Should you invest in a vertical farm?

Vertical farms have been getting a lot of attention in the (ag) news lately, much of which has not been positive. Pittsburgh-based vertical farm company Fifth Season closed operations in October last year, even after receiving US$35 million from several large venture capital investors. Meanwhile, InFarm, Europe’s biggest vertical farming company (valued at more than US$1 billion) has been in the process of laying off half of its staff.

For a few years it seemed like investment in agricultural technology could not be stopped. According to the AgFunder Investment Report, in 2021 US$51.7 billion was invested in agrifood technologies, up 85% from the previous year; and an increase of US$10.1 billion from 2017.

Factors such as inflation, increased cost of materials, and supply chain slowdowns are negatively affecting the viability of these operations. People are making less, spending less, and saving more.

Boons and busts are also not atypical for new industries. When new technologies rapidly advance there is usually a point, when the market gets saturated, and the savvy, and sometimes often luckier, businesses take the reins. In general, most startups don’t last more than a few years, and vertical farming can be both competitive and expensive to get off the ground.

Not all technology-backed agricultural businesses are faring poorly however. In fact, Plenty, a San Francisco-based Vertical Farm, is valued at well over US$1 billion and growing.

With all the volatility of this new industry, when does vertical farming make sense and when does it not? Let’s take a look at the pros and cons of vertical farms, and when alternatives, such as greenhouses, might make a lot more 'cents'.

Typically, vertical farms are indoor grow rooms, powered by artificial lighting, with rows of plants stacked vertically. Vertical farms are usually located in densely populated areas, where shorter transportation to consumers and higher demand can help offset some of the costs. Indoor vertical farms also offer the advantage of less water usage and higher yields per quare foot. Some other advantages of this farming technology include fresher produce, less labor, assuming more automation, more uniform product, and less fertilizer.

Although it might make sense to start a vertical farm if you are growing a high-value crop that can be grown hydroponically, and you are limited to growing in a dense population area, it might still be a risky business investment if you do not have access to cheap renewable energy.

The biggest disadvantage of vertical farms is the cost, which includes the cost of startup and investment, operating, equipment (some of which is novel, and therefore carries a higher investment risk). Let’s delve deeper into the reasons for these high costs, and then we can explore some other downsides that might come along with a VF.

Vertical farming can cost €2,200-2,600/m2 of cultivation bed space, which is six to 10 times more than what a high-tech greenhouse might cost, according to Henry Gordon-Smith, CEO of agricultural advisory company Agritecture. This might be prohibitively expensive for many startups, especially given a potentially very long period for return – some estimates guess up to 10 years.

More equipment is also required in a vertical farm, including more artificial grow lights. Lights are not cheap, and they will need to be replaced when they eventually break down. They also produce extra heat, which may need to be offset with increased HVACD systems – an added expense that will also be in need of ongoing maintenance and eventual replacement.

Indoor vertical farms also require more high-tech systems in general such as the hydroponic system itself, and oftentimes additional control systems. These are not only expensive to buy and install, but they also carry the risk of breaking and needing to be replaced. If a vertical farm is using a particular grow system, for example, and that company raises its prices for their equipment, or goes out of business, that can strain that vertical farm to the point of needing to shut down themselves.

The cost to run grow lights, even LEDs touted as 'high efficiency', is exorbitant. In 2022, the cost of consumer electricity jumped 14.3% in the USA. While in the EU, household electricity prices rose by 22%, in the first quarter alone. With this kind of increase, payback periods could become unimaginable and profits completely out of reach. In an indoor grow facility, lights might run 12-18 hours per day and account for well over half of the energy bill. The more vertical 'stacking' a grow entails, the more lights are needed and the higher the bills.

Additionally, to compound the cost of lighting, vertical farms do not exchange much air with the outside, as they are typically enclosed, and therefore have higher cooling and dehumidification needs.

Increasing crop volume increases the volume of heat and humidity, and therefore the need for even more cooling and dehumidification – once again driving up the cost of electricity.

Many vertical farming technologies are new, hardly any have existed for more than a decade. Without a reassurance of profitability, investment firms might rightfully feel a little wary about injecting money into such novel tech. This, coupled with a downturn in the economy, is reason enough for investors to turn toward more reliable and longer running ag investments, such as outdoor and greenhouse farms.

An indoor vertical farm might make sense if efficient lights are used (and smartly controlled), if high-value crops are produced (ideally with lower lighting requirements), the grow location is in a dense urban area with an accessible and populous market, and cheap renewable energy sources are available.

Although greenhouses may also use artificial lighting, cooling, and dehumidification, the need for these are greatly reduced by the ability to use natural sunlight and venting.

Compared to a vertical farm, greenhouses have a cheaper startup cost, carry less risk (less technology to break and more easily able to pivot and adapt to externalities), cheaper to operate, can grow a greater variety of crops, and are substantially more energy-efficient.

The efficiency of something is defined by the output divided by the input. The sun doesn’t cost anything, no input means infinite efficiency. On the other hand, only 60% of light coming from the most efficient artificial lights is usable. Looking past the issue of cost, the use of artificial lights is just simply extremely inefficient.

It is true that a vertical farm will give you complete climate control abilities, as well as increased water savings. However, in this current time, investing in a greenhouse, especially one that has a tight building envelope and is designed for maximum efficiency and sun harvesting (such as the Ceres HighYield kits) is both a safer and smarter option.

Another great option is to employ some of the positive attributes of a vertical farm to a greenhouse facility. Stacking vertically can be a great option inside a greenhouse for particular applications.

Growing smaller products, such as microgreens, vertically can easily be done inside a greenhouse, and electricity and water can be mitigated by employing this technique. Layering trays for seeds and starts is another great way to save space in the greenhouse and get crops ready for planting outside.

The reason you might not want to go 'full vertical' inside a greenhouse is, again, because of the amount of lights you would need to make this workable. Typically, with greenhouses you can spread further horizontally in order to take advantage of the free light coming from the sun.