Vertical farming seems to have lost its appeal to venture capitalists, with funding for the sector plunging some -91% over the last year. The once-hot industry promised to change the future of farming with its high-tech approach but has instead delivered exorbitant energy costs and a lot of high-priced leafy greens. Despite some $4 billion in funding over the last five years, profits and market share remain elusive and bankruptcies are mounting.
AppHarvest, who many considered a leader in the space, filed Chapter 11 Bankruptcy just this week. The Kentucky-based indoor farming company began shipping beefsteak tomatoes to Kroger, Walmart, Publix and other grocers in early 2021. But now finds itself carrying very large debt. At the same time, Elon Musk’s brother’s ‘smart farm’ startup announced last week that they were shutting down most of its locations and laying off most of its staff. The vertical farming startup was founded in 2016 and quickly grew to five locations. This past week they notified employees via a Zoom call that the startup would halt production at its locations in Springfield, Ohio, Shepherdsville, Kentucky, and Kenosha, Wisconsin. The company shut down its original farm in Brooklyn earlier this year.
Some argue that the industry is witnessing a typical path through the so-called “Gartner hype cycle,” which measures the maturity, adoption, and social application of new technologies through five phases. Right now, proponents of vertical farming think the industry is currently in the “trough of disillusionment,” where interest wanes as experiments and implementations fail to deliver on their promise. This is typically a period of sharp consolidation where surviving businesses improve and streamline their technology, making the path to widespread adoption possible. Critics, however, don’t understand why investors would keep sinking money into the technology.
One of the biggest criticisms of the industry revolves around the fact that vertical farms are expensive to both build and operate. A single large-scale vertical farming facility may cost more than $100 million in construction costs alone, according to industry estimates.
Longer-term, ongoing energy costs are mind-boggling, and energy comprises about 50%-70% of the cost of goods sold for vertical farms, according to Barclay’s. A small, 10,000-square-foot vertical farm can rack up electric bills as high as $200,000 per year. While solar panels can help offset this to some degree, the amount of solar panels needed to produce just one acre of indoor crops would take up as much as 9 acres. A hypothetical skyscraper filled with lettuce would require solar panels covering an area the size of Manhattan, according to Kale Harbick, a USDA researcher who studies controlled-environment agriculture.
To cover the high costs, vertical farms maximize throughput by focusing on crops like leafy greens and herbs that have short growing periods from seed germination to harvest. Still, a 2020 study from Cornell University estimated that lettuce from indoor farms in Chicago or New York was more than twice as expensive to produce as lettuce grown outdoors and delivered from the West Coast. That means vertical farms have to sell their crops at a significant premium to traditionally grown crops.
Higher energy consumption also means the argument that indoor farms are more climate-friendly than traditional agriculture doesn’t hold up in reality. While it’s true that indoor hydroponic systems that recirculate water use as little as 10% of the water needed to irrigate a field, the amount of fossil fuels burned to grow a pound of lettuce produces about 8 pounds of CO2. That compares to around 0.52 lbs of CO2 produced per pound of traditionally grown lettuce, which includes the fuel burned to transport it 1,000 miles.
There is also the question of what and how much vertical farms can realistically produce. Vertical farm pioneer AeroFarms, for instance, touted being able to produce 390 times as much greens per acre as outdoor farms. But lettuce is only grown on about 0.2% of global agricultural land, so shifting leafy green production indoors is not offsetting a significant amount of land use. What’s more, salad greens can hardly sustain the global population.
While some indoor farms do grow fruits and vegetables, these foods account for less than 3% of agricultural land use. In reality, about two-thirds of agricultural land is used to graze livestock while the remainder supports major staples like wheat, rice, soybeans, and other grain and oilseed crops. Critics say that until vertical farms can figure out how to produce staple crops indoors, the technology will never come close to supplying enough food to feed billions of people.
Industry experts believe the vertical farming space will continue to witness consolidation but even those that do survive will likely fail to deliver returns above their cost of capital. Experts also doubt vertical farms will be able to compete with traditional agriculture in North America inside the next decade. Henry Gordon-Smith, founder of Agritecture, a firm that consults on urban farming projects, says the only place they make economic sense right now is in the Middle East, where extreme heat makes outdoor growing impractical and consumers currently pay high prices for imported greens. Of course, if climate impacts on crop productivity become more extreme in traditional agricultural hubs, growing food indoors may make increasing economic sense. At the same time, they will need to figure out how to grow more than salads. (Sources: AgFunder, Fast Company, CoBank, Grow)
