How To Make Towering Profits From Vertical Farming

How To Make Towering Profits From Vertical Farming
Reda Farran, CFA

over 2 years ago5 mins

  • Vertical farming is a method of growing fresh food indoors in vertically stacked trays.

  • It has many advantages including less water and land usage, higher food production, lower emissions and transport needs, zero pesticides and herbicides, and the ability to grow food all year round in an environment immune to extreme weather events.

  • But vertical farms are much more expensive to operate because of all the energy costs associated with powering the necessary growing 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 is a method of growing fresh food indoors in vertically stacked trays.

It has many advantages including less water and land usage, higher food production, lower emissions and transport needs, zero pesticides and herbicides, and the ability to grow food all year round in an environment immune to extreme weather events.

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

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

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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 indoors in vertically stacked trays without soil, 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…

What factors are driving vertical farming?

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 can produce a lot more food than traditional farms because things like light, water, climate, and nutrients are all optimized to grow plants 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. 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 operated in closed environments, there are no runoffs of agricultural chemicals into the environment – a major cause of arable land loss.

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.

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 the matter is only going to get worse as the population shifts from rural to urban areas. These challenges were highlighted this year when pandemic supply disruptions and unreliable harvests pushed global food prices to a six-year high in January. But vertical farms are built directly in cities, drastically reducing transport time and costs for the end consumer.

Greenhouse gas emissions

Food production accounts for about a quarter of the world’s greenhouse gases 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.

Sounds great, but what’s the catch?

One word: cost.

Vertical farms are much more expensive to operate because of all the energy costs 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 going to have to get a lot cheaper.

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.

The one stock I did manage to find is Kalera (ticker: KSLLF), a small Norwegian vertical farming company that made slightly less than $1 million in sales last year. But once all of its new facilities are operational in early 2022, production capacity is expected to increase by 12 times. That’ll position the company for strong sales growth, but whether it can turn a profit remains to be seen.

Another company on my radar is US-based AeroFarms – one of the world’s biggest and best-known vertical farms, which counts firms like Whole Foods and Amazon Fresh as its customers. The company is in the process of going public by merging with a special purpose acquisition company (SPAC) called Spring Valley Acquisition (ticker: SV) in a $1.2 billion deal.

AeroFarms is only expected to make a couple of million dollars in sales this 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. If it can achieve that, it would be an impressive feat. But as always, you should take company projections with a grain of salt.

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. Two such companies 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 almost tenfold from 2016 to 2020, and now represent almost 30% of the company’s total sales.

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

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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