Commercial Greenhouses & Vertical Farms- Economics & Investor Base

By Peter Tasgal

COMMERCIAL GREENHOUSE & VERTICAL FARMS

-       ECONOMICS & INVESTOR BASE

In February 2019, I published an article comparing the cost of growing and delivering greens on a conventional farm, to growing them in a container farm (https://www.igrow.news/news/the-future-of- container-farming-amp-controlled-environment-agriculture). My conclusion was that the consumer can get both a hyper-local and superior product from a container farm. However, it will be approximately ten times more costly to grow and deliver. Unless the industry can change the consumer mindset to pay the significant differential (much like what Starbucks did to the brewed coffee market), container farming is likely to remain a niche industry.

My research concludes that today’s consumer would like to buy produce with the following attributes:

(i) Competitively priced; (ii) Locally grown; (iii) Tastes fresh and is healthy; (iv) Available at same location where other shopping is currently done – “one-stop shopping”; and (v) Year-round availability. If conventional and container farming are on opposite sides of the spectrum - price vs. quality; what alternative forms of growing can meet the demand of today’s consumer? Based on my research, greenhouse or vertical farm growing, or a combination of the two, can get farmers close to meeting the needs of today’s consumer. Efficient deployment of further technology and capital into each of these growing structures will allow the farms to get ever closer to fulfilling consumer demands.

As illustrated below, I researched a prominent domestic greenhouse grower, BrightFarms, Inc. (“BrightFarms”) and a prominent domestic vertical farm grower, AeroFarms. Currently, BrightFarms has several greenhouses and recently announced it is building additional greenhouses in Massachusetts, New York and California. Each of these greenhouses will be 280,000 square feet and produce in the range of 2 million pounds of greens per year. AeroFarms operates a 70,000 square foot vertical farm in Newark, NJ which can also produce in the range of 2 million pounds of greens per year. Per AeroFarms website, this vertical farm is the largest in the world in terms of annual capacity.

My research indicates the following costs per pound to grow and deliver greens grown in each of the following formats (including depreciation):

Conventional Outdoor Farm	Hydroponic Greenhouse	Vertical Farm	Container Farm
$0.65 / lb.	$2.33 / lb.	$3.07 / lb.	$7.14 / lb.

Assuming a 40-45% gross margin for a typical supermarket produce department; retail prices for greens would need to be approximately $1 a pound for conventional, $4 a pound for greenhouse, $5 a pound for vertical and $12 a pound for container grown. A typical head of bibb or butter lettuce weighs less than half a pound. Therefore, the lettuce can be grown in a greenhouse or vertical farm and sold at retail for $2 to $3 per head.

Although greenhouse or vertical farming is 3 to 5 times more expensive than growing on a conventional outdoor farm, it still allows for competitive pricing to the consumer with other vegetables and sides.

What is Preferable - Greenhouse or Vertical Farm?

Greenhouses and vertical farms each have different benefits that should be prioritized based on location, product type, access to capital, human resources and other requirements. Prior to my research

on the two farm types, I hypothesized that vertical farms had a higher upfront cost and a lower ongoing growing cost compared to greenhouses. Due in large part to advancements in technology, my research ended up showing something different than my hypothesis.

Cost of a Commercial Greenhouse (Further outlined in Appendix A)

Upfront Costs ($0.61 / lb.):

In June 2018, BrightFarms raised $55 million to build 3 greenhouses ($18.3 million per greenhouse), each of which will be 280,000 square feet and grow 2 million pounds of greens annually. For analytic purposes, a 15-year straight-line depreciation of the upfront costs is used, with no remaining residual value, or $1.22 million of annual depreciation1. Based on $1.22 million of annual depreciation and 2 million pounds of annual growth, depreciation of total upfront costs is allocated at $0.61 per pound of production.

Growing Costs ($1.52 / lb.):

Per AmHydro, a leading consulting firm to the agriculture industry, it costs $31,244 per year to grow crops in a 2,880 square foot greenhouse, or $10.85 per square foot. Based on a 280,000 square foot greenhouse, the total cost to grow would be just over $3.0 million per year for 2 million pounds of greens or $1.52 per pound. BrightFarms stated that each of the new greenhouses would employee 55 people. Based on conservative cost per employee assumptions and my research, I estimate that of the

$1.52 per pound to grow, $1.10 consists of employee costs.

Delivery / Transport Costs ($0.20 / lb.):

Delivery and transport costs can range based on size of load, location(s), and other factors, but $0.20 per pound is used as an industry standard. The same cost is used for both greenhouse and vertical farm analysis to maintain consistency.

Based on the above, the all-in delivered cost of a pound of greens grown in a commercial greenhouse is estimated to be $2.33 per pound.

Cost of a Commercial Vertical Farm (Further outlined in Appendix A)

Upfront Costs ($1.30 / lb.):

It is estimated that AeroFarms’ 69,000 square foot facility in Newark, New Jersey cost $39 million2 and can grow 2 million pounds of greens annually. Similar to the greenhouse outlined above, a 15-year straight-line depreciation of the upfront costs is used, with no remaining residual value, or $2.6 million of annual depreciation. Based on $2.6 million of annual depreciation and 2 million pounds of annual growth, depreciation of the upfront costs is allocated at $1.30 per pound of production.

Growing Costs ($1.57 / lb.):

In the case of the greenhouse above, the growing costs included $1.10 per pound of people costs and all other costs were $0.42 per pound. I assumed that all other costs were $0.42 per pound, whether in  a greenhouse of vertical farm. Some may argue the costs of power are more in a vertical farm, as there

¹ Accounting standards provide for a 15-year depreciation period for single-purpose agricultural or horticultural structures.

² Per Tech Insider “Inside the World’s Largest Vertical Farm” March 15, 2016 by Leanna Greenfield.

is no natural light. However, based on location there may be higher costs in a greenhouse for cooling or heating. In either case, the people costs are likely to far outweigh all other costs.

In the greenhouse case, 2 million pounds of greens are expected to be grown by a staff of 55 full-time employees, at an assumed all-in cost per employee of $40,000, or a total of $2.2 million in annual employee costs. Per the website https://craft.co/aerofarms, AeroFarms has 87 people on staff as of February 2019. As the 69,000 square foot facility is being analyzed; which represents 66% of AeroFarms total farm square footage, 66% of the staff or 58 people were allocated toward the farm. Using the same all-in cost per employee as the greenhouse, total employee costs are $2.3 million. Based on 2 million pounds of production, employee costs are $1.15 per pound. By adding the $1.15 per pound of growing costs to the all other costs of $0.42 per pound, I arrived at an all-in growing cost of $1.57 per pound of production.

Delivery / Transport Costs ($0.20 / lb.):

Delivery and transport costs were assumed to be equal to those of a greenhouse, as outlined above.

Based on the above, the all-in delivered cost of a pound of greens grown in a vertical farm is estimated to be $3.07 per pound.

Cost Conclusion:

My comparative analysis and research above between costs of growing in a greenhouse versus a vertical farm shows an unexpected conclusion. Whereas the initial hypothesis was that the ongoing costs of growing in a vertical farm would be less than those of growing in a greenhouse, the research and analysis shows today it is more expensive to grow in a vertical farm. The upfront costs of a vertical farm are more than 2x those of a greenhouse on a per pound of production basis, but no higher. Commercial greenhouses have been around since the 1920’s yet commercial vertical farming is a relatively new area of farming. Per the USDA’s 2015 Floriculture Crop Summary there is 409 million square feet of commercial greenhouse space in the United States. In contrast, the largest vertical farm analyzed in this document is Oasis Biotech’s 215 thousand square foot vertical farm in Las Vegas, Nevada.

The all-in costs of growing in a greenhouse or vertical farm today are relatively close, yet each is still multiples of the all-in cost of growing on a conventional outdoor farm. Technological innovation is happening in all areas of farming and will bring down all costs and improve the quality of product over time. Which form of farming is likely to have the most innovation is unclear.

What is clear however is that with today’s technology it is possible to deliver locally grown greens to the mass market at a price that is competitive with other offerings through all seasons of the year.

Why are there not more greenhouses and vertical farms providing locally grown food to meet consumers demands?

If technology is available today to farm locally grown and competitively priced produce in greenhouses and vertical farms, why are these farms not more prevalent in the market today. Key factors are outlined below:

Price: As stated above, it is still 3 to 5 times more costly to grow in a greenhouse or vertical farm compared to conventional farming. Even if a greenhouse or vertical farm grown product can be

profitably priced at $2 to $3 a unit at retail, a conventionally grown lettuce can be priced below $1. Alternatively, a conventionally grown lettuce can be priced at $2 to $3 a unit at retail and provide a much higher profit margin through the supply chain.

Capital Requirements: In comparison to the price of a re-purposed shipping container ($85,000 list price) or the cost to lease an acre of farmland in Monterey County, CA (estimated around $3,000 per year), the significant upfront capital requirements of commercial greenhouses and vertical farms limit the pool of market participants.

Investors and Capital Returns: Growing a wide range of products in greenhouses and vertical farms, regionally, across the United States, and around the world is going to cost billions of dollars. To-date those levels of capital have not been available in the market. The company that has received the most buzz is Plenty, a vertical farm operator, which has raised in excess of $200 million. Investors in Plenty have included SoftBank’s Vision Fund (close to $100B fund size) as well as the investment vehicles of Jeff Bezos (Amazon) and Eric Schmidt (Google). The lead investors in AeroFarms and BrightFarms are Dubai’s Meraas Holdings and Cox Enterprises, respectively.

It is not the size of investment that is keeping typical investors away, given the willingness of major Silicon Valley investors to make multi-billion dollar investments. Uber, individually, has raised well in excess of $20 billion. I believe investors have not joined due to the factors below:

·         Lack of technological certainty;

·         Timing of returns – historically has not fit traditional 5-year holding period of Private Equity firms (although this period is lengthening – Blackstone, Carlyle and CVC each have large funds which allow for 10 to 15-year and longer holding periods); and

·         Size of market – The end consumer may desire the product; however, is the demand important enough for purchasing departments of domestic supermarkets to alter current purchasing programs? Especially if they can earn a higher margin on existing programs.

There is a unique group of investors currently in the space. Many of these investors are willing to take a long-term view and often envision their investment to be more than just the return on that individual investment in a greenhouse or vertical farm operator. Examples include3:

·         New Jersey’s Economic Development Authority has provided AeroFarms with over $11 million in tax incentives for redeveloping and bringing employment opportunities to underserved areas.

·         SoftBank Group of Japan’s Vision Fund, the lead investor in Plenty, is the world’s largest technology fund. SoftBank Group makes long-term investments that can affect evolutionary change.

·         Oasis Biotech built a 215,000 square foot vertical farm in Las Vegas. Its parent company is Sananbio, which is owned by Chinese LED chi-making giant Sanan Group. Sananbio sells lighting and other types of technology enhanced products for vertical farms and other horticultural businesses.

·         Maraas, the lead investor in AeroFarms, is a Dubai-based conglomerate with a goal of improving the city of Dubai. Dubai imports most of its produce and has significant water shortages as part of its climate.

³ Appendix B includes an overview of some of the largest vertical farms and greenhouses in the United States today.

Without question investors of all types would welcome the opportunity to delve further into this space. Certainly, there have been major investments in agriculture as a whole; in a previous document I spoke of IndigoAg, a Massachusetts based company that has raised in excess of $600 million, focusing on microbes to optimize plants health and maximize their productivity. It is the lack of certainty of technology, as well as the high-level of capital costs, that has limited the investor base to-date. This is a short-term concern. As the technology improves and therein returns are improved and become more consistent, investors will enter the space in a more comprehensive way.

Conclusion:

As leaps occur in technology, I predict the days that consumers are going to have their produce shipped months in advance and from thousands of miles away, are numbered. Technology is available today to grow locally and bring fresh produce to the mass-market within days or even hours. Additionally, as climate change brings dramatic weather changes, controlled-environment agriculture allows for constant conditions regardless of weather patterns. As time goes on vertical farms and greenhouses will increasingly grow greater sums of our produce both domestically and across the world.

APPENDIX A – COST TO GROW IN A GREENHOUSE COMPARED TO A VERTICAL FARM

GREENHOUSE COMPARED TO VERTICAL FARM
BrightFarms compared to AeroFarms
	Greenhouse	Vertical Farm
	BrightFarms	AeroFarms
Facility Size (sq ft)	280,000	69,000
Upfront Costs	$18,333,333	$39,000,000
Upfront Costs / Sq Ft	$65.48	$565.22
Assumption: Depreciation Years - Straight Line	15	15
Annual Depreciation	$1,222,222	$2,600,000
Annual Pounds of Production	2,000,000	2,000,000
Annual Depreciation / Pound of Production	$0.61	$1.30
Total Full-Time People	55	58
Assumed All-in Cost / Person	$40,000	$40,000
Total Annual People Costs	$2,200,000	$2,309,005
Total People Costs / Pound of Production	$1.10	$1.15
Al-Other Grow Costs	$0.42	$0.42
Total Grow Costs / Pound	$1.52	$1.57
Estimated Delivery / Transport Cost / Pound	$0.20	$0.20
ALL-IN DELIVERED COST / POUND	$2.33	$3.07

APPENDIX B – MAJOR DOMESTIC PRODUCE GROWING GREENHOUSES AND VERTICAL FARMS

Company	Current Domestic Locations	Total Sq Ft (000)	Farm Type/s	Lead Investor / Owner	Capital Raised ($MM)
AeroFarms	NJ	106	Vertical	Meraas	$138
Backyard Farms	ME	1,830	Greenhouse	Mastronardi Produce4	Unknown
Bowery Farming	NJ	Unknown	Vertical	GV Capital	$118
BrightFarms	IL, OH, PA, VA	4865	Greenhouse	Cox Enterprises	$113
Gotham Greens	NY, IL	170	Greenhouse	Silverman Group	$45
Jacobs Farm Del Cabo6	CA	1,000+	Greenhouse	Family Owned	Unknown
Little Leaf Farms	MA	218	Greenhouse	MassDevelopment	Unknown
Oasis Biotech	NV	215	Vertical	Sanan Group7	$30
Plenty	CA, WA	100	Vertical	SoftBank Vision Fund	$226

⁴ Backyard Farms, originally funded by the investment arm of Fidelity and was an important project for Ned Johnson, Fidelity’s leader for many years and current owner along with his daughter Abigail.

⁵ Does not include the 3 greenhouses to be built, adding 840k additional square feet.

⁶ Grow organic fresh herbs in greenhouse space in the Monterey Bay of California.

⁷ Oasis Biotech is owned by Sananbio, whose parent company is the Chinese LED chip making giant Sanan Group. Per the company, it is currently using approximately 40,000 square feet of the space for production.