Why does vertical farming fail, or why do companies fail in this area? In today's post, I want to write about these issues as an advocate of sustainable and innovative farming practices. I've been doing a lot of research on this concept and have discovered some of the challenges it faces. In my last post, I already talked about the challenge of Vertical Farming and Staple Food written.
For the sake of transparency, I'm involved with the Association for Vertical Farming.
What is Vertical Farming?
For those unfamiliar with the term, vertical farms are agricultural facilities housed in multi-story buildings. They allow food to be grown directly in urban areas where space is often at a premium. A fascinating idea, isn't it?
So why do so many fail?
In recent months, there have been many companies (Upward Farms, Future Crops, AeroFarms), which unfortunately went bankrupt (Verticalfarming Daily, Bloomberg), and for various reasons; not every company publicly states the reasons, and in retrospect it is easy to say what should have been done better. Nevertheless, the industry is definitely struggling with this, because the fear of a bubble bursting, similar to the Dotcom bubble in the 2000s is quite justified, because there were many investors in the past who pumped large sums of money into start-ups and companies. The bursting of this bubble is imminent if too many promises are made and the reality cannot reach these promises.
The answer to this question, why companies fail now, is complex and includes several aspects, not all companies are affected by all points and depending on the situation and profitability of the company, one or the other point is more important:
1. High operating costs
Like any business, vertical farming companies have operating costs, and as is common in the high-tech sector, there are high operating costs:
- Energy costsLighting, temperature and humidity control usually require a lot of energy. LED lights are often used because they are more energy efficient, but the energy cost remains a significant item and this is difficult to reduce because plants need light for photosynthesis.
- Water costsVertical Farming often uses hydroponic or aeroponic systems that require a continuous water supply. Although the vertical farming methods can save up to 90% water compared to conventional farming, the plants need the water to grow, and the air also absorbs moisture, so over time, water must be replenished here too, although these costs are almost negligible compared to energy costs, but should not be forgotten.
- Nutrient Costs: The nutrient solutions supplied to the plants can be expensive, especially if specialized or organic solutions are used.
- Personnel costs: Depending on the automation of the system, labor costs may vary. In some highly automated systems, labor costs could be relatively low, while in others more human labor is required. In addition to energy costs, labor costs are a big part, because while field labor is cheaper in conventional farming, higher skilled labor is usually needed in the indoor area of a vertical farm. Scientists do research, technicians and engineers keep the whole thing running, and you also need people to do the harvesting, packing and transportation. As far as I know, as of 2023, there is no vertical farm that automates 100% and does not operate without human maintenance.
- Rental or real estate costsSpace costs can be significant, especially in urban areas where real estate prices tend to be higher. Especially in areas where space is expensive and vertical agriculture uses the main argument of growing food vertically to save space, the disadvantage is that the cost of the horizontal space required is still higher than in rural areas. As of August 2023, Numbeo states, that the price per square meter of space in New York City costs between 10,000-15,000 US dollars, and that for 1 square meter.
- Licensing and insuranceDepending on local laws and regulations, there may also be costs for permits, licensing and insurance. Here, especially SaaS - Software as a Service platform fees are incurred if you need certain software solutions. Of course, this depends on the individual company. However, this cost item does not take on an overriding role.
2. Energy challenges
The need to provide artificial light and air conditioning to allow plants to grow in a controlled environment can drive up energy consumption.
In the societies that rely on renewable energies, this can be a difficult problem to overcome, because these are Co2 free, and cheap, and yet they cause but large costs, it seems paradoxical, but this can be explained. Regenerative energies are cheap in operation and construction, but depend on the energy sources wind and sun, no wind blows, and shines no sun, so the electricity is expensive, because in one fell swoop, the electricity becomes a scarce commodity, in the power grid then reserve power plants are ramped up and energy capacity from abroad purchased. A quasi black day on the power exchange in Europe was the 16.09.2022, on that day has a megawatt hour MWh, cost more than 500€ (Source).
Rising electricity prices are a symptom of the effect of renewable energies, as they produce irregularly and then sometimes too much at once, but this electricity must also be distributed so that the grid is not overloaded. These measures are called redispatch and cost thousands to millions of euros.
Since the industry is a high-tech industry and its profitability depends on the price of electricity, my prediction is that these companies will find it more difficult to maintain their profitability, especially in countries with an increasing share of renewable energies.
Vertical farms consume, depending on source, 38.8 kWh per kilogram of product. A significantly higher average energy consumption compared to conventional greenhouses, which consume an average of 5.4 kWh per kilogram.
The problem is, when the price of electricity in Germany is at is above 30 cents per kWh, then the production price is €11.64. Although there is an industrial electricity price for industry, the dependence of profitability is primarily shown by the electricity price. With an electricity price of 17 cents per kWh, the production price, considered only from the electricity would be 6,59€/kg. This is a price which as of 2023 is comparable to meat from the supermarket.
However, there are also solutions here, so research can be done to breed plants that are More efficient with less light get by, or where less light output is needed, less power consumption means lower costs. Also the possibility of Daylight use in the interior is an underestimated investment, as far as I know, only offers HyPAR Sungrown CEA such a solution in the industry.
3. limited plant selection
Vertical farms can technically grow anything, wheat, potatoes, rice, corn, etc., but just because it's technically feasible doesn't mean it's economical. Unfortunately, that's exactly the sticking point, because higher priced products, plants whose fruit, have a lot of calories, can't be grown economically enough. More about this in my article about Vertical Farming and Staple Food. The choice of plants is therefore limited due to the necessary economy, in addition, each plant species needs different light, depending on the growth phase, sometimes more red, more blue, the mixing ratio is not freely selectable and depends on the finished LED modules.
4. non-sustainable financing model
From what one could gather from the trade press in recent years, money and financial injections have been needed again and again, and investors have been sought. The problem is, if you are already dependent on financial injections several times, that is a warning sign that something is not working properly.
Because while the farmer in the field is dependent on nature and the weather (pesticides and fertilizers excluded), he is virtually not dependent on the price of electricity, but on diesel for his agricultural machinery. If one would want to produce more, one could simply buy/lease more fields, and sell the harvest, that is probably also cheaper than to build a building especially for it in order to cultivate plants.
But a vertical farm has to pay bills every month, large sums for electricity, a farmer doesn't have that. And especially for investors, you need to make profit as soon as possible, pay back loans and while it is easier for IT companies in the field of SaaS platforms through monthly subscription, you still have to convince customers to buy products from a Vertical Farm, or to get this product to retail first. And especially in times of recession, inflation and stagnant economy, people spend less money and have to save more, and there also saves on food.
I do not want to talk badly about the industry, but it seems to me that quite a few companies hide the circumstances for investors behind embellished marketing terms, in order to be able to convince. This is wrong and testifies to the fact that you have no sustainable financing model, if you always need investors to keep everything running, you could then subsidize the same state, like in Germany subsidizes organic farming will. Nevertheless Vertical Farming NOT a Scam and there are always people who will try to lure money from ignorant people by false promises. Vertical farming is a serious industry and there are many other companies which like it.
Are vertical farms doomed to fail then?
Not at all! I strongly believe in the potential of vertical farming and see the problems mentioned as challenges that can be solved. With careful planning, investment in research and development, and implementation of sustainable practices, vertical farms can be an important part of our future. However, it also requires a clear view of reality, not dream castles fantasies to sell, but also show that there are challenges that have not been solved so far.
Even if this article is rather negative, it is not to harm the idea itself, because the idea of growing food in urban areas, locally, to save emissions, resources and costs, is important for the future.
In a later article I will present solutions on how to make a Vertical Farm better