Indoor Farming Investment Opportunities

For the entire history of the human race, we’ve been eating pretty much the same way. Plants capture sunlight – and we either eat them directly, or consume animals that feed on them.

Of course, things have changed at various times. We’ve developed some clever stuff – such as farming, artificial fertilisers, and industrial food manufacture. But, when you strip it back to energy flows, the process has always been the same – since the very dawn of humanity.

In this article you will find all you need to know about this new disruptive industry.

But now, we’re breaking the link between sun and food

Indoor farming is now A Thing – and that typically means farming under artificial light. This approach has a precedent – although not one you might immediately think of. For many years, Britain has been partly dependent on indoor farming to grow its cannabis. Importing drugs by speedboat, Miami Vice style, is risky (albeit glamorous). A practical alternative is renting a house, and bypassing the electricity meter to grow rooms full of dope. You don’t get to pose in a powerboat, but it’s a comparatively low-key criminal operation – helping to keep its perpetrators out of jail. Chuck in a couple cheap workers to mind the joint, and you’ve got yourself a very nice little earner – although not one that Exponential Investor officially recommends…

Meanwhile, back in the world of food, things are changing rapidly. It’s not unusual to give plants a bit of a boost with some artificial light. For example, tomatoes are often helped along by grow lamps – previously high-pressure sodium, but now usually LEDs. Recently, however, we’ve seen an accelerating trend towards indoor farming with 100% artificial light. For example: Growing Underground is producing food in London’s disused tube tunnels. Similarly, a huge amount of venture capital money is starting to find its way into comparable US startups, such as Plenty.

A vertical indoor hydroponic vegetable farm, growing many rows of butter lettuce, basil, mint and other herbs. This is a modern and space- as well as water-efficient way of producing food in a soilless manner.

For clarity, indoor farming consists of two interrelated concepts. The first is vertical farming. This basically means growing food on shelves and racks, often without soil, known as hydroponics.

The idea of hydroponic farming has a century-old history, and was first scaled up at least as far back as the early 1950s. However, the really radical shift is not the move indoors, but the move away from using sunlight. That obviously necessitates “feeding” plants with artificial light.

In the same way that we grow flowers indoors, this technology could apply to all kinds of crops and buildings, from small scale vertical farming to skyscraper farms. In a few years, the sight of a vertical greenhouse will be part and parcel of every city’s landscape.

What’s behind the move to indoor farming?

Led indoor farming has some distinct advantages. The environment is highly controlled – optimising growing conditions, and limiting the spread of diseases. Of course, you could do that with a greenhouse, but this doesn’t match indoor farming’s “secret weapon”: proximity. If you can grow salad in a disused tube tunnel, you can have it on a London plate mere minutes after picking – as opposed to days, in a conventional supply chain. The benefits in terms of freshness, flavour, and nutritional value are significant. Furthermore, there’s a huge reduction in transport costs and the consequential energy demands – and we’ll explore this in more depth below.

Other economic changes are also significant. Various input costs are reduced, and yields are stabilised. To explain this, we’ll return to the issue of environmental control. The nature of indoor farming is that the growing environment makes plants much less vulnerable to being eaten by creepy-crawlies than is the case in an open field. You can generally make a reasonable effort to prevent infestation in the first place – and, if you are unlucky enough to have pests and diseases enter an indoor farm, you can use isolation and decontamination techniques to remove them. This means that the entire process lends itself very well to organic farming. I find the idea of organic farming that’s based entirely on artificial energy to be a rather bizarre concept – but that’s presently the way the rules work.

So, is indoor farming just an insane environmental nightmare?

Actually, using energy in this way might not be as bad as you think. Let’s look at the broader economic situation for indoor farming. We manage to waste around a third of our food, between the farm and our mouths. Anything we can do to reduce that is a blessing.

We don’t typically find indoor farms being used to produce bulk energy crops. They can’t grow things like potatoes or apples. Instead, they’re used to creating a supply chain for fresh salads, and the like. These highly perishable foods are particularly prone to wastage. As such, they make a disproportionate contribution to food waste. Accordingly, improvements in the supply chain inherent to indoor farming mean that highly perishable crops have much lower risk of spoilage and waste, due to being grown indoors.

Although the growing energy comes from fossil fuels, having a simpler supply chain really matters. Shorter haul distances, and a lower refrigeration requirement, have a non-negligible environmental benefit.

From an economic point of view is indoor farming profitable? Even though the original costs might be high, considering better quality, a shorter supply chain, lower chemicals cost and more manageable farming processes all help keep costs down. But of course, energy is the elephant in the room, below we look in more depth at how indoor farming could change the world of food.

Is indoor farming complete madness?

Our electricity is presently made largely from fossil fuels – so when we are consuming foods grown indoors, we’re actually eating frozen sunshine. But this energy mix is changing rapidly – and that’s going to have big implications for the nascent indoor farming industry.

We now have a long history of reliably falling solar prices

While breathless mainstream media headlines might express surprise at these costs falls, Exponential Investor simply sees highly predictable trends. In fact, drops in the cost of solar are so reliable that there’s even a law to describe them: Swanson’s law.

These costs reductions mean that, as we as we move into the middle of the 21st century, our energy system will likely shift inexorably towards mass solar power, as our primary energy source. Coupled with this, we’ll see a trend towards long-distance transmission of electricity. We’ll also benefit from inexpensive storage using technologies – such as power to fuels, and grid-scale stationary batteries. Instead of relying on “frozen sunshine” from millions of years ago, we will soon be able to catch sunbeams in deserts – moving them in time and space to the world’s indoor farms.

Ultra-Cheap power

What’s more, indoor farms are the perfect electricity consumers for tomorrow’s renewable power generators. Cinemas and offices need reliable electricity. By contrast, you can switch the lights off in a farm without difficulty. Ceding control of their grow lamps to power companies will mean that farms will be rewarded with ultra-cheap power. The end result is that we may soon be able to import very cheap solar electricity to farms. These will be hosted in warehouses, basements, etc – in and around all major cities.

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To fully understand the logic behind indoor farming, we need to look at energy in a bit more depth. In my local supermarket, I can buy sugar snap peas. The energy required for these to grow is almost certainly dwarfed by the energy taken to get them on to the shelf. That’s because, in common with so much of our high-value fresh food, these peas are flown into the UK from tropical developing countries. If you think indoor farming is a bit mad, think about it this way: it’s a lot less mad then flying salad around the world.

White-Collar Farmers

In our new, renewable-focused energy economy, indoor farms will have the ability to cut out these transport costs. They’ll localise around consumers – bringing just-in-time, local production to the modern food industry. This will be a significant advantage for a new generation of white-collar farmers – who will swap muddy fields for industrial indoor racks. As a result of this regularisation of the growing environment, these farmers will be able to mechanise in new ways – and farms of the future may increasingly come to resemble the highly automated car factories of today.

Two scientists in their greenhouse laboratory. There are rows of small green plants. Some of the plants have small white flowers.

Furthermore, it’s worth remembering that a lot of the energy used in food production isn’t for light – it’s for heat. Indoor farming has three huge advantages, in this regard. Firstly, the densely packed racking means that the building’s external surface area per crop plant is much reduced –in fact, some call this structures farm buildings. Secondly, the absence of thermally leaky windows reduces heat transfer per unit area. Thirdly, the ability to be flexible on location means that farms can take advantage of low-grade waste heat. You won’t find many tech stories in the mainstream media about waste heat – but it’s a massive issue, and there are some really innovative companies working in the space. That’s why it’s a subject we’ve covered before.

Remember: dull is good, dull makes money

In conclusion, it will be many decades before we see the widespread use of indoor farming to grow low-cost bulk energy crops – such as potatoes, wheat, rice and sugar. These can be cheaply stored, and transported without spoilage. However, for high-value perishables, it’s a different story. We can’t yet grow trees in practical indoor farms, so forget peaches. But low-growing crops (eg, lettuce, cucumbers and strawberries) are well suited to this new form of agriculture. Once you throw some seriously cheap off-peak renewable energy into that mix, the business case only gets better.

If you’re interested in backing indoor farming startups, you should check out some of the firms that have attracted recent investment from some deep-pocketed American venture capitalists (VCs). In particular, look at companies such as Plenty, Bowery and Infarm. These are pioneers in the first wave of a new type of farming – one which could end up providing a really significant part of the global food industry’s outputs, in coming decades.

Is indoor farming the future? Let us know: andrew@southbankresearch.com.

Best,

Andrew Lockley
Exponential Investor

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Category: Technology

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