In today’s Exponential Investor:

  • Right growing conditions, all the time
  • Lots of money is coming into this sector.
  • Vertical farming in 2022 is like “pot stocks” in 2017.

Once thought of as “lettuce for rich people” vertical farming is emerging sub sector of agriculture.

As explained on Tuesday, vertical farming allows hundreds of acres of crops to grow on a single acre of land, but upwards instead of across.

Bigger crops, such as potatoes, wheat and rice aren’t going to work in vertical farms. These crops are heavy and have a low per-kilo price. The economies of scale don’t work in their favour in vertical farming.

Vertical farms are still restricted to leafy greens, herbs, berries and tomatoes because they grow quickly and are high-value per kilo crops.

Scientists are working on redesigning plants so that stone fruits, mushrooms, eggplants, peppers and cacao plants can be grown indoors.

In spite of the drawback of not being able to grow bulk calories, vertical farming isn’t reliant on seasons, climate or soil.

Soil and climate are the two key reasons why agriculture is clustered to one tenth of the world’s land mass.

And having both comes down to nothing more than winning the geology jackpot.

The seasons and soils must suit the crops.

For traditional farming, soil is the main medium.

Each season, the soil is “refilled” with fertilisers to get the required nutrients, then the seeds are planted and additional fertilisers are added to aid the growing process.

Take rice, for example. Rice is mainly grown in areas where the climate is 25 degrees and above, with an annual  rainfall of more than 100cm. India’s hot and humid climate with monsoonal rain, coupled with the clay soil which holds more water and nutrients, is ideal for rice crops.

In contrast, the UK’s maritime climate creates shallow, dark, rich moist soil with cool weather conditions that is ideal for root vegetables, as well as for growing grass to feed livestock.

Yet, a mainstay of the UK diet is tea, which doesn’t grow very well in the British climate.

To grow tea leaves, you need year-round temperatures of 21-29 degrees, annual rainfall of between 150cm and 200cm, and a deep root system of 1.5m or more in well-drained soil at medium-to-high sea levels. This is why tea is grown in places such as Kenya, Sri Lanka and Vietnam.

Controlled growing conditions

The short version is of our story in this edition of Exponential Investor is that vertical farming offers the ability to grow a lot of food in much smaller spaces, regardless of weather, soil conditions or season.

In these farms, nutrients, air temperature, humidity and lights are controlled to meet the exact specifications as per the crop needs for optimum plant growth.

Without being exposed to the elements, vertical farms aren’t impacted by heat waves, cold snaps, droughts, floods or other natural disasters, giving us consistent crop production.

Again because of the controlled conditions, vertical farming hydroponic crops use 70% less water, whereas aeroponic crops use up 90% less water, and the water is also recycled.

Rather than two harvests a year, vertical farming allows the continuous production of fruit and vegetables all year round, eliminating the need for cold storage as consumers have become used to having seasonal food “on demand”.

There are no waxy residues or pesticides sprayed onto the plants to deter pests or stop the food from decaying during transportation.

In addition, controlled conditions mean that most produce is grown to consistent appearance and flavour. This has its own benefits. A consistence appearance makes packing, storage and distribution much more efficient and reduces costs in the long run, as well as cutting waste.

Up to two-fifths of fruit and vegetable crops are wasted because products are considered unappealing to look at. This is not a standard set by the farmer, rather the supermarkets… and as much as 40% of a crop is rejected at the store level because a vegetable is an odd shape.

A new industry about to boom

Vertical farming is highly unlikely to replace outdoor agriculture, but will much more likely complement it. Think of it as enhancing the food supply chain.

And there’s a surge in the money moving into this nascent sector…

Prior to the arrival of Covid, vertical farming was considered to be worth roughly US$3.4 billion (£3 billion), which was tipped to reach US$25.1 billion (£22.9 billion) by 2030.

Research from venture capitalist firm Pitchbook suggests that those numbers could grossly underestimate the size of the industry.

Vertical farming investment has increased tenfold since 2013

Source: Pitchbook

After the absolute explosion in investment in 2021, Pitchbook now says vertical farming’s value is much closer to US$79.3 billion (£70 billion), and could be worth as much as US$155.6 billion (£137.5 billion) by 2026.

A flurry of money moves in, which is eerily similar to the rush into “pot stocks”

The amount of money rushing into vertical farming is eerily reminiscent of “pot stocks” in the lead up the legislation change in the United States. 

Between 2013 and 2018 when interest in cannabis stocks exploded, a report by MGO & Ello showed that the cannabis industry received US$16 million (£14.1 million) across 11 deals in 2013.

By the end of 2019, some 80 deals had invested a total of US$1.29 billion (£1.4 million) in private equity (PE) placements.

Cannabis investments saw a rapid 80-fold increase from 2013 to 2019. It was a stunning amount of growth in a very short space of time. The for pot stocks took the world by storm as governments in both Canada and the United States were actively working towards legalisation of cannabis for medical use.

While we don’t need a legalislative change for vertical farming to take off, I believe we are seeing a similar surge in venture capital (VC) and PE money that is making its way into vertical farming now.

The explosion in cannabis investing didn’t really happen until 2018 and 2019. And vertical farming isn’t quite at the “explosive” investment phase just yet.

In my view, vertical farming is actually similar to the cannabis industry in 2017… that as the time it was clear the laws about to change and there was a rush of “first mover” money into “pot stocks”.

Expensive to start

Vertical farming is a new sub-sector of agriculture, and it comes with both similar and completely different risks to traditional commodity markets.

For example, the start-up costs for vertical farming are extremely high.

Credit Suisse estimates that one vertical farm has an initial cost of around £35 million per building (or roughly £2,600 per square metre). This means a massive capital injection is required to get the farm started… with this spending money going on buildings, planning permits, robotics, automation, staffing costs and solar panels.

In fact, the cost break-up for a vertical farm is 80% electricity use, 15% labour costs and 5% other inputs.

Those issues aside, the pandemic, extreme weather, crop damage and strained relationships with major growing nations – and other  countries that control the supply of fertilisers – are putting pressure on governments to bring food systems back within their borders.

There have already been big investments from household name VC and PE firms for 2022. Look for the excitement about vertical farming to continue for some time to come.

Until next time,

Shae Russell,
Co-Editor, Exponential Investor