Is vertical farming profitable?
One of the most frequently asked questions is whether vertical farming is profitable?
The simple answer is that it depends on whether you follow expert guidance and avoid making common mistakes.
“From spectrum wave form analysis to nutrients analysis, there are so many different elements that come into the mix. If you’re given the wrong advice, not only is your vertical farm not going to be profitable, you’ll risk a lot of investment going down the pan,” warns Craig Price, director of operations at Light Science Technologies, which works with customers in the sector.
The magic of three
If you want your vertical farm to be profitable, the most important first step is to make sure you get the foundations right. That means finding and maintaining the right balance between three key elements – capital expenditure (capex), operational expenditure (opex) and yield.
“There’s no point in trying to cut too many corners, as you won’t get the output you want. Likewise, there’s no point in trying to build the Rolls Royce of vertical farming without getting the backend returns from it,” Price explains.
Similarly, it’s essential to take a long, hard look at your operational costs and resources, including staffing, supply chain, seeding and nutrients.
Price advocates asking yourself basic but tough questions such as: How much are you going to grow? How long will it take to grow those specific plants? How much yield are you expecting?
Of course, there’s a huge amount of granular detail within each of these elements and it’s essential to balance infrastructure costs such as plants, equipment, machinery, lighting, growing mediums and so on correctly.
There’s also the question of whether you’re aiming for an automated or manual vertical farm. Whatever the answer, even with an automated operation you will still need a lot of labour, much of it specialist, and it’s easy to underestimate the costs that come with that.
Investors flocking to the vertical farming market
For those who get it right, the rewards are considerable. Currently worth £19.2bn, the global market for vertical farming is growing by 20% a year and is forecast to reach a staggering $11.7bn by 2027, according to Emergen Research’s report published in 2020.
Not surprisingly in the face of such attractive rates of growth, investors are proving enthusiastic about the sector.
Giant indoor farming company BrightFarms, which supplies US grocery retailers with packaged salad greens, recently secured $100m funding, including capex to support its expansion plans, while vertical farm startup Infarm attracted $100m investment in June 2019. And California-based Plenty raised $200m in 2017, while managing to attract backers which include Amazon boss Jeff Bezos.
The public sector is showing itself equally keen to wade in, such as the Abu Dhabi government which invested $100m in indoor farming in 2020.
However, for every success story, there are those who fail to take expert advice and end up with capex so high it takes a decade to generate profit, or even worse – they find themselves saddled with needlessly high operating profits which make it impossible to ever reach a profitable position.
Shining a light on profits
One of the major challenges for growers is that different crops need different light spectrums and even tiny variations in lighting solutions can result in costs going up and profitability going down.
In fact, lighting can account for up to 30% of capital expenditure when setting up a vertical farm and between 25-30% of operational costs.
Unfortunately, there are a myriad of misconceptions around lighting technology and a common mistake is to treating LED lighting as a commodity and buy on price. There’s also the danger of being misled by misunderstanding the technology, product and related data.
Getting the lighting setup wrong won’t just affect your capital costs, it will also become an ongoing problem in terms of consuming larger amounts of energy and, subsequently, pushing up operating costs.
For example, if you deliver a plant 200 micromoles of light when it needs only 180, you are wasting 10% of that light – an unnecessary cost that will be reflected in your electricity bills and ultimately your end of year profits.
Profit from the laws of physics
By seeking advice from experts like LST, it’s possible to cut out that type of waste and increase profit margins by sticking to a bespoke growing ‘recipe’.
Price explains: “It’s vital to do your due diligence. Driven by the manufacturing process, there are vast differences in the quality of LED and how it produces light. For example, cheaper but poorer quality LEDs would typically have low CRIs, poor phosphor and colour hues and won’t deliver the amount of light and cost the client more in power.”
Price adds: “Be careful not to be steered down the path of a particular manufacturer, rather than the correct way. Looking at the science attached to some quotes I’ve seen, given that light depreciates over distance and time, some of what is cited is just not possible within the laws of physics.”
As well as its research with some of the world’s top laboratories and plant scientists, LST’s own in-house laboratory includes the latest technology, including controlled environmental growing chambers which are linked and able to transmit data continuously to keep you constantly updated with data about plant performance, quality, colour and taste.
The company’s Growise lighting range is designed for maximum flexibility and so includes 44 variants to create the perfecting ‘recipe’ to suit your unique environment and make sure you’re energy efficient.
Controlling the environment means controlling costs
Of course, the other way in which vertical farming has a natural advantage when it comes to being more profitable than traditional farming is its ability to eliminate damage from pests.
As well as saving money by not having to purchase pesticides, it also means far greater consistency in terms of yield.
Sadly, severe weather events which cause huge damage and eat into profits are likely to become more common, given the greenhouse effect and climate change and this, also, is a key way in which indoor farming can improve your bottom line.
“If you’re growing crops outside in a field and there’s a frost or major flooding, it can decimate crops,” Price points out.
The beauty of vertical farm technology is also the ability to controlling the environment and that includes plant architecture, for example making a plant shorter or taller, or more or less leaves, depending on what you are trying to grow.
What should you grow if you want your farm to be profitable?
It’s possible to grow pretty much anything using vertical farming. However, if you want your enterprise to be profitable, you are likely to want to concentrate on faster-growing crops that yield a high market value, as they will be more cost-effective.
Consequently, the majority of vertical farms focus on high plant-density, short-turnover crops such as herbs and salad leaves which tend to need less resources to cultivate and which can be sold for a higher price than produce like root vegetables.
Although the salad and herb markets tend to dominate the vertical farming at the moment, before becoming too reliant on this type of crop, it’s obviously wise to check that there are not too many competing vertical farms in your geographical region who are all growing the same thing, as this could result in over-supply which will push the price down.
Certainly, it’s a good idea to explore other options, such as out that soft fruit and berries, which tend to sell at a premium offseason.
Another potentially profitable option is producing ‘transplants’, a thriving sub-sector where vertical farmers take advantage of the high germination rate achievable in a controlled environment and sell starter plants on to commercial field and greenhouse growers.
Organic profits are the future
If you want to grow your revenue, achieving the right price for what you produce is paramount. This links back to crop selection, since certain crops command different price points, as discussed above. In fact, vertical farms are starting to command a slightly higher price for product already but it’s also crucial to be able to adapt to the right price point for each crop.
Sales of organic produce are soaring as consumers become more conscious of their health, with the organic food and drink market predicted to be worth $320bn by 2025. And with vertical farming able to provide the ‘organic approach’ for less cost, it will become more profitable, Price believes.
“People want organic but the organic method in a field is very, very expensive,” he points out.
“You’ve got to have a robust customer base and that organic-ness and reduced environmental impact that vertical farming brings bodes well for the future,” he adds.
If you’re considering launching a vertical farm, or want to make your current farm cheaper to run and more sustainable, we’d be happy to talk through your options. Call us on 01332 410601.