The second generation of vertical farming is approaching. Here’s why it’s important.

Editor’s Note: Boaz Toledano is a business consultant specializing in vertical farming and other agtech markets. His website is: www.EconoMind.co. Here he writes about how vertical farming is progressing into its next stage. Disclosure: Toledano independently included mention of one of the AgFunder’s portfolio companies IGS (Intelligent Growth Solutions).

Vertical farming practitioners claim to be pioneering the third agricultural revolution.

Vertical farming is the practice of growing produce in vertical stacks using soil, hydroponics or aeroponics to deliver water and nutrients to the plants.

With seemingly higher-quality produce that is grown efficiently, locally and with a potentially lower environmental footprint, the industry appears to be a promising answer to the rising need for sustainable farming methods. 

The market was valued at $2.3 billion in 2018 and investments grew significantly from $60 million in 2015 & 2016 to $414 million in 2017 & 2018. What’s less commonly known, however, are the challenges vertical farming companies face and the prospects of overcoming them in order to establish the viability of this industry.

Not surprisingly, capital expenditure (CAPEX) is high. A smallscale, low-tech vertical farm employing 1st generation technology (more on this later) can cost around $280 thousand to start. However, when we consider the more complex operations, those that employ 2nd generation technologies, the setup costs may surpass $15 million. 

In order to understand why these figures are so high, we must first understand the difference between the two generations of vertical farming technologies, and why the transition between the 1st and the 2nd is the most important process in this industry’s short history.

First generation technology enables the basic functions of a vertical farm to occur without the constant intervention of human operators. Second-generation technology enables the growing process to not only be automated but also be continuously optimized to the requirements of the plants being grown. These two generations can be further divided into five levels, detailed below. Generally, the more a company has advanced down these levels, the better its competitive advantage.

When vertical farms were being established around the world about a decade ago, they employed 1st generation technology. These operations showed it was possible to grow food — and other plants — in vertical structures, thus enabling a more efficient use of land. On average, 2nd generation vertical farms yield 55 times more produce per unit of area compared with conventional farms. For the first time in modern history, food could be grown in cities, where it is eaten.

It has also become possible to remove problematic sections of our food supply chain, for instance, transportation and the pollution that goes with it, excessive packaging and preservatives. Also, we could finally reconnect to the source of (some) of our food, a privilege that was removed from our lives around the 17th century, when the Second Agricultural Revolution — also known as the British Agricultural Revolution — sparked the industrial revolution that led to mass urbanization.

Next, vertical farms had to prove their economic viability. Virtually the only way companies were able to become profitable is by using technology to cut down on the high operating expenses (OPEX), which mainly consist of lighting and labor (~30% of OPEX each).

Enter 2^nd generation technology.

In a vertical farm, LEDs (light-emitting diodes), which provide light to the plants, are more efficient than other forms of artificial lighting that were used in the past (fluorescent and incandescent), resulting in lower operating costs. According to the International Energy Agency (IEA), LED lighting efficiency is expected to increase by an extra 70% by 2030. The pricepoint also continues to drop.

Labor expenses will be tackled by automation. Many startups and some capital-backed growers are developing technologies to help vertical farms reduce their dependence on human labor, with remarkable achievements. A noteworthy example is IGS (Intelligent Growth Solutions), which has developed an automated system that enables highly efficient production using modular structures. The company claims to have reduced labor by up to 80% and power by up to 50%. Its plan is to sell its technology to companies that want to improve the efficiency of their vertical farms’ operations.

Another example is Plenty, an industry leader and one of the best-funded vertical farming groups globally, which was able to improve the energetic efficiency of its newest facility, Tigris Farm, fivefold, compared with its previous facility. Though quite secretive, we now know that the company uses plant management automation to transfer its growing towers around the warehouse, as well as harvesting automation.

These are examples of the OPEX reduction trends the industry is seeing. Lighting improvements should reduce OPEX by 12%, and automation should cut OPEX by a further 20%+.

Since vertical farms have thus far introduced mediocre returns on investment (ROIs), these reductions in OPEX are crucial for the industry to prove itself to investors, governments, and companies considering entering the market. Although CAPEX will remain high compared with conventional and organic farming, the 30%+ expected reduction in OPEX makes a compelling case for vertical farming.

Current market prices for 1 kg of leafy greens are around $33 for vertically-grown produce and $23 for organic produce. As vertical farms invest and employ higher levels of technology, they will be able to increase their competitive advantage by driving down costs and prices. Eventually, I believe, they will be able to compete with organic producers, who last year operated in a $100 billion market.