Hard Times for Indoor Agriculture

Only a couple of years ago, indoor agriculture was heralded as a potentially important component of the world’s future food supply, a way to provide locally raised fruits and vegetables in urban areas, a means to reduce the impact of outdoor agriculture on the environment, and an answer for mitigating food safety problems that still plague traditionally grown produce.

The long-term promise might still be there for an industry that has scratched out its early existence growing mostly leafy greens, herbs, tomatoes, and strawberries. But the current new reality is that the indoor ag business has fallen rather abruptly into disarray, with some important startups in bankruptcy, major initial investors withdrawing or pulling back on their support, and surging energy costs proving an Achilles’ heel for some prominent business models.

At AppHarvest, a vast controlled environment agriculture startup in Kentucky’s Appalachia region, CEO Jonathan Webb recently was ousted as the company slashed expected sales in half, widened its anticipated net losses, delayed opening new strawberry farms, and clashed with lenders. AeroFarms, which had built a technology-dense vertical farm in the heart of Newark, N.J., canceled plans for a $1.2-billion IPO last summer and filed for bankruptcy even in the wake of a new development partnership with Cargill. Infarm, a European vertical farming company that had raised more than $600 million in venture capital, laid off more than half its workforce in the past year and downsized operations.

What happened? As with many breathless bets on new technologies, enthusiasm about the promise of indoor agriculture got ahead of the realities it was delivering.

It’s the savior complex,” says Henry Gordon-Smith, founder and CEO of Agritecture, an advisory firm for the controlled environment agriculture industry. “Vertical farming had its moment because it fits so well into the mindset that we’re running out of food, water, and land. People drank the Kool-Aid as with so many other tech sectors.

“The technology took center stage and became propped up by voices in the sector combined with new startups getting tons of money,” says Gordon-Smith. “So the incentive to stretch the truth and greenwash and hype it up externally became very visible. Everyone started exaggerating because they were competing for VC (venture capital) money where they had to tell the story.”

Cindy van Rijswick, senior analyst for fresh produce for Rabobank, additionally cites “the fear of missing out” for investors in indoor ag. “Once Bill Gates started investing in this technology, others though this must be something big and real and they started investing. And the people not investing began wondering, ‘Did I miss something big?’”

Coming Up Short

The realities delivered by indoor agriculture so far have fallen short of expectations for a few reasons. The general economy has been a hindrance, with food inflation making even upscale consumers more sensitive to the premium prices usually charged for indoor-grown produce. Meanwhile, high interest rates made continued venture capital financing difficult in the face of little initial profitability for indoor-farm investors. Another obstacle has been increasingly expensive inputs for electricity for the innumerable LED growing lights at the heart of these operations, as well as for water.

Some investors got sucked in by the sector’s initial investments in cannabis facilities in states that legalized recreational marijuana, where multimillion-dollar, pristine growing environments for weed often also included tomatoes and other crops. “The costs in those facilities are just too high for low-value crops,” says Roger Royse, a partner in the Haynes and Boone law firm and an experienced advisor on tech investments.

And in general, some venture capital investors that were accustomed to evaluating pure tech plays got out of their depth in assessing the operational challenges and retail potential for indoor ag startups. “Some of these new players just started this adventure without having the more traditional horticulture knowledge you need to grow the crops and spent more time on hiring people to do presentations for investors,” van Rijswick says.

Now, the industry is rationalizing and consolidating, with, for instance, AppHarvest having sold its big indoor farm in Berea, Ky., in a $127 million sale-leaseback with Mastronardi Berea LLC, a joint venture with Mastronardi Produce, which distributes AppHarvest’s goods, and COFRA Holdings.

Some indoor ag pioneers continue to prosper. Apparently they include Plenty, which produces greens in California, is doubling its retail presence in the state in Whole Foods Market stores and others, and is partnering with Driscoll’s to build a vertical farming strawberry-growing facility in Richmond, Va.

For the longer term, van Rijswick says the industry will have to find a cost-efficient way to produce staples such as grains, rice, and potatoes—the world’s most important feedstocks. Gordon-Smith believes survivors are “entering a slope of enlightenment” where they’ll learn from previous mistakes. And Royse says the sector “is going to reset.”

“Next,” he says, “we will see a lot of microfarms, mom-and-pop lifestyle businesses, and within 10 years we will see very large farms. It’s an opportunity for consolidation and building scale.”ft