The 4 Key Drivers Of Indoor Vertical Farming Success
Aidan Connolly is the President of AgriTech Capital, a food/farm futurologist, and has a new book out soon, The Future of Agriculture.
Continued droughts and climate change have elevated consumer and government concerns about water consumption, particularly for food production. While nuts might be the thirstiest crop, fruits and vegetables also need a lot of watering. The epicenter of the “water wars” is California, pitting rural against urban, golf courses against grapes and lawns against lettuce.
Innovators have sought solutions including micro-irrigation technology, gene-edited crops with lower water footprints and recycling, but none have attracted investor attention like vertical farming. Between 2019 and 2026, indoor farming is predicted to grow to $22 billion. Raises this year include greenhouse Gotham Greens ($310 million) and indoor vertical farm Plenty ($400 million).
Since one-third of the planet’s arable farmland has been lost in the past 40 years, shifting more farming indoors has engaged investors, inventors and farmers alike. Indoor farming, also known as controlled environment agriculture (CEA) uses a fraction of the land and water of conventional field farming without the impacts of climate change and seasonality.
Indoor farms can be built in areas of dense population, reducing travel time and food miles. Being “local,” no borders are crossed and labor is reduced through automation. Vertical farms offer produce to consumers with the cleanest label, peak-season flavor and freshness all year round.
Indoor food production accounts for a tiny fraction of today’s food supply. Building the infrastructure required to make vertical farming a significant hedge against the fragility of the current system will require unprecedented investment levels. Ultimately, indoor farm economics must compete with field farming on a cost-per-pound basis to be affordable, notwithstanding premium consumers who appreciate the quality difference. There are four key drivers of cost in indoor farming.
Building farms is capital-intensive. Predictable cash flows and IRRs allow access to less expensive financial packages usually only available to real estate, equipment and project-level financing. Companies like AppHarvest, Plenty and Bowery are already advancing partnerships with debt and structured finance partners. Others like Local Bounti have gone the SPAC route with the attendant goal of raising debt via public markets. If LTV ratios can be maintained at competitive levels, billions could be allocated to indoor ag as part of a new asset class in farming.
Technology is perhaps the most powerful lever for improving indoor farming’s cost efficiency and capital needs. Yield has always been the critical metric for farmers, and this is no less the case in indoor ag. Capital expenditure per pound of food produced (capex/lb.) and its “cousin,” daily output per square foot (lb./sq. ft./day) are important to understand whether the capital investment will “pencil.” Failure to do so could mean growers ending up with capex so high that it takes a decade (or longer) to generate profit.
It’s interesting to see how the investment landscape is bifurcating between all-new greenhouse capacity being built and the bets on radical breakthrough technologies, especially in vertical farms. Greenhouse output is lower than that of other forms of indoor farming because crops are grown in a single-layer, flat plane. Vertical farms typically grow in a flat plane, but with trays that can be stacked, meaning the ability to produce exponentially more than a greenhouse of the same size. Vertical towers such as those used by Plenty and Eden Green purport to unlock greater yield per unit area with an architecture that’s efficient to scale.
Plenty, for example, claims to generate yields of up to six times greater than traditional stacked vertical farming and up to 350 times greater than conventional field farming. This output advantage is key for vertical farms in offsetting their higher upfront costs over greenhouses and open-field production.
Technology is also key to lowering operating costs, labor in particular. Automation aims to reduce reliance on manual labor but also create safer work environments and lower the risk of health issues from pathogen outbreaks, as we’ve seen regularly in the field and even in greenhouses. Some players claim to benefit from large data sets and AI algorithms driving continuous improvement in their yields and costs.
Lighting efficiency—converting to biomass and fruit—is also critical when paying for photosynthesis. Ultimately companies are making a tech bet that innovation can continuously improve cost curves over time—effectively a “Moore’s Law” of produce.
Retailers are taking notice of the burgeoning indoor or CEA category. But today, most producers are focused on herbs and leafy greens drawn from publicly available genetics. Indoor growing would benefit from new plant varieties optimizing for characteristics including flavor, texture and yield. Varieties that were optimized for survival in the field aren’t necessarily best suited to a controlled environment. Indoor farms can tailor everything from temperature to light to humidity to what each individual plant needs to thrive.
The assortment of crops grown indoors is growing, such as the Driscoll’s-Plenty partnership to grow strawberries. Building farm infrastructure that can support new crops will likely be a major focus of the next phase of indoor ag.
In technology, speed matters. The list of companies entering indoor ag with plans to deploy new greenhouses or farms grows by the day, not least if press releases are a metric. Current supply chain disruptions are affecting everything ranging from steel to HVAC units and this means a challenging environment to get new capacity built and operating.
Vertical farm companies have an additional challenge in that they are also innovating on multiple fronts simultaneously, both in improved tech stacks for their farms as well as expanding the range of produce they can grow economically. The ability to build new facilities, find or develop trained labor, and prove market access (and continued customer demand/success) will be a key growth factor.
While water and climate are creating unique challenges to food producers, CEA and vertical farming offer considerable potent advantages over traditional agriculture methods. Expectations of a hotter, climate-disrupted world ensure that reducing the global water footprint of food production is a promise likely to accelerate the growth and success of novel technological food systems.