Don’t Look Down: The Rise And Rise Of Vertical Farming

Don’t Look Down: The Rise And Rise Of Vertical Farming
Reda Farran, CFA

over 1 year ago5 mins

  • Vertical farming uses less water and land, produces more food, emits fewer emissions, uses no pesticides and herbicides, and can grow food all year round in an environment immune to extreme weather events.

  • But vertical farms are much more expensive to build and operate because of all the energy costs associated with powering the necessary equipment.

  • You can invest in the industry by investing in vertical farming companies, or in firms that manufacture and sell the necessary growing equipment.

Vertical farming uses less water and land, produces more food, emits fewer emissions, uses no pesticides and herbicides, and can grow food all year round in an environment immune to extreme weather events.

But vertical farms are much more expensive to build and operate because of all the energy costs associated with powering the necessary equipment.

You can invest in the industry by investing in vertical farming companies, or in firms that manufacture and sell the necessary growing equipment.

Mentioned in story

The planet is going through some stuff right now, and we’re going to need innovation in every sector to fight back. Enter vertical farming: a way of growing fresh food in vertically stacked trays without soil indoors, which one research consultancy predicts could grow 25% a year on average to hit $32 billion by 2030. And if you want to harvest some of those profits for yourself, here’s what you need to know…

Why is vertical farming set to boom?

Population growth

According to the World Resources Institute, food production will need to increase by 69% by 2035 to feed the growing population and expanding middle class. Vertical farms produce higher yields of food than traditional farms, because things like light, water, climate, and nutrients are all optimized to grow plants all-year round at much faster rates.

Water scarcity

The United Nations estimates that global water supply will fall 40% short of demand by the end of the decade. A big part of that is due to farming, which is the thirstiest user of our precious water supplies: 70% of global freshwater is used for agriculture. Vertical farming uses as much as 90% less water than traditional farms because the same water can be recycled time and again through the growing system.

Arable land loss

The world has lost a third of its arable land – that is, land capable of growing crops – in the last 40 years due to soil erosion and contamination. Vertical farms use less than one percent of the land of a field farm since plants are stacked on top of each other in tall-built environments. And because vertical farms are closed-loop systems, there are no runoffs of agricultural chemicals into the environment – a major cause of arable land loss, water pollution, and more.

Social awareness

Consumers are increasingly concerned with sustainability and chemicals in their food. According to one analysis, a whopping 70% of fresh produce sold in the US had pesticide residues on it even after washing. Since indoor vertical farms are completely sealed off from the outside environment, there are virtually no pests – and no need for any pesticides or herbicides. In fact, the plants can be grown in such clean conditions that there’s no need to wash them before eating.

Climate change

The frequency of extreme weather events such as droughts and floods has surged fivefold over the last 50 years. These events can have big negative effects on crop yields and harvests. But food produced in vertical farms is grown all year round in an indoor environment that's immune to weather and seasonal changes.

Supply chain risks

Around 14% of the world’s food is lost during transportation, and that’s only going to get worse as the population shifts from rural to urban areas. These challenges were highlighted over the past two years as pandemic supply disruptions, unreliable harvests, and the outbreak of war pushed global food prices to an all-time high in March. What’s more, the Russia-Ukraine conflict and resulting impact on crop and vegetable oil supplies heightened governments’ focus on food security. Vertical farms are built directly in cities, drastically reducing transport time and costs for the end consumer and improving a country’s food security.

Greenhouse gas emissions

Food production accounts for about a quarter of the world’s greenhouse gasses emissions. Vertical farming reduces emissions caused by plowing fields, weeding, harvesting, and transporting the final produce since there’s no need to plow, weed, or harvest fields, nor to transport the goods over long distances.

Sounds great, but what’s the catch?

One word: cost.

Vertical farms suffer from high start-up costs and big energy bills associated with powering equipment like growing lights, water pumps, heaters, sensors, humidifiers, and more. Sure, vertical farming might be able to help solve several of the world’s most pressing problems, but at what price? Are consumers really willing to pay multiple times more for a pack of greens grown in a vertical farm compared to one grown in a traditional farm?

So for vertical farming to deliver on its lofty aspirations, it’s either going to have to get a lot cheaper, or it’s going to need to capture some of the subsidies given to traditional farmers, on the basis that it has much lower environmental costs.

What’s the opportunity here?

There aren’t many pure-play vertical farming stocks (for now at least), which makes investing in the industry difficult.

US-based AeroFarms is one of the world’s biggest and best-known vertical farms, and counts firms like Whole Foods and Amazon Fresh as its customers. AeroFarms only made a couple of million dollars in sales last year. But according to the company’s own projections, it’s expecting to make more than half a billion dollars in 2026 and to be profitable the year before that. Take its projections with a grain of salt, but it would be an impressive feat if it can achieve them.

The company was in the process of going public by merging with a special purpose acquisition company (SPAC) in a $1.2 billion deal, but called off the deal last October for unspecified reasons. Still, it’s worth keeping the company on your radar in case it makes another attempt at going public. Other high-profile vertical farming firms worth keeping on your radar (in case they go public one day) include Bowery Farming, Plenty, Crop One, Kalera, Infarm, and Agricool.

There is another, more tangential way to invest in the vertical farming industry: investing in companies that manufacture and sell the growing lights, climate control devices, water pumps, irrigation tools, and so on. You can think of this as a “pick-and-shovel” play: investing in firms that provide the tools needed for an industry to produce a final product, rather than in the companies that offer the final product itself. That could be a less risky way to invest in the industry until it proves it can be sustainably profitable.

Two companies that stand out here are Hydrofarm (ticker: HYFM) and Scotts Miracle-Gro (ticker: SMG). The former is a pure-play company, whereas Scotts Miracle-Gro also sells consumer lawn and garden products. Still, its business segment focused on hydroponics – the name of the growing method used in vertical farms – has seen sales grow more than tenfold from 2016 to 2021, and now represents 30% of the company’s total sales.

As always, do your own research before you invest, and good luck – may your profits forever grow vertically.

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