenges by utilizing technology such as solar panels and LED lighting seems promising but vertical farming companies have made some critical mistakes while also facing technological limitations.
Vertical Farm Mistake 1: High Equipment and Labor Costs
Fifth Season, among other vertical farms, chose to use robotics to cut on labor costs. Unfortunately, in addition the capital expenditures for automated systems, they ironically had to pay high labor costs for teams of robotics and software engineers.
AppHarvest, raised over $640 million, but reported net losses of $83 million through the first nine months of 2022, including a summer quarter that yielded a paltry $524,000 in net sales. The company’s total revenue for the first three quarters of last year was $10 million, but most of that was used on up to $7 million in severance payments when it fired two executives.
While on the topic of management; startups with little experience trying to figure out how to efficiently grow food with new processes is a challenge. A lawsuit filed by AppHarvest investors argued that the startup had failed to disclose problems and misrepresented its ability to succeed; the company said that its challenges were reasonable for “a young company with an inexperienced management team undertaking a massive farming endeavor for the first time.” At AeroFarms, only the VP of Sales had farming vegetable farming experience.
Vertical Farm Solution 1: Hybrid Processes
Traditional greenhouses in Mexico and Canada already grow a large percentage of the tomatoes eaten in the United States. In the Netherlands, greenhouses grow nearly a million tons of tomatoes a year, along with other crops, making the country a major food exporter despite its tiny size.
Dutch agriculture company, Agro Care, was one of the first tomato growers to supplement natural light with artificial light and has grown into one of the largest tomato producers in Europe, producing nearly 200 million pounds a year. Agro Care has greenhouses in Tunisia, Morocco and France. Because of their intensive electricity needs, they started their own small energy company. The CO2 generated is piped into the greenhouses where the plants turn it into oxygen.
With Dutch greenhouses, the overhead to run the farm is a lot lower because there’s no corporate offices. There’s an outsourced technical support staff team and outsourced IT team. The manager of the entire facility is also the head grower, who is also the person who pays payroll.
“There are many reasons why they’re doing it, but one of the reasons is because they know that Silicon Valley investors won’t invest in a farm, but they’ll invest in a tech company,” says Henry Gordon-Smith, founder of urban farming consultancy, Agritecture.
Vertical Farm Mistake 2: Wrong Financial Partners
Relying too much on technology required greater capital investment for the vertical farms. The founders, being mainly from tech backgrounds reached out to the investors that they knew: Silicon Valley VCs. This resulted in financial partners that expected to tech company returns from commodity products. One founder vented in exasperation that many investors don’t really understand this space, and that they’re often drawn to the sexiest, most revolutionary technology, rather than more incremental improvements and business models that are already proven, like lower-tech greenhouses.
AeroFarms, launched in 2004, estimated in their May 2021 investor presentation, just $4 million in 2021 EBITDA-adjusted revenue—and $39 million in losses, and continued net losses until 2025. This means interest and depreciation expenses are incredibly high. Depreciation is from the massive amount of hardware and sophisticated robotics, and interest from high rates typical of VC investors.
“There are many reasons why they’re doing it, but one of the reasons is because they know that Silicon Valley investors won’t invest in a farm, but they’ll invest in a tech company,” says Henry Gordon-Smith, founder of urban farming consultancy, Agritecture.
Vertical Farm Solution 2: Cheaper Loans from Better Partners
USDA Farm Loan Programs give low interest loans at below 5% while venture capital interest rates (also) can be as high at 25% in addition to up to 50% of equity given up.
“I thought investors understood that this was a long game,” says Chris Cerveny, a horticulturist who was head of grow science at Fifth Season. “Now all of a sudden they want a return on their investment.”
Vertical Farm Limitations
It wasn’t all mismanagement that is hurting these vertical farms. There are several factors that are unavoidable and outside the control of vertical farms.
Building: Vertical farms rely on buildings whereas traditional farms do not. As such, vertical farms are expensive to build. Fifth Season, for example, reportedly spent $27 million on its Braddock farm, which could produce around 4 million salads a year. Therefore, owners have depreciation before operations even begin.
LED Lights and Solar Arrays: LED lights are expensive. Vertical farms often start growing leafy greens first because they require less light than some other crops, but buying the lights, and paying the electric bill, is still a significant expense. Even a small, 10,000-square-foot farm might have a lighting bill over $100,000 or even $200,000 a year. Running air conditioners and other equipment adds to the energy used.
Adding renewable energy outside can help—and reduce the carbon footprint that goes along with that energy use—but putting a few solar panels on the roof can’t cover the total amount of electricity needed. In a typical cold climate, a vertical farm would need about five acres of solar panels to grow one acre of lettuce. A hypothetical skyscraper filled with lettuce would require solar panels covering an area the size of Manhattan.
COVID: Many farms faced delays by pandemic supply chain issues, so they weren’t able to grow and sell as much as expected. Raw materials, packaging, growing trays, etc. are all inputs that were not always reliably available that disrupted operations for these farms.
Read the entire article from Fast Company.
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