A view of vegetable grown at Sky Greens vertical farm in Singapore, Reuters

The progress of two small vertical farming companies, Yasai based in Switzerland and One Farm based in the UK, both going through fundraising rounds will further test investors’ appetite for an industry that raised over $1.1B in 2021. This new, technologically enabled, food production method using LEDs and controlled environments consumes less water, uses no pesticides or animal matter, and reduces imports, transportation costs and climate impact. As well as offering 365 days per year growing performance, it addresses the very immediate issue of food security.

These are just two examples of a growing number of vertical (sometimes known as “urban”) farms, and how these and the other vertical farming companies perform beyond the fund raising and over the next three years will be an important test for a new and innovative industry. Whilst still relative new and niche, vertical farming offers much potential to investors, consumers and the natural world, and with over $1b invested in 2021 investment firms like Softbank and GIC are clearly seeing the potential even if global revenues today are less than $100m per year, a fraction of the market.

One Farm and Yasai fundraising overview

Vertical farming, so called in 1999 by Dr. Dickson Despommier an ecologist at Colombia University, envisioned skyscrapers 100’s of metres high used to meet the growing demand for food across cities.

The truth is that most “vertical farms” are not that vertical, and despite Dr Dickson’s vision most farms occupy re-purposed or new warehouses outside city centres. In 2012 the world's first commercial vertical farm was opened in Singapore, developed by Sky Greens Farms, and was three stories high. Today they have over 100 nine-meter-tall towers and are the first vertical farm to be certified as organic.

In Singapore where only 7% of food is grown locally food production and security issues are clear. In both the UK and Switzerland 48% of food is imported and, driven by high inflation, the war in Ukraine and failed harvests, many countries across Europe, the US and Middle East are addressing food security as a major concern. Kalera as a good example has opened a vertical farm in Kuwait, a country than imports a large amount of food, with capacity to produce 500kg of fresh food daily. Kalera and is just one of several Vertical Farming examples in the Middle East.

But the benefits of vertical farm to the planet and consumers are far greater than just being able to grow produce locally, 365 days a year, close to consumers. They produce much higher yields (up to 200x) per square meter of land, and use 90% less water. Growing in controlled environments means no need for harmful pesticides, no animal manure or fertilisers are used, nor peat or other harmful extracts from soils (CO2 is used to support growth). The quality and nutritional value is managed and improved. As, if (and only if)  grown in airlocked systems,  no water washing is required, this extends shelf life and reduces food wasted. Lastly growing food nearer populations irrespective of the environment or local weather reduce transportation costs, time and Co2 emissions. And whilst they do consume relatively large amounts of electricity, this should be compared with traditional gas heated green houses and associated CO2 emissions of transportation and storage or to extensive agriculture where fertilizers, tractor use and transport to sales all contribute to higher CO2 footprints.

With global population forecasted to reach 10B people by 2050 the demand for more food is pushing us past the limits we can convert more forests to farmland, the use of fertilisers, and availability of fresh water. On paper at least vertical farming seems to offer the solutions to an efficient food industry, which is estimated to contribute to 30% of all anthropic greenhouse emissions, 70% of freshwater consumption and 40% of land use. So the question is why is it not bigger, and why a decade after the first vertical farm opened in Singapore are not more financial investors, governments and food companies all supporting and investing in this space?

There are a number of questions which the progress of vertical farms like Yasai and One Farm will answer in the next few years, for investors with an appetite for investing in a relatively new field of food production, there should be healthy returns, but despite the advances in scientific research and pilots this is still relatively early and carries similar risks to investments in new technology and business production models

The produce today is still relatively niche, but growing

To date, vertical farming has focused to date on mainly on microgreens, leafy greens (e.g. lettuce), herbs (mint, dill, chives sage etc), partly due to the fact that these are easier to grow in controlled environments, are imported in northern Europe from warmer climates and have a higher price point.

Demand growth and pricing is evolving

Whilst there is clearly demand for vertical farm produce, as proven by Yasai (who in pilot mode are generating around Euro 200k p.a. through sales to Co-op) and the large more establish farms like Bowery and Plenty in the US, or Jungle in France. The question is the pace of growth and will the price of production as these organisations scale fall below the Euro 50/kg price of comparable imported produce. The industry is very much in investment model, and few or no institutions offer a clear forecast on what the market size could be.

Consumer acceptance and branding is evolving

The phrase “Vertical Farming” might be a good descriptor for the original skyscraper vision, but it has little consumer recognition. Yasai, like others,  use their own brand focusing on health and taste advantages as well as home produced, and are already supplying to 80 stores in Switzerland with plans to expand both domestically and abroad, One Farm has created an trademarked the brand “Wholly” as well as plan to distribute through UK supermarkets and other distributors using their brand.

Whilst the benefits to consumers and the environment are well understood, organic produce in the UK and the US, growing at double digits, is still less than 5% of total consumer demand. Just because something is better (for animals, the planet and our nutrition) it does not mean more consumers will buy especially if priced at a premium or with lower shelf life. Several companies claim improved nutritional benefits of the indoor produced food. Kalera, operating vertical farms across several US and European locations, claim between 50-200% increase per gram in elements such as Vitamin A, K, Folate and Calcium. It will be interesting to see if these benefits translate to a price premium for ‘vertical’ food, or as Yasai plan, as yields improve they will be offered at a lower price than traditionally produced and imported produce. It will be also important to see how organic and vertically produced food align and contribute to each other’s success - the answers to these questions are yet to be determined.

Yield efficiency improvements need to be delivered

Both Yasai and One Farm are promising yields far higher than traditional farming, but with the increased capital investment a financial return and profitability in a 5 year window requires yields to improve from around 30 kg/m2 of produce per year to even 50-60 kg/m2. This improvement partly comes from scale and technology investment, improved automation and processes. Whilst this improvement seems a tall order, 30 kg/m2 is already 20-30 times comparable yields from traditional farming methods and One Farm claims this level of yield already in their pilot.

Inflating Input costs, particularly electricity, needs to be controlled

With wholesale electricity costs increasing 2-3 times in Europe both Yasai and One Farm have been challenged on their cost forecasts as they seek to attract investors. Both companies use renewable power. Yasai say 100% renewable but it is not clear if this is self-generated or purchased, One Farm intend to partially meet their power demands through on site solar. Sky Greens in Singapore use natural light and water power to rotate food on towers. Both Yasai and One Farm can use long term fixed contracts as well to see through the price rises predicted for the next 12-18 months.

Government and Regulatory support is coming, slowly

Singapore, unlike many European governments do not have to rely on the political support of large farming population. Other countries have to balance the need of the traditional farming community and new innovations, which might explain reluctance to embrace and support the industry. This could change, what is important for governments is that these are complimentary not competing methods. Vertical Farming advocates argue that vertical farming will not displace the farming communities of Europe but be a complimentary replacement for high cost, high imported and high carbon ways of production and replace food supply outside natural growing seasons (the Uk imports 90% of all spinach sold on the shelves)

Unlike the organic certification there is yet no similar certification for a vertical farm in Europe where organic refers to solid base production. There is no reason why vertical farming produce cannot be organically certified, as has been done in Singapore and in the USA where this has now changed to to include vertical farming where pesticides are not used. This kind of move in Europe or the UK would be of great benefit.

Several countries, like Switzerland, are offering R&D grants which have been used to fund start up (Yasai has received Euro 4.3m to date) and this is just one example.

Conclusion

Traditional farming methods often struggle to attract large capital investment and new innovation. For investors, the new innovation of vertical farming offers attractive returns from a high capital and potentially highly scaled business model, if the assumptions and improvements in yields and costs are delivered. For the planet, the advantages are enormous, however even if it grows to ten times the size in the new few years it is unlikely that this will replace large scale traditional commodity product methods and will only make a small dent in the 13.5 GTonnes IPCC scientists estimate AFOLU (Agriculture, Food and Other Land Use) can contribute to overall GHG reduction. To really move the needle, the investment in Vertical Farming needs to be complimented with major investments, incentives and demand for alternative and regenerative farming methods, reducing carbon emissions and reducing impact to the natural system.

 The author is the former founder and CEO of Refinitiv, and chairs the TNFD (Task Force on Nature-Related Financial Disclosures) as well as an investor in natural capital.

 The World’s emerging and established Vertical Farms

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