indoor crop production feeding the...
TRANSCRIPT
INDOOR CROP PRODUCTIONFEEDING THE FUTURE
MARCH 2015
About the White Paper
Thepurposeofthispaperistoconsolidateknowledgeonthecurrentstateoftheindooragricultureindustry,demonstrateitsgrowingimportancetoourfoodsystem,andpresentthecaseforitslong-termeconomicviability.Ourtargetaudienceisthosethatdonotknowtheindustrywell;thepaperisintendedasanintroductiontoindooragriculture.Asitsauthors,wedonotconsiderourselvesexpertintheindustry,norareweboundbyanylegalorcontractualrelationshiptooneanother.Wecametogethertocreatethispaperoutofasharedbeliefthat,bybetterunderstandingthecurrentstateandtrajectoryoftheindooragricultureindustry,wecancollectivelyworktoexpediteitsgrowthandcreatenewopportunitiesforeconomicgainaswellaswide-scaleimprovementintheUSfoodsupplysystem.
About the Authors
NewbeanCapitalisaregisteredinvestmentadviserthatmanagesearlystageventurecapitalmandatesforinstitutionalinvestors.Itsfounder–NicolaKerslake–hasalongstandinginterestinagricultureinvestment,havingpreviouslycoveredagriculturestocksasanequityanalystandmanagedinstitutionalinvestmentportfoliosthatcoveredthesector.ShefoundedtheIndoorAg-Coneventthreeyears’agotoprovideameetingplaceforthosewhoareaspassionateassheisaboutthepromiseoftheindooragricultureindustry.
[email protected] www.newbeancapital.com
LocalRootsisathoughtleaderinindooragriculture,dedicatedtosolvingsystemicfoodchaininef�icienciesthroughinnovationandtechnology-drivensolutions.LocalRootsiscurrentlypioneeringmodularcontrolledenvironmentagriculturetechnologiesthatenableyearroundcropproductioninanyclimate,inanygeography.LocalRoots’Missionistoprovideeveryoneaccesstofresh,healthy,andaffordablelocally-grownproduce.
ProteusEnvironmentalTechnologiesprovidesbothmarket-basedsolutionstofacilitatethesuccessfulcommercializationofnewtechnologiesaswellasconsultingservicesthathelpitsclientstoimprovetheirbottomlinethroughthecarefulimplementationofsustainabilitytechnologiesandpractices.Weprovideclientswithacomprehensiveanalysisofsustainabilityoptionsthatisweightedbyboththeeconomicandsocietalbene�its.Commercializationandconsultingde�inesentrepreneurialstrategiesforachievingsustainabilitygoalsandcanhelpimplementthechosenstrategies.
[email protected] www.proteusenv.com
Acknowledgements
Theauthorswouldliketothankthefollowingfortheirinputintothispaper:MeganKleinatFarmedHere,ChrisHigginsatHortAmericas,AndrewMefferdatJohnny’sSelectedSeeds,WendyMilletandDougMillaratTomKatRanch,MattRoyatUSFoods.
Disclaimer
ThispublicationhasbeenproducedbyNewbeanCapital,aregisteredinvestmentadviser.Readershipofthispublicationdoesnotcreateaninvestmentclient,orotherbusinessorlegalrelationship.Itprovidesinformationabouttheindooragriculturemarkettohelpyoutobetterunderstandthisindustry.Thispublicationdoesnotpurporttoprovideinvestmentadvice,normayitberelieduponasasubstitutefor,speci�icinvestment,legalorotherprofessionaladvice. You should seek such advice only from a qualifiedprofessional.
NewbeanCapitalhasactedingoodfaithtoprovideanaccuratepublication.However,NewbeanCapitaldoesnotmakeanywarrantiesorrepresentationsofanykindaboutthecontentsofthispublication,theaccuracyortimelinessofitscontents,ortheinformationorexplanationsgiven.NewbeanCapitalhasnoobligationtoupdatethisreportoranyinformationcontainedwithinit.
NewbeanCapitaldoesnothaveanydutytoyou,whetherincontract,tort,understatuteorotherwisewithrespecttoorinconnectionwiththispublicationortheinformationcontainedwithinit.Tothefullestextentpermittedbylaw,NewbeanCapitaldisclaimsanyresponsibilityorliabilityforanylossordamagesufferedorcostincurredbyyouorbyanyotherpersonarisingoutoforinconnectionwithyouoranyotherperson’srelianceonthispublicationorontheinformationcontainedwithinitandforanyomissionsorinaccuracies.
PAGE 3 | INDOOR CROP PRODUCTION | FEEDING THE FUTURE | MARCH 2015
ndooragricultureisquicklygainingmomentumintheUnitedStates.Indoorfarmsmostlyuse Ifarmingtechniquesandtechnologieswhichallowforimprovedcontroloverthevariablesinvolvedin
thegrowingofproduce.Weestimatethatthereare15commercial-scaleverticalfarmsandrooftop
greenhousesinNorthAmericatoday,andthatafurther30willbeaddedin2015alone.Withatotal
addressablemarketsizeofover$9bn–or17xthecurrentUSmarketsize-indooragricultureispoisedto
bethenextmajorenhancementtotheAmericanfoodsupplychain.
Stronggrowthin“localfood”demand,themarketforwhichhasexpandedfromanestimated$1billionin
2005tonearly$7billionlastyear,hasmeantauniquemarketentrypointforindoorfarms’higherprice-
pointproducts,whetherthismeansleafygreensharvestedthatmorningforlunchserviceormicrogreens
growntoorderforalocalsupermarket.Whileseasonality,soilconditions,andaccesstolandhave
traditionallymadeyear-roundlocalproducesourcingimpossible,indooragricultureiswellpositionedto
satisfythelargelyunmetneedforlocalproducebygrowingyear-roundinanyclimate.
Indoorfarmshavehistoricallystruggledtocompeteoncostwithoutdoorcounterpartsbut'�ieldparity'–
growingatthesameperplantcostasinoutdoorfarms-isquicklybecomingarealitythankstorapidfallsin
technologycostsinareasasdiverseaslighting,seeddevelopmentandcontrolsystems.Continuedadvances
intechnologyaredrivingtheindustrytowardswide-scaleeconomicviability.
Indoorcropproductionhassecondarybene�itsthatincreaseef�iciencyinournationalfoodsupplychain.
Indoorfarmscantheoreticallybelocatedanywhere,includingretailerparkinglots,urbanrooftops,vacant
lots,andrurallocations.Farmerscanmore easily grow“justintime”andcansupplementoutdoorgrowing
bysupplyingproduce“offseason”.Combined,thismeanslowertransportationcosts,lessspoilageandbetter
qualityproduceonthesupermarketshelf.Ithelpssupermarketscutthe$15bntheyloseannuallyonunsold
andspoiledproduce.This�lexibilityhasencouragedsupermarketchains,restaurantsandcampusestosource
producefromindoorfarms.
Investorstoohaveanewfoundinterestinthesector,withabout12%ofglobalagtechinvestmentdollars
goingintoindoorcultivationsystemslastyear.IntheUS,atleast$32millioninventurecapital-likefunds
wasinvestedinindooragriculturein2014,morethan60%ofthetotalraisedfrom2011onwards.
Likemanyyoungindustries,theindooragriculturesectorlookstoavarietyofstakeholderstoaidits
expansion.Localgovernmentshavearoletoplayinclarifyingregulationandzoningforindoorfarms,
whiletheirfederalcounterpartscanprovidebetterdataandextendexistingfundingprogramstothe
indoorsector.Chefscanusetheirvoicetoincorporateindoorcropsintomenus,toeducateconsumerson
itsbene�itsandtoworkwithfarmersoninnovative�lavorpro�iles.
Indoorfarmingwillneverreplaceconventionaloutdoorfarmingmethods.Itwillinsteadaugmentthefood
chaintocreateadiverse,distributedsystemmoreresilienttosupplyshocksandbetterpreparedtomeet
thedemandsofagrowingglobalpopulation.
EXECUTIVE SUMMARY
©NewbeanCapital2015
Executive Summary
A. An Introduction to Indoor Agriculture
Diagram One: Indoor Agriculture Industry Timeline
Diagram Two: Indoor Agriculture Industry By Structure
Diagram Three: USA’s Large Greenhouse Companies
Diagram Four: Canada’s Large Greenhouse Companies
Diagram Five: US & Canadian Commercial Scale Vertical Farms
B. Primary Factors Driving Indoor Agriculture Growth
Diagram Six: State Fruit & Veggie Production As Share of Demand (%)
Case Study: Lufa Farms Brings Local Food to Montreal
C. The Technologies Behind Indoor Crop Production
Diagram Seven: Hydroponic System Components
Case Study: The Rise of the Greenhouse Tomato
Diagram Eight: Retail Tomato Dollars
D. Secondary Benefits of Indoor Crop Production
Diagram Nine: Non-Organic Green Leaf Letuce Prices By Hub, $/Carton 24S,Nov 2012-Nov 2014
Diagram Ten: Year on Year Changes in Incidence of Laboratory-ConfirmedBacterial Infections, US, 2013
Case Study: Feeding A Grass-Fed Herd In A Time Of Drought
E. The Indoor Agriculture Investment Landscape
Table Eleven: Venture Capital Investment In North American Indoor Agriculture
F. Expediting Industry Growth
Case Study: How an Urban Ordinance Fueled Chicago’s Indoor Agriculture Industry
G. The Future of Indoor Crop Production
Appendix: Calculating the Addressable Market for Indoor Crops
Table Twelve: Production Value By Crop ($1,000)
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PAGE 5 | INDOOR CROP PRODUCTION | FEEDING THE FUTURE | MARCH 2015
TABLE OF CONTENTS
INDOOR CROP PRODUCTIONFEEDING THE FUTUREMARCH 2015
An Introduction toIndoor Agriculture
A
A. AN INTRODUCTION TO INDOOR AGRICULTURE
Between1930and2000,UnitedStatesagriculturaloutputquadrupledwhiletheUnitedStatesDepartment
ofAgriculture’s(USDA)indexofaggregateinputs(land,labor,capital,andothermaterials)remained
essentiallyunchanged.1Theprimarydriverofincreasedproductivityhasbeentechnologicalprogress,
fueledbyrapidimprovementsinirrigationtechniques,developmentofsyntheticnitrogenfertilizers,
widespreaduseofpesticides,advancedplantbreeding,andahostofotherinnovations.
IndoorAgriculture,onesuchfamilyoftechnologies,hasreceivedincreasingattentionoverthepastdecade
foritsabilitytosupplementfoodsystemsinasustainablemanner.Businesseshavestartedtacklingthe
challengesofyear-roundlocalfoodproductionbydesigninganddeployingsystemsimpervioustoweather
andotheroutdoorenvironmentalconditions.
Indoorproductionofcropsisnothingnew;thefoundationsofmoderngreenhousesdatebacktoRoman
timesasisshownindiagramoneoverpage.Sincethecreationofkeyenablingtechnologiesinthe1960s,
thegreenhouseindustryhasgrowntobeasigni�icantpartoftheUSproducesupplychainandgreenhouse-
grownvegetablesareprevalentinallnationalsupermarketchains.Insulatingthemselvesfromtheoutside
environment,thesefarmsextendthegrowingseasonbeyondthelimitsofconventionalagriculture.The
freshtomatoindustry,forexample,hasexperiencedrapidtransformationoverthepasttwentyyearsas
greenhouse-grown“on-vine”varietiesoftomatohavecapturedmarketsharefromtraditionaloutdoor
growersandforeignimportmarketsduringwintermonths.
Anewwaveofinnovationhasrecentlyemergedthataugmentstraditionalgreenhousetechnologiesby
extendingwidercontrolsoverthevariablesinvolvedwiththegrowingofplants–includinglight,water,
carbondioxide,airtemperature,nutrients,andavarietyofotherfactors.Thesesystemsarepredominately
soilless,insteadusinghydroponic,aquaponicandaeroponicgrowingtechniquestofacilitateplantgrowth.
Hydroponicsystemsworkbysubmergingplantrootsinaclosed-looprecirculatingwatersystem�illedwith
dissolvedessentialmineralsandnutrients.Aeroponicsystemsaresimilarinconcept,deliveringwaterand
essentialnutrientsinamisttoincreasewateref�iciencyandexpediteplantgrowth.Aquaponicsisa
couplingofhydroponicplantgrowingmethodswithconventionalaquaculture.
Theburgeoningindustryisreferredtobyanumberofdifferentnames:closedloopsystems,Controlled
EnvironmentAgriculture(CEA),plantfactories(acommonterminAsiainparticular),protected
environmentagriculture,soillessgrowing,urbanagriculture,verticalfarms.Forthepurposesofthispaper,
weusethetermindooragriculturetorefertothegrowingofproduceusinghydroponicandaeroponic
technologieswithingreenhouses,warehousesandcontainers.Itisanintentionallybroadde�inition
intendedtoencompassthefullrangeofsoillessgrowingtechniquesandenvironments,fromthemostbasic
greenhousetofullyautomated,remotelycontrolled,cleanroomsystems.
MARCH 2015 | PAGE 8
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
1 “USAgricultureintheTwentiethCentury”,BruceGardner,UniversityofMaryland,EconomicHistoryAssociation
th th16 - 19Centuries
stPre 1Century
1940s &1950s 1980s
1930s 1960s 2010s
FUTUREBiodiverse SystemsCost ReductionsSystem Automation
DARK AGESLittle progress untilEuropean Renaissancein 1300s-1500s
1970sHigh oil prices &pests cause manyoperations to fail
Developmentofgreenhouseindustryforinstance
1550>1stgreenhouseatabotanicalgardenbuiltatPadua,Italy
1720>1stgreenhousewithglassonallfoursidesbuiltinBoston,whichlaterbecomesgreenhousehub
1820>1stcommercialgreenhouse
1899>Totalgreenhousecropsof2,200acres&$2.25mninrevenue
Earliestexperimentationwithindoorgrowing
600-500BC>HangingGardensofBabyloncontainterracedgrowingareas
14-37AD>Off-seasoncucumbersgrownunder"transparentstone"fortheRomanEmperorTiberius
Extremeenvironmentgrowingforwealthypatrons:
e.g.hydroponicsusedbyPanAmAirlinestogrowproduceforpassengersonWakeIslandinthePaci�ic
Technicaldevelopments
e.g.inventionofthehose
1937>GerickeatUCBerkeleycoinsterm‘hydroponics’
Introductionofcommercialplasticsleadstocheapergrowingsystems&revivalofhydroponicsin1970s
e.g.vanWingerdenbuildsdoublelayerpolyethylenegreenhouse,nutrient�ilmtechniquedevelopedinUK
Fallinsolarpanel&LEDlightprices,plusdevelopmentof‘bigdata’abilities,enablesrejuvenationofindooragriculturetechnology
USmilitaryuseshydroponicstosupplytroopsinPaci�ic&inJapanpostwar
1946>54acrehydroponicfarmopensinChofu,Japan
Commercialhydroponicindustrygrows
1950s>CommercialhydroponicsoperationsappearinFrance,UK,Germany,Israel,Spain,Sweden,US,USSR
Increasedscienti�icinterestinhydroponics,NFTsystemspopularized&newsubstrates(cococoir,perliteetc)developed
1982>LandPavilionatEPCOTCenterfeatureshydroponics
1983>FirstplantfactoryopensinJapan
1985>NASA’sBreadBoardprojectbegins
DIAGRAM ONE: INDOOR AGRICULTURE INDUSTRY TIMELINE
Sources:MiscellaneousincludingUniversityofArizona’sControlledEnvironmentAgricultureCenter,ShizuokaUniversity,NewbeanCapitalanalysis
MARCH 2015 | PAGE 9
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
Ascanbeseenfromdiagramtwo,thewidespectrumofindooragriculturesystemscurrentlyonthemarketcanbesummedupinfourbroadcategories:
Ÿ HydroponicGreenhouses–likesoil-basedgreenhouses,thesegreenhousesgrowcropsinasinglelayer.Transparentroofsareemployedtoutilizenaturalsunlight,augmentedwithsupplementallightingduringdarkdaysandoff-peakgrowingseasons(i.e.winter).
Ÿ WarehouseFarms-industrialwarehousespaceisbuiltorretro�ittedwithhydroponic,aquaponicoraeroponicequipmentandcropsaregrownverticallytoachieveeconomiesofscale.Arti�iciallightingsystemsareusedatalltimes.
Ÿ ContainerFarms–standardized,self-containedgrowingunitsthatemployverticalfarmingandarti�iciallighting.Incontrasttocustom-designedwarehouses,containerfarmsstriveforstandardization.
Ÿ InHomeSystems–smallstandardizedgrowingunitsforusebyconsumersinhomesettings.Thesefocusmoreonconvenienceanddesignthanonyield,andarenotafocusofourpaper.
Asofthiswriting,theindooragricultureindustryisstillinitsinfancy.Itssubstantialmarketpotentialhasbeenonlymarginallypenetratedbytraditionalgreenhousehydroponics,whichin2013hadtotalrevenuesof$555mn2,withlargegreenhousesacrossNorthAmerica(seediagramsthreeandfour).Thoughverylittleindustry-widedataexistsonotherformsofindoorcropproduction,weestimatethattherearenomorethan50businessesintheUnitedStatesfocusedoncommercialscaleverticalfarming,mostwithsinglefarmlocationsandlimitedinvestmentfrominstitutionalcapital.Approximately15arecurrentlyfarmingatcommercialscale–thatiswithmultiplelargepurchasecontractssupportingadedicatedfulltimestaff;theirlocationsareshownindiagram�ive.Therewerenoneasfewasfouryears’ago.Eventhelargestplayersarestillsolidifyingbusinessmodelsandexploringstrategiesforrapidgrowth.
Butthisisquicklychanging,andthepotentialislarge.WeestimateanaddressableUSmarketsizeof$9bn,thecalculationforwhichisintheappendixtothispaper.Thediversegroupofindooragricultureentrepreneursisrapidlyexpanding,attractingthoselookingfornewsolutions,andinspiredtomeetthechallengesofcreatingthefoodsystemoftomorrow.
Thispaperwillprovideanoverviewoftechnologies,opportunitiesandmarketfactorsdrivingthisindustryforward,andoutlinewaysinwhichthisgrowthcanbebolsteredandaccelerated.ItwillfocusoncommercialfarmsusinghydroponicandaeroponicgrowingsystemsintheUS.
2 "HydroponicCropFarmingintheUS”,IBISWorld,January2015
MARCH 2015 | PAGE 10
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
DIAGRAM TWO: INDOOR AGRICULTURE INDUSTRY BY STRUCTURE
Source:Miscellaneouspublicsources,greenhousedatafromCuestaRobleConsulting,NewbeanCapitalanalysis
HYDROPONICGREENHOUSES
Likesoil-basedgreenhouses,thesegreenhousesgrowcropsinasinglelayer.Transparentroofsareemployedtoutilizenaturalsunlight,augmentedwithsupplementallightingduringdarkdaysandoff-peakgrowingseasons(i.e.winter).
250greenhousevegetablecompanies,(notallhydroponic)further20+greenhousesunderdevelopment
Houwelings,Mastronarti,NatureSweet,VillageFarms,Windset
VERTICALFARMS
Industrialspaceisconstructedorretro�ittedwithhydroponic,aquaponicoraeroponicequipmentandcropsaregrownverticallytoachieveeconomiesofscale.Arti�iciallightingsystemsareusedatalltimes.
15fullycommercial,atleast30moreinactivedevelopment
FarmboxGreens,FarmedHere,Gar�ieldProduceCo,GreenSenseFarms,PodPonics,
CONTAINERFARMS
Standardized,self-containedgrowingunitsthatemployverticalfarmingandarti�iciallighting.Incontrasttocustom-designedwarehouses,containerfarmsstriveforstandardization.
3commercial,atleast4-5othersinprocessofcommercializinge.g.LocalRootsFarms
Daiwa’sagri-cube,CropBox,FreightFarms,Growtainers,PureGenius(formerlyAquaHarvest)
IN HOMESYSTEMS
Systemstargetedatconsumersforsmallscaleinhomegrowth,whetherasfridgesinkitchensorasstandaloneunitselsewhereinthehome.
Atleast20offeringsomeformofin-homesolution
agrilution,GroveLabs,ModernSprout,UrbanCultivator,Windowfarms
Description
CompanyExamples
EstimatedNo. of Cosin US Market
MARCH 2015 | PAGE 11
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
Vertical Farm
MARCH 2015 | PAGE 12
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
HydroponicGreenhouse
MARCH 2015 | PAGE 13
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
DIAGRAM FOUR: CANADA’S LARGE GREENHOUSE COMPANIES
ONTARIO|65%OFCAPACITYLargeGreenhouseOperators:AgrivilleFarms,AMCOFarmsCliffordProduce,DiCiocco’sDoubleDiamondAcres,FlavourPictProduce,GreatNorthernHydroponicsMucciFarms,NatureFreshFarmsOrangelineFarms,PlatinumProducePrismFarms,RedSunFarms,SabelliFarms,SmartyBrand,St.DavidsHydroponics,Sunset,Suntastic,WestmorelandSales
BRITISHCOLUMBIA|29%OFCAPACITYLargeGreenhouseOperators:Canagro,Houweling,MeromFarmsMilleniumPaci�icGHs,RandhawaFarms,SouthAlderGreenhouses,Sunselect,VanderMeulenGreenhouse,VillageFarms.WestCoastVegetables,Windset
QUEBEC|5%OFCAPACITYLargeGreenhouseOperators:LesSerresduStLaurent
29%
65%
Source:DatafromCuestaRobleConsulting,analysisbyNewbeanCapital.Companieslistedarethosewithgreenhousesof30acresormore.FiguresareforshareoftotalCanadiangreenhouseacreage,remaining1%isoperatedbysmallcompanies
DIAGRAM THREE: USA’S LARGE GREENHOUSE COMPANIES
CALIFORNIA|28%OFCAPACITYLargeGreenhouseOperators:Hollandia,Houweling,PrimeTimeInternational,QuailMountainHerbsSunSelect,WindsetFarms
ARIZONA|19%OFCAPACITYLargeGreenhouseOperators:NatureSweet
TEXAS|14%OFCAPACITYLargeGreenhouseOperators:VillageFarms
RESTOFUSA|38%OFCAPACITYLargeGreenhouseOperators:BackyardFarms,ColdwaterGreenhouse(Mastronardi),Houweling,Intergrow,SunblestSunsetgrown(Mastronardi)
38%
Source:DatafromCuestaRobleConsulting,analysisbyNewbeanCapital.Companieslistedarethosewithgreenhousesof30acresormore.FiguresareforshareoftotalUSgreenhouseacreage.
28%
19%
14%
5%
MARCH 2015 | PAGE 14
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
DIAGRAM FIVE: US & CANADIAN COMMERCIAL SCALE VERTICAL FARMS
BIBLEHILL,NSTruLeafMONCTON,NBLocalByAtta
NEWTON,MASkyVegetables
BROOKLYN,NYGothamGreens
MONTREAL,QCLufaFarms
CHICAGO,ILGar�ieldProduceCoThePlantBEDFORDPARK,ILFarmedHere
NEWBUFFALO,MIGreenSpiritFarms*PORTAGE,INGreenSenseFarms
NASHVILLE,TNGreenerRoots
ATLANTA,GAPodPonics*
TAMPA,FLUriahUrbanFarms
LOSANGELES,CAUrbanProduce
SEATTLE,WAFarmboxGreens
USVerticalFarms
CanadaVerticalFarms
RooftopGreenhouseFarms
KEY
Source:IndustryReports*GreenSpiritFarmshasasecondlocationinMedina,OH*PodPonicsisbasedinAtlantaGA,andalsohasafarminDubai
MARCH 2015 | PAGE 15
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
GROWING CONSUMER DEMANDFOR LOCAL FOODS
MARCH 2015 | PAGE 16
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
Primary Factors DrivingIndoor Agriculture Growth
B
B. PRIMARY FACTORS DRIVING INDOOR AGRICULTURE GROWTH
Aprimarydriveroftheindooragricultureindustryisitsabilitytosatisfytherapidgrowthinconsumer
demandforaffordable,highquality,localproduce.StronggrowthinNaturalandOrganicsegmentsoverthe
pastdecadehasestablishedaprecedentforpremium,brandedproducesoldthroughavarietyofsales
channels.Distributionoptionshaveexpandedforfarmersaslocaldeliveryplatformshavegainedtraction,
suchasNewYorkonlinegrocerFreshDirectandonlineretailerOverstock.com’sFarmers’Marketinitiative.
Indoorfarmshavehistoricallystruggledtocompeteoncostwithtraditionaloutdoorfarms,buttherecent
rapidmovementtowards“eatinglocal”,alongwiththeintroductionofnewdistributionchannels,has
providedtheopportunityforhigh-marginindoorcropstoestablishafootholdinthemarket.
1. GROWING CONSUMER DEMAND FOR LOCAL FOODS
Asacategory,“localfoods”israpidlygainingmarketshareintheproduceindustry,growingfroman
estimated$1billionin2005tonearly$7billionlastyearwithanticipatedrapidcategorygrowththrough
2017.3Theunmetneedislarge:39statesinthenationgrowfewerfruitsandvegetablesthanthey
consume,ascanbeseenfromdiagramsixbelow.
DIAGRAM SIX: STATE FRUIT & VEGGIE PRODUCTION AS SHARE OF DEMAND (%)
3“USDAcon�irmsfarmersmarkets’growth,sustainability”,AgriNews,August25,2013.
MARCH 2015 | PAGE 18
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
Source:NewVentureAdvisorsLLCdata,NewbeanCapitalanalysis
KEY
Lessthan50%
50%-100%
Morethan100%
ALASKA
HAWAII
NEWJERSY
CONNECTICUT
WASHINGTON
MONTANANORTHDAKOTA MINNESOTA
OREGON
IDAHO
WYOMING
NEBRASKA
SOUTHDAKOTA WISCONSIN
MICHIGAN
NEWYORK
VERMONT
MAINE
NEWHAMPSHIRE
MASSACHUSETTSRHODEISLAND
CALIFORNIA
NEVADA
UTAH
COLORADO
KANSAS
IOWA
ILLINOIS
MISSOURI
ARKANSASTENNESSEE
KENTUCKY
INDIANAOHIO
PENNSYLVANIA
ARIZONA NEWMEXICO
TEXASLOUISIANA
MISSISSIPPI
OKLAHOMA
GEORGIA
ALABAMA
FLORIDA
SOUTHCAROLINA
NORTHCAROLINA
VIRGINIAWEST
VIRGINIA
MARYLAND
DELAWARE
Thedesireto“eatlocal”isnotsimplytheproductofeffectivemarketingtacticsbycorporateexecutives.
Decentralizingthesupplychainandbringingproductionclosertotheconsumercandirectlyresultin
longershelflifeandbettertaste.Moreover,producetraditionallybredforresilienceandtheabilityto
withstandlong-distancetransportcaninsteadbecultivatedforuniquesizeand�lavorpro�iles.
Accordingtoa2014studyconductedbytheHartmanGroup;“’local’isemergingasacategorypoisedto
surpassbothorganicandnaturalasasymboloftransparencyandtrust.Withitsconnotationsof
community,economyandenvironmentalstewardship,‘local’offerscompellingnarrativesthatinclude
small-scaleproductionandcloser,reciprocalrelationshipswithfoodproducers.”4Theinternethasgiven
modernconsumersinformationonfarmingpractices,allowinginsightintogrowingmethodsandan
unprecedentedopportunityto“knowyourfarmer.”Thisdemandforincreasedtransparencyingrowing
practicesmirrorsabroadertrendofregulatorymandatedtraceabilitythroughoutthefoodchain.
Growthhasbeenseenacrossdirect-to-consumerchannels(farmersmarkets,communitysupported
agriculture)andintermediatedmarketingchannels(grocers,restaurants,regionaldistributors)alike.The
numberoffarmersmarketshasmorethandoubledoverthepastdecade,providingincreasedopportunities
forconsumersto“buylocal.”5Smallfarmstendtofavordirect-to-consumerchannelsastheyofferlogistic
simplicityandhigherper-unitmargins.Largefarmstendtowardsintermediatedchannels,contributing
towardsamorepermanentpresenceof“localfood”sectionsinretailoutlets.
2. BUSINESSES HAVE LACKED YEAR-ROUND SOLUTIONS
Commercialfoodbuyersareeagertomeetthisincreasedconsumerdemandforlocalfoods.Forretailers,
distributors,andfoodserviceprofessionals,thelocalcategoryrepresentsanopportunitytonotonlymeet
consumerdemand,butsimultaneouslydecreasefoodwaste,increaseunitmarginsandultimatelydrive
bottomlines.
TheUSDAestimatesthatsupermarketslose$15bnannuallyinunsoldfruitsandvegetables.6Alarge
portionofthislossisattributabletoshrink(producedamagedduringtransport)andspoilage,which
typicallyincreasesproportionatelytofoodmiles–thedistancefoodtravelsbetweenfarmandtheend
customer.Localproduceoffersanopportunitytomitigateshrink,asfoodisnolongerrequiredtotravel
hundreds,oreventhousandsofmilesintransportbetweenfarmandstore.Shelflifeissimultaneously
increasedasthetimebetweenharvestandcustomerdrops.Successivestudieshaveshownthat,in
commonwithpartsoftheorganiccategory,localproducecangenerallydemandapricepremiumand
increaseperunitmargins.Forexample,a2014CornellUniversitystudy7listeda27%premiumforlocally
producedstrawberriesinOhio,a27.5%oneforlocalproduceinSouthCarolina,andpremiumsforboth
tomatoesandstrawberriesinaNewYorkcounty.
4“Organic&Natural2014”,HartmanGroup5“NationalCountofFarmersMarketDirectoryListingGraph:1994-2014”,USDAAgriculturalMarketingService6“Wasted:HowAmericaIsLosingUpto40PercentofItsFoodfromFarmtoForktoLand�ill”,DanaGunders,NaturalResourcesDefenseCouncil,August20127“ACaseStudyofPricePremiumsforLocalFoodsinTompkinsCounty,NewYork”,Tang,Gomez&Park,CharlesH.DysonSchoolofAppliedEconomicsandManagement,CornellUniversity,November2014
MARCH 2015 | PAGE 19
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
Asaresult,manygrocershaveaddedorexpandedcategoryshelfspaceandarerapidlydevelopinglocal-
sourcedinitiatives.Sourcinglocallyenablesregionalgrocerychainstodifferentiatethemselvesfrombig
boxcompetitors,anditallowslargerplayerstomeetcorporatesocialresponsibilitytargets.Forinstance,
in2010,Walmartannouncedits‘HeritageAgriculture’initiativewherebyitaimedtodoubletheamountof
localproducethatitsourcedintheUS.8InanarticleinthemagazineTheAtlantic,Walmart’sSenior
DirectorofLocalandSustainableSourcinghighlightedthechangeinit’ssourcingforjalapenopeppers,
whereitsaysthatitworkedwithexistingsupplierstoexpandsourcingto20states,soloweringcostsand
carbonemissionswhilesupportinglocalfarmers.9
Inreality,mostfoodbuyersstruggletosourceanyportionoftheirproducelocallyonaconsistentbasis.
Seasonalitymakesyear-roundsourcingdif�icult,ifnotimpossibleformanypartsofthecountrywhere
climateconditions,soilconditionsandaccesstolandlimitthegrowthofhigh-qualityproduceformany
monthsoftheyear.Smallfarmsfrequentlycannotmeetdeliveryschedules,volumedemands,regulatory
requirements,orotherfoodsafetycerti�icationsimposedbylargeproducebuyers.Insteadtheyturnto
direct-to-consumerchannelswheretheysellatpricesunattainableformuchofthepopulation.
3. INDOOR AGRICULTURE IS WELL PLACED TO BE A YEAR ROUND SOLUTION
Bycurtailingtheeffectsofweatherandseasonalityandenablingyear-roundcropproductioninallpartsof
thecountry,indoorgrowingtechniquesareuniquelysituatedtomeetthismarketneed.Severalbusinesses
arealreadyusingindooragriculturetechnologiestodrivepro�itsandgrowindoorcropsinacost-
competitivemanner,whetherit’stogrowleafygreensduringthewinterwhenlocalproducewouldbe
otherwiseunavailable,togrowahighvalueherbcropwithparticular�lavorcharacteristics,ortosubstitute
freshbarleyfordryhayforanimalfodder.
MARCH 2015 | PAGE 20
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
8“WalmartUnveilsGlobalSustainableAgricultureGoals”,PressRelease,October14,20109“AnInsider'sAccountofWalmart'sLocalFoodsProgram”,TheAtlantic,November17,2010¹0Source:EnterpriseLEDMarketResearchforhistoric�igures,LuxResearchforforecasts
Themostenduringcriticismoftheindustryhaslongbeenthatitcould
notcompetewith�ieldgrownproduce,andthiscriticismstillholdsin
somecases;fewindoorfarmscanclaimtoproducelettuceatthesame
priceasCalifornia’sfamedfarmingarea,SalinasValleyinsummer
months,forinstance.But‘�ieldparity’iscomingcloserasthecostsof
indoorfarmequipmentfalls;forexample,LEDlightbulbpricesfellby
24%between2010and2012,andareforecasttohalveby2020.¹0
Moreover,thistrendisjustbeginning.Asislaidoutbelow,indoor
growershaveanincreasinglyplentifulrangeofoptionswhenitcomes
tothetechnologiesthattheycanemploytoreachcostcompetitiveness.
CASE STUDY: LUFA FARMS BRINGS LOCAL FOOD TO MONTREAL
Montreal-basedLufaFarmswasoneofthepioneersofcommercialurbanagriculture,openingits�irst
hydroponicgreenhouseinFebruary2011.Wheremostbeginningfarmerssellthroughlocalfarmers’
marketsorsmall-farmer-friendlygrocers,suchasWholeFoodsMarket,LufaFarmsinsteaddecidedtosell
itsproducedirecttoconsumers.TheapproachallowsLufaFarmstocapturethefullreturnfromits
produce,butalsoposesthechallengeofbuildingacustomerbaseone-by-one.Thecompany’sonline
platformoffersproductsfromlocalartisansalongsideitsownproduce;customersselectaweeklybasket
andcollectitfromoneofdozensoflocationsinthecity,whetheragym,of�iceorneighborhoodcoffeeshop.
Ineffect,thecompanyhascreateditsowndistributionplatform,withtheaddedbene�itofvertical
integration.
Inarecentinterview,LufaFarmsco-founderLaurenRathwellcommentedthat;“we’vemadeittoover
5,000weeklysubscribers,largelythroughwordofmouth” ,thoughthisdownplaystherolethatcustomer¹1
service,technologyandeconomiesofscalehaveplayedinthecompany’ssuccess.
AstrongtraditionalandsocialmediapresencehasdoubtlesshelpedLufaFarmsreachawideraudience.It
hasalsomadeorderingandcollectingbasketsasimpleand�lexibleprocessforconsumers,forinstance,by
allowingcustomerstotailorbasketstotheirneedsthatweek,ratherthaninsistingthattheysignupforan
entireseason’sworthofproduceasisthecasewithsomecommunitysupportedagricultureagreements.
Asthecompanygrowsover40vegetables,there’splentyofchoiceandthisissupplementedbyother
locally-sourceproducts,suchascutsofmeatandyogurt.Customerscanpickupbasketsfromthevenues
thattheyvisitaspartoftheirdailyroutines,whetherthat’sacoffeeshoporagym.
Thecompanyhasbeenateconomicscalesincetheget-go,itsinauguralMontrealgreenhousebeingcapable
ofproducingmorethan150klbsofproduceannually.Itopenedasecond,larger,greenhouseontheroofof
anewbuildinginOctober2013inconjunctionwithDutchgreenhousemanufacturerKUBO.Inmedia
reports,thecompanyhasdiscusseditsintentiontomoveintotheUSmarketwithBostonlikelytobethe
locationofits�irststate-sidefarm.
Finally,thefarmsfeatureagooddealoftechnicalsophistication,forexample,utilizingcloud-basedremote
cropmonitoringanddiseasemanagement.Itisthiswinningcombinationthathas,inouropinion,allowed
LufaFarmstodefytheoddsinbuildingasuccessfuldirect-to-consumerbusiness.
¹1“#5LaurenRathwell:Co-FounderLufaFarms”,TheEditorial,December30,2014
MARCH 2015 | PAGE 21
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
INDOOR AGRICULTURE IS WELL PLACEDTO BE A YEAR ROUND SOLUTION
MARCH 2015 | PAGE 22
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
The Technologies BehindIndoor Crop Production
C
C. THE TECHNOLOGIES BEHIND INDOOR CROP PRODUCTION
Indooragricultureisatech-industryatitscore,drivenbyrapiditerationsinthetechnologiescriticalto
plantgrowth.Newintegrationsofthesesystemscontinuetoraiseyields,increasegrowingef�iciencies,and
lowercostsassociatedwithindoorcropproduction.Weanticipatethattherateoftechnological
advancementwillcontinuetoincreaseastheindustryproveswide-scaleeconomicviability.
Whatwouldhelp:Webelievethatwehavereachedatippingpointwherethefocusofdevelopmentshould
switchfromcreatingnewandnovelformfactorstoincreasingtheyieldandsubstantiallyloweringthe
manufacturingandoperatingcostsofexistingsolutions,soimprovingpaybackperiodsofindoorgrowing
systems.Standardizationandcentralizedmanufacturingofformswoulddramaticallyreducecosts.Form
factorresearchanddevelopmentshouldcontinuetobedirectedtowardsincreasingoutputandlowering
costspercubicfoot,forinstance,byincorporatingmoreautomationanduseofsensorsintosystems.
Diagramsevenoppositeshowsthebasiccomponents
ofagenerichydroponicgrowingsystem,eachof
whichareundergoingsubstantialtechnology
upgrades.Themostimpactfulareasofongoing
developmentare:
FORM FACTOR AND GROWING SYSTEMS
Currentstate:Aspreviouslyhighlighted,indoorcrop
productionoccursinawidevarietyof
con�igurations.Onceanoverallformfactoris
selected(greenhouse,warehouse,container,etc.),
farmerscancustomizefacilitieswithavarietyof
growingsystems.TheserangefromtraditionalEbb&
FlowandNutrientFilmTechniquerackingsystemsto
ZipGrowverticalgrowrackstoevenmorenovel
conceptssuchasthepyramid-shapedgrowing
systemPyramidGardensorVolksgarden'scircular
OmegaGardens.Farmsaremostfrequentlycustom-
engineeredandmanufacturedtomeetspeci�ic
geographic,andcroprequirements.Afarm'soverall
size,shape,materialsusedforconstruction,andcrop
spatialarrangementslargelydictateupfrontcapital
expendituresrequiredtodevelopcommercial-scale
farms.
LED LIGHTING
CONTROLSYSTEM
PLANTSIN GROWINGSYSTEM
RECIRCULATINGWATER MIXEDWITH NUTRIENTS
MARCH 2015 | PAGE 24
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
DIAGRAM SEVEN: HYDROPONIC SYSTEM COMPONENTS
LIGHTING
Currentstate:Indoorcropproductionsystems,particularlywarehouseandmodularones,relyonhighly
ef�icientlightstoaugmentorreplacenaturalsunlight.DramaticadvancesinLEDtechnologiessince2010
haveaffordedindoorgrowersunprecedented�lexibilitytocustomizelightspectrumsasamethodto
expediteplantgrowth.ModernLEDsuseprimarilyblueandreddiodestoincreaselightef�iciencywhile
minimizingtemperatureimpactswithinagrowthchamber.Commerciallyavailablehorticulturelightsnow
allowforanaloguecontroloverlightspectrums,encouragingunprecedentedworkinplantspectrum
responseandenablinggrowerstooptimizelightdeliverytoachieveidealplantcharacteristics.
Whatwouldhelp:AdaptiveLEDswillallowlightspectrumstobefullycustomizedthroughoutthelifespanof
acropbyadjusting,lightintensity,spectrumcomposition(redvs.blueproportions),andlightheight
(distancefromplants)toensureevenspreadacrossgrowthchambers.Upfrontcostsremainhigh,solower
prices,alongwithLEDswithmoremicromolesperjoule(whichtranslatestohigheryields)wouldbe
bene�icial.
CONTROL SYSTEM HARDWARE
Currentstate:Large-scalecontrolsystemsareavailablefromindustryleaders,suchasPrivaandArgus
ControlSystems.Thesesystemsareemployedbymanylarge-scalegreenhouseoperators,designedinto
farmsfrominceptiontomonitorandregulatelighting,CO2levels,nutrientreservoirs,plumbingandahost
ofothervariables.Thesystemsaretypicallycost-prohibitiveforsmalloperationsandbeginningfarmers.As
aresult,manypractitionersaredevelopingandleveragingproprietarycontrolsystemsasacompetitive
advantage.
Whatwouldhelp:Small-scalecontrolsystemswithrobustfunctionalitywouldallowbusinessesona
shoestringbudgettobetterautomatetheirsystems,increasingyieldswhiledecreasinglaborcosts.Inthe
longrun,user-friendlyhumanmachineinterfacesshouldallowskilledtradesmentocustomizeprebuilt
systemsandhorticulturaliststomorepreciselycontroltheplantenvironment.Assensorsdecreaseincost
andmoredataiscollectedfromtightlycontrolledsystems,bigdatamethodssuchaslinearprogramming,
non-linearoptimization,machinelearning,arti�icialneuralnetworks,clusteranalysis,andotherarti�icial
intelligencetechniquesshouldbeappliedtooptimizeplantcharacteristicsandyields.
WATER CONSUMPTION
Currentstate:Closed-loopindoorsystemshavebeenshowntoreducewaterusagebyover90%compared
withtraditionaloutdoorfarms.Certainaeroponicfarmsandotheradvancedwaterrecapturesystemsallow
for95%ormorereductioninwaterusage,butcanbeprohibitivelyexpensivetoinstallandmaintain.
ExamplesofwatermanagementcompaniesinthespaceincludeBioSafeSystems,Dosatron,andDRAMM.
MARCH 2015 | PAGE 25
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
Whatwouldhelp:Additionalwaterpuri�ication,desalination,andatmosphericrecapturetechniquescould
bedevelopedtoincreasepotentialfarmsitelocationsandultimatelydriveoff-grid�lexibilityforindoor
farms.
NUTRIENTS
Currentstate:Awiderangeofnutrientsolutionsexistsforhomeandcommercialhydroponicsystemsthat
provideawideofmacroandmicromoleculesessentialtoplanthealth.Mostlargecommercialplayers
createtheirownnutrientmixes.
Whatwouldhelp:Manynutrientsolutionsmakeclaimsregardingeffectsonplantformation,including
increasedspeedofplantgrowthortaste,buttheseclaimsarepredominatelypoorlydocumentedand
untested.Inaddition,microbiomeswithinsoilarenotwellunderstoodandfuturedevelopmentcouldbring
vastadvantagestoplantgrowthinhydroponicsystems.
SEEDS
Currentstate:Mostindoorfarmsuseseedsbredto
growoutdoorsunderhighlyvolatile
environmentalconditions.Selectcrops–
particularlyleafygreens,tomatoes,peppersand
cucumbers–havebeenbredforconventional
greenhousesbutlimiteddataexistson
performanceundermore-tightlycontrolled
environmentconditions.Largergrowersoperate
theirownseeddevelopmentprograms.
Whatwouldhelp:Seeddevelopmentandtesting,
tooptimizegrowingqualitiesforindoorsystems
whereconditionsaretightlymanagedand
traditionaloutdoorconcerns(pests,drought,
�loods,highwinds,extremetemperatures,etc.)are
limited,wouldbehelpful.Suchdevelopment
couldalsobeinstrumentalinexpandingthe
universeofcropsthatcanbegrowncommercially
inindoorsystems.Thisdevelopmentislikelytobe
slowerthanthatforothersystemcomponents
mentionedhereasseeddevelopmentprograms
arelongtermbynature;greenhouseseedtrials
havebeenrunningsincethe1970s,forinstance.
MARCH 2015 | PAGE 26
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
CASE STUDY: THE RISE OF THE GREENHOUSE TOMATO
Thesecondlargestintheworld,theUStomatomarketbifurcatesbetweenthosethataregrownforprocessing(mostofthemarket)andthosethataredestinedforthefreshproducemarket.Tomatoesaregrownbothinthe�ieldandinthegreenhouse.Traditionally,FloridaandCaliforniahavebeenthelargestUSgrowersofoutdoortomatoes,withnearlytwo-thirdsoftotalUSfreshtomatoacreage,asharethathasbeensteadysincethe1960s.¹2
Inits2000-2001annualreport,theFloridaTomatoCommittee,anindustryadvocacygroup,notedthatthegreenhousetomatosector“appearstobeontherise”butthatnosolidnumberswereavailable.By2004,greenhousetomatoeswereunder10%oftotalUSsupply,butby2011,theywere40%,withahighershareinretailchannels.¹3
TheUSDA’sEconomicResearchServiceattributesthisriseto“consumerdemandforyear-roundsupply,agrowingdiversityoftomatotypes/substitutes,anddevelopingtechnologies”.²⁰Thetotalmarkethasalsogrown:USpercapitafreshtomatoconsumptionrosefromunder15lbpain1985toapeakof20.6lbpaby2010.¹4
Consumershavebecomeaccustomedtobeingabletopurchasefreshproduceyear
round,andtohavingabundantchoicesingrocerystores.Thetotalnumberofallproducts(includingpackagedgoods)intheaveragesupermarketgrewfromanaverageof8,948in1975toalmost47,000by2008.²¹Greenhouse-growntomatomajorVillageFarmsoffers10varieties,forinstance.
IntheUS,Californiaisthedominant�ield-growntomatosupplierinthesummer,andFloridainthewinter,withMexicanandCanadianimportsful�illingsurplusdemandinthewinterinparticular.Thisde�icitallowedgreenhousegrowerstogainafootholdinthemarketby,forinstance,introducingtomatoesonthevine,whicharenowthemostpopularvarietyamongconsumers.
Atthesametime,a2013UniversityofFloridapaperconcludedthattheimprovedyieldsingreenhouseproductionoutweighedsubstantiallyhighercosts,inturnrenderinggreenhousebasedgrowingmorepro�itablethan�ieldbasedproductioninsomeenvironments.15
WithcontinuedimprovementsingreenhousetechnologyandfallingUSfarmlandacreage,themarketexpectationisthatthegreenhousegrownshareofthemarketwillcontinuetorise.
35%
16%
49%
Undefined
Field Grown
GreenhouseGrown
DIAGRAM EIGHT: RETAIL TOMATO DOLLARS
Source:VillageFarmsFiguresexcludeCostcoandBJswhichare100%Greenhouseretailers
MARCH 2015 | PAGE 27
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
¹2USDAEconomicResearchServicedata13“Protected-CultureTechnologyTransformstheFresh-TomatoMarket”,USDAERS,September2013¹4FoodMarketingInstitute�igures15“ThePotentialforGreenhouseTomatoProductionExpansioninFlorida”,VanSickle,Cantliffe&Asci,SouthernAgriculturalEconomicsAssociation(SAEA)AnnualMeeting,3-5February2013
INDOOR CROP PRODUCTION ENABLES YEAR-ROUNDGROWING BY MITIGATING THE EFFECTS OF WEATHER.
MARCH 2015 | PAGE 28
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
Secondary Benefits ofIndoor Crop Production
D
D. SECONDARY BENEFITS OF INDOOR CROP PRODUCTION
Itisclearthatconsumerdemand,businessdemand,andtechnologiesareconvergingtocreatean
opportunityforrapidexpansionofindoorcropproduction.Toexpeditethisgrowthandwinbroaderpublic
opinion,theindooragricultureindustryshouldcommunicateitssecondarybene�itsaswell.
YearRoundGrowing
Indoorcropproductionenablesyear-roundgrowingbymitigatingtheeffectsofweather.Thiscontrolover
croptimingallowsindoorfarmstoincreasemarginsbygrowing“off-market”andsellingagainstoutdoor
seasonality.Inotherwords,indoorfarmsareuniquelycapableofgrowingtraditionalsummercropsduring
thewinterandwintercropsduringthesummer.Further,indoorfarmingtechniquesgreatlyreduce
productionvariabilityatthefarmlevelandenableunprecedentedaccuracyincostforecasting.For
consumers,thisallowsconsistentavailabilityandqualityofproducethroughouttheyearinallpartsofthe
country,andforproducebuyersaccustomedtoinconsistentsuppliesandvolatilemarketprices,
Source:USDAEconomicResearchServicedata,NewbeanCapitalanalysis
$36
$16$8
SAN FRANCISCO
$33
$13 $9
LOS ANGELES
$34$16
$5
CHICAGO $33$16 $10
DETROIT
$40
$18$10
DALLAS$58
$27 $13
ATLANTA
$38
$17 $12
ST. LOUIS $36
$16 $9
PHILADEPHIA$38
$16$6
NEW YORK
$38$19 $13
BALTIMORE
$38$20 $15
MIAMI
$38
$18 $12
BOSTON
KEY
HIGH
AVG LOW
DIAGRAM NINE: NON-ORGANIC GREEN LEAF LETUCE PRICES BY HUB, $/CARTON 24S,NOV 2012-NOV 2014
MARCH 2015 | PAGE 30
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
itrepresentsapotentialparadigmshiftasthepracticebecomesmorecommon.Suddenlyproducebuyers
donotneedtoaggregatefrommultiplefarmsonanongoingbasistohedgeagainstvolatility;asisshownin
diagramninebelow,pricesvarybyasmuchas300%acrossayearforacropascommonplaceaslettuce.
Instead,longer-termcontractswith�ixedpricingandvolumescanbeinstigated.Inthisscenariobothsides
bene�it.Farmsreceiveguaranteesthattheirproductwillbesoldandhavegreaterinsightintorevenue
metricsforstrategicplanningpurposes.Producebuyerscanaccuratelyforecastcosts,whilesavingtime
andenergybyavoidingthespotmarkets.Certainproducebuyerswhohavetraditionallyreliedupon
distributorstosmoothsupplymayhavegreater�lexibilitytodealdirectwithfarmers,increasingpro�it
marginsonbothsides.
FlexibilityofFarmLocations
Indoorsystemscan,intheory,belocatedanywhere–includingretailerparkinglots,urbanrooftops,vacant
lots,andrurallocations.Forbusinessesseekingto�itintoexistingtransportationinfrastructure,farmscan
belocatedadjacenttocold-storagewarehousesorendpointsofconsumption.Co-locationwithcustomers
reducestransportationcosts,minimizesspoilageandmitigatesqualitydegradationwhileextending
productshelflifeforconsumers.
PotentialHealthBene�its
USDA’sEconomicResearchServiceestimatesthat23.5mnAmericansliveinfooddeserts,ofwhich13.5mn
arelowincome.16Theseindividualslackbothregularaccesstonutritiousfoodsandtheabilitytoafford
freshproduce.Enablingmasscropproductioninurbanenvironmentsallowsforuniqueapproachesto
solvingfoodaccessissuesbecauseitchangestheunfavorableeconomicsoflast-miledistributionlogistics.
Byplacingindoorfarmsinsideoffooddeserts,thecostofshippingproduceisgreatlyreducedoreliminated
entirely.Thesesavingscanbepassedontocustomers,ultimatelyloweringproducepricestolevels
affordableeveninlow-incomecommunities.TheFarmery,forexample,isaprototypefacilitythatacts
simultaneouslyasafarmandaretailoutletindowntownDurham,NC.Othercreativesolutions,suchasthe
ArcadiaCenterforSustainableFood&Agriculture’sMobileMarkets,a28’farmstandonwheels,provide
relevantpartnershipopportunitiesandareasforblueoceanmarketexpansion.
WaterEf�iciencyIsImportant
Recorddroughtconditionsarecurrentlyoccurringinkeyagriculturalregions,speci�icallythelargestinthe
U.S.,California.Ifdroughtconditionspersistasisasispredictedduetothechangingclimate,therewillbe
continuingpressuretoreduceagriculturalproductionandfallowsomeland.Indooragriculturecantakeup
someorallofthisslackinproduction,inregionslikeCalifornia,usingonlyafractionofthewater,and
continuingtooperateevenunderseveredroughtconditions.
16“FoodDeserts”,USDAEconomicResearchService
MARCH 2015 | PAGE 31
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
Increased Food Safety and Traceability
Growingindoorsinsoillesssystemsinherentlylimitsexposuretomanysoil-bornepathogensthatmayhave
causedE.Coli,salmonella,andinturnproducerecallsinrecentyears.Thisisofparticularbene�itduringa
timewhentheincidenceandawarenessoffoodborneillnessesarerising.Someindoorfarmsarecreating
“clean-room”environmentswhereworkerswearspecialgloves,hats,anduniformstopreventoutside
pathogensfrominfectingcrops.Pestsaremucheasiertokeepout,andmanureuseisall-buteliminated.
Shouldarecallprovenecessary,indoorsystemsareoftenabletotrackindividualplantvariables
throughoutthegrowthcycle,allowingfarmerstoquicklyidentifythesourceofcontaminationandisolate
anyaffectedproducts.Theoverallresultiscleanerandsaferproducefortheend-consumer.
Campylobacter
Listeria
Salmonella
Shigella
STEC* Non-O157
STEC* O157
Vibrio
Yersinia
-15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35%
YEAR ON YEAR CHANGES IN INCIDENCE OF LABORATORY-CONFIRMED BACTERIAL INFECTIONS, US, 2013
Source:UnitedStatesCentersforDiseaseControlandPrevention,dataismostrecentavailable*Shigatoxin-producingEscherichiacoli
MARCH 2015 | PAGE 32
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
DIAGRAM TEN: YEAR ON YEAR CHANGES IN INCIDENCE OF LABORATORY-CONFIRMEDBACTERIAL INFECTIONS, US, 2013
CASE STUDY: FEEDING A GRASS-FED HERD IN A TIME OF DROUGHT
TomKatRanchisaneighteenhundredacrecattleranchinPescadero,CAwhichactsasa“learninglaboratoryforanimalagriculturefocusedonclimatestability,nature’sbene�its,healthyfood,biodiversity,andvibrantcommunity”.Ithousesseveralbusinesses,includingLeftCoastGrassFed,agrass-fedbeefcompanythatsellsatlocalfarmers’marketinordertoeducateconsumersaboutthebene�itsofgrass-fedmeat.
Asforanycattleoperation,feedisalargecomponentofLeftCoastGrassFed’scosts,andbecameaparticularconcernwhenhayfodderwasinshortsupplythispastsummer.OwingtoCalifornia’sdroughtandlowersurfacewaterallocationstofarmers,haypricesrose35%yearonyearbyMay2014to$320perton.17Naturally,bothpastureandhaycropsrequiresuf�icientwaterforoptimalgrowth.Worse,haywascomingtoTomKatfromeverfurthera�ield:“wewerepaying$100pertonjustfortransportationinsomecases”commentsWendyMillet,TomKat’sranchdirector.LeftCoastGrassFedholdsAnimalWelfareApprovedandAmericanGrassFedAssociationcerti�ications,sotraceabilityisextremelyimportanttotheventure,anditsvaluesleadittoseeklocallysourcedfodderwhereverpossible.
Theanswercameintheformofa self-made fodder machine from Symbi Biological, which raises insect proteinfor an aquaponics operation on TomKat Ranch. The system consists of three racks of growing trays, in whichthe ranch grows fresh barley. "The cattle really liked it once they figured out what it was" Wendy adds "andit ended up being cheaper than importing hay". There are also ready-made solutions on the market, such as that from Fodder Solutions, an Australiantechnology company thatdistributesitshydroponicfoddersystemglobally and is used by a ranch neighboringTomKat.Theproductconsistsofatruckcontainingupto108hydroponicgrowingtraysinsixlayers,whichrotateasthecropgrowssuchthataportionofthefoddercanbeharvestedandplanteddaily.Theunitcanbedriventothecattlefeedstations,andbarleytakesonlysixdaystogrowfromseedlingtofeedintheclimate-controlledgrowroom.Theseedsgrowonmatsthatareediblebycattle,sothere’snowastefromthesystem.Itallowstheranchtopreciselycontrolinputsintothefeed,andthelargestunitusesunder300gallonsadayofwater.Foraranchthatiscarefultotracksuchmetrics,italsoreducesfeedmilesandwaste,forinstance,haystoredoutsidecandevelopmoldandloseproteinqualityintimesofheavyrainaswasseeninMontanainSeptember 2014 for example.
Traditionalfoddergrowershaveoftenbeendismissiveofhydroponicallygrownfodder,citingthehighermoisturecontentcontainedinyounghydroponicallygrownbarleyandlower‘drymatter’(thepartoffeedthatcontainsthenutrientsthatanimalsneed)contentinhydroponicallygrownfodder.Theyarguethatthisrendershydroponicfodderextremelyexpensiveonalike-for-likebasis,buttheiranalysishasbeenchallengedbysomeranchers,forinstance,a2005paperbyAustralianrancherJosephMooney18argued that thecosttofattenabeastonhydroponicfodderovera90-120dayperiodisaroundasixthofthecostoffatteningthebeastongrain.
Weanticipatethatfoddersystemswillbecomemoreef�icientandeconomicasLEDlightingandothertechnologiesdevelop,andashaypricesremainatriskfromdrought(NOAA19 forecastscontinueddroughtforCaliforniain2015),itseemslikelythatranchessuchasTomKatRanchwillcontinueto�indaplaceforhydroponicfodderasasupplementtotraditionalanimalfeeds.
17USDAHayReport,comparingMay24,2013andMay23,2014pricesforSacramentoValleyFOBSupremeAlfafa18“GrowingCattleFeedHydroponically”,JosephMooney,July2005,AustralianNuf�ieldFarmingScholarshipAssociation19NationalOceanicandAtmosphericAdministration,December2014forecast
MARCH 2015 | PAGE 33
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
GROWING INDOORS INHERENTLY LIMITS EXPOSURETO MANY SOIL-BORNE PATHOGENS
MARCH 2015 | PAGE 34
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
The Indoor AgricultureInvestment Landscape
E
E. THE INDOOR AGRICULTURE INVESTMENT LANDSCAPE
Forinvestors,theindooragricultureindustryhasmuchincommonwiththesolaroneofadecadeago;detractorscriticizebothforbeingmoreexpensivethanalternatives(traditionalenergyand�ieldfarmingrespectively)anddecrythe“backyard”natureofmanyofthesolutions.Inbothcases,theymisstherapidfallintechnologycostsandtheswiftadoptionamongthoseforwhomtheindustry�ixesarealproblemofmeetingyear-roundconsumerdemandforlocalproduce.
Investmentinindooragricultureremainsafractionofthatinagtechasawhole,wherethehipsectorsofbiologicals,precisionagricultureanddistributionplatforms(suchas,SequoiaCapital-backedGoodEggs)haveattractedthegreatestattention.Globalagtechventurecapitalinvestmentsin2014alonewere$1.1bn,up34%yearonyear,accordingtoindustryconsultant,theCleantechGroup.IntheUS,weestimatethatthere’sbeenatotalof$52mninvestedsince2011byventurecapitalistsinindooragriculture,withover60%ofthisbeingin2014alone:
Company
Aerofarms
BrightFarms
BrightFarms
BrightFarms
FarmedHere
FreightFarms
FreightFarms
GothamGreens
GothamGreens
GreenSenseFarms
GreenSpiritFarms
GroveLabs
IndoorHarvestCorp
IndoorHarvestCorp
IndoorHarvestCorp
LufaFarms
PodPonics
PodPonics
PodPonics
PodPonics
TruLeaf
TruLeaf
UrbanBarns
Windowfarms
TOTAL
Funders
Quercus,21Ventures
EmilCapital,NGEN
WPGlobal,NGEN,EmilPartners
WPGlobal,NGEN,EmilPartners
PrivateInvestors
WeFunder,LaunchCapital,
MorningsideGroup,Rothenberg
Ventures
SparkCapitaletal
NYSERDA,PrivateInvestors
PrivateInvestors
PrivateInvestors
PrivateInvestors
Upfront,Vayneretal
PrivateInvestors
PrivateInvestors
PrivateInvestors
CycleCapitalManagement,
KuboGreenhouse,AndrewFerrier
NA
NA
NA
NewGroundVentures
InnovaCorp
InnovaCorp
DundeeCorp,Private
Kickstarter,PrivateInvestors
Description
VerticalSystem
Greenhouse
Greenhouse
Greenhouse
VerticalSystem
ContainerFarm
ContainerFarm
Greenhouse
Greenhouse
VerticalSystem
VerticalSystem
Consumer
VerticalSystem
VerticalSystem
VerticalSystem
Greenhouse
ContainerFarm
ContainerFarm
ContainerFarm
ContainerFarm
VerticalSystem
VerticalSystem
VerticalSystem
Consumer
Amount($mn)
$1.70
$4.30
$4.90
$2.40
$6.00
$1.20
$3.70
$2.00
$8.00
$0.65
$0.30
$2.22
$0.06
$0.46
$0.02
$4.50
$0.73
$1.25
$2.00
$3.40
$0.80
$0.25
$0.50
$0.26
$51.59
YrFunded
2009
2011
2014
2014
2014
2013
2014
2011
2014
2014
2013
2014
2013
2014
2015
2012
2011
2013
2013
2014
2012
2013
2014
2011
Sources:Crunchbase,mediareports,companypressreleases,SEC�ilings
TABLE ELEVEN: VENTURE CAPITAL INVESTMENT IN NORTH AMERICAN INDOOR AGRICULTURE
MARCH 2015 | PAGE 36
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
Our�iguresexcludeLEDlightingcompanies(suchas,Illumitexwhichhasraised$64mn20inventure
funding),andoverseasinvestments(forexample,the2014IPOofSwedishLEDlighting�irmHeliospectra).
Theyincludeonlyroundswhereinvestmentamountshavebeenpubliclyannounced,andwebelievethat
theyconsequentlyunderestimatetotalinvestmentinthesectorbyasigni�icantmargin.
Theseinvestmentsrunthegamutfromearlystagetechtogrowthcapitalforfarmingoperations.
HydroponicgreenhouseoperatorBrightFarms–whoseinvestorsincludeNGENPartnersandEmilCapital–
hasraisedover$9mnforitsstrategyofbuildinggreenhousesproximatetogrocerychaincustomersonlong
termagreements.Ontheotherendofthescale,GroveLabs–createdinanMITdormroom–hasraised
$2mnfromUpfrontVentures,amongothers,todevelopaquaponicfridgesdesignedforuseinresidential
kitchens.Theunitsareinbetaatthemoment.Elsewhere,TechStarsgraduateFreightFarmssellsfully
equippedcontainerfarmsthatcanbesitedanywherethatpowerandwaterareavailable.Eachsupplies
enoughlettucetomeettheconsumptionofmorethan3,400Americans,andtheCompanyhasaround20
unitsdeployedsofar.
Investorshavebeenattractedbyrapidtechnicalchange,byinnovativebusinessmodelsandbyalargeand
growingmarket:
VeryLargeandGrowingMarket
The2014domesticmarketforfreshvegetablesisestimatedat$25.2bn21,withforecastannualgrowthrate
of1.2%to2019.22Weestimatethatmorethanathirdofthisvalueisincropsthatcouldbegrownindoors
(seeappendixforrationale).Withinthis,greenhouseandverticalfarmsectorsareexperiencingfaster
growth;greenhousegrowingisexpectedtogrowby10%perannumthrough2016.23Further,awell-placed
industryconsultantestimatesthatafurther30verticalfarmsareunderconstructionintheUSalone,
doublethenumberpresentlyoperating.Insomecases,thesefarmsaresubstitutingforimports.
Elsewhere,theirproductsarecreatingnewmarkets,suchasfromthepopularizationofmicrogreens.
InnovativeBusinessModels
Onthefarmingsideoftheindustry,entrepreneursareintroducinglongtermproducepurchaseagreements
andseekingnichecropsasbusinessmodelinnovations.Long-termproducepurchaseagreements,suchas
thoseprocuredbymulti-sitegreenhouse�irmBrightFarms,havegainedpopularityinrecentyearsamongst
largebuyerslookingtolockingoodratesforhigh-quality,localproduce.Theseagreementshavean
additionaladvantageastheycanbeusedtosecurealternative�inancingtohelpoffsetupfrontcapital
expenditures.Examplesofnichecropsincludehigh-valueherbs,microgreensandtreesaplings.
20Crunchbase�igure21Thesemarketestimatesrepresentonlyafractionofthetotallettucevaluechain,astheyarederivedfromterminalwholesalemarketpricesanddonotre�lectadditionalvaluecreatedatretail,foodservice,value-addprocessing,andothermarketsegmentspriortoend-consumption22“VegetableFarmingintheUS”,IBISWorld,July201423“GlobalGreenhouseHorticultureMarket2012-2016”,TechNavio,March2013
MARCH 2015 | PAGE 37
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
Onthetechnologysideoftheindustry,anascentbusinessmodelissoftwareasaservice(SAAS),asdata
captureandremotefarmmonitoringbecomesamoreprevalentofferinginanindustrythathaspreviously
eschewedsucharrangements.
TechnologyDevelopment
Thebulkofventurecapitalinvestmenthas,ofcourse,gonetostartupsfocusedondevelopingnewform
factorsorgrowingsystemstodate,thesebeingtheareabestsuitedtoreturningthe35%+oncapital
commonlyexpectedbyventurecapitalists.Weanticipatethatthiswillchangeastheindustrymaturesand
focusshiftsawayfromthebasicsofgrowingandtowardsimprovingyieldsandreturnsintheindustry.
Broadly,therearethreetypesofinvestmentopportunitywithinthesector:
Farming
Producefarminghastraditionallybeenfundedbyfamilyinvestmentsandbankdebt.Outsideofthelarge
row-cropfocusedfarmlandfunds–managedbythelikesofGMO,JohnHancock,MacquarieBankandUBS–
therearefewinstitutionalinvestorsinthefarmlandspaceandtheinvestmentsizeandreturnpotential
offeredbyindoorfarmsmeansthatthisisunlikelytochangeintheshortrun.Thoughsomeindoorfarmers
expecttoreturn40%+toinvestors,mostarelookingtoraisefundingatan8-12%returnrate,wellbelow
thosepresentlyseeninlessriskyinvestmentcategories,suchasrealestate.
TechnologyInvestment
Aswasoutlinedabove,thereremainanumberofhigh-potentialavenuesfortechnologydevelopment
withinindooragriculture,whetherinbiologic,bigdataorenvironmentalsensingarenas.Itislogicalthat
thesewouldaccrueventure-capitallikereturns,andgeneralventurecapitalists–whoseusualstomping
groundsaresoftwareandhealthcare–havebeguntotakeaninterestinthesectorasaconsequence.
FinancingorLeasing
Indoorfarmshavecomparativelyhighstartupcosts,andraisingsuf�icientcapitaltocovertheseorto
retro�itnewtechnologyintoanexistingfarm,isoneofthegreaterchallengesfacedbyindoorfarmers.
Consequently,anobvious‘nextstep’fortheindustryisthedevelopmentofadditionalleasingand�inancing
structuresthatallowfarmerstofundcapitalcoststhroughthefarm’srevenuestreams.
Aswasthecaseforthesolarindustry,thereareplentifulopportunitiesforinnovativeentrepreneursto
createtechnologysolutionsfortheindooragricultureindustry,foreverythingfromtrackingplantbehavior
tocreatingorganicnutrientmixestoplanningnewfarms.Whatwe’veseensofarisjustthetipofthe
iceberg.
MARCH 2015 | PAGE 38
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
Expediting IndustryGrowth
F
F. EXPEDITING INDUSTRY GROWTH
Increasingthesizeoftheindooragricultureindustryultimatelyrequiresamultitudeofsolutionsinvolving
advancesintechnology,changesinsupplychainoperations,andincreasingindustryawarenessamongst
producebuyersandend-consumers.Ashasalreadybeenseenfromthesuccessoftherenewableenergy
industry,severaltacticsfrombothpublicandprivatesectorsarecriticaltoexpeditingindustrygrowth.
1. HOW LOCAL GOVERNMENTS CAN SUPPORT INDOOR CROP PRODUCTION
ClarifyRegulationandZoningonIndoorAgriculture.Removingambiguityinregulationspertainingtourban
farmingandverticalfarmingatcountyandmunicipallevelscaneliminatelargebarrierstoentryfor
entrepreneursseekingtostartindoorcropproductioninurbanorsuburbanareas.CitiessuchasChicago,
IL,Cleveland,OHandSeattle,WAhaveprovidedblueprintsfortheintroductionofurbanagriculture
ordinances.
ExtendTaxAbatementsorRebatestoIndoorCropProduction.Asisalreadythecasefortraditionalfarming,
incentivesshouldbeputinplacetoattractindoorcropproduction.Manycitieshavevacantlots,abandoned
buildings,orotherunderutilizedspacethatcouldbeofferedatdiscountedratestoindoorfarmers.New
York,forinstance,has10,000acresofusablelandandrooftopspace.24Indoorcropproducerscouldhire
localworkersanddevelopinnovativewaystosupplyfreshproduceintofooddeserts.
FacilitateFarmRelationshipswithPotentialCustomersandLocalUtilityProviders.Governmentof�icials
couldconnectfarmerswithpotentialcustomersotherresourcesnecessarytomitigatecustomeracquisition
riskpriortofarmdeployment.Incaseswheremunicipalleadershavedirectin�luenceonutilityproviders,
stepscouldbetakentonegotiatelong-termelectricratesandalloweasiermarketentryfornewindoor
cropproviders.
2. HOW FEDERAL GOVERNMENT CAN SUPPORT INDOOR CROP PRODUCTION
Trackdataonindoorcrops.USDAdataisa‘goto’sourceforanyindustryobserverlookingtounderstand
agriculturetrendsorforbeginningfarmerslookingforabenchmarkonproductprices.WeusedtheUDSA’s
wholesalemarketpricestocalculatenationallettucepricevarianceinchartnine,forinstance.Usable
strongdatasetsfortheindustry–includingproduction,pricingandvolumedata-wouldallbewelcome.
Extendfederalfundingprogramstoindoorfarming.Asisshowninthetableoverpage,weestimatethat
indoorfarmersareeligibleforthreeUSDAfundingprogramswhosefunding$192mn.25Somegovernment-
backedlenders,suchas1stFarmCreditServices,workwithindoorfarmers.Yet,thesectoriscurrently
24“ThePotentialforUrbanAgricultureinNewYorkCity”,ColumbiaUniversity’sUrbanDesignLab,201225For2014-15,REAPtotalallocationis$101.35mnperEnvironmentalPolicy&LawCenter,$66mnforspecialtycropblockgrantfor2014perUSDA,$25mninvalueaddedproducergrantsin2014perUSDA
MARCH 2015 | PAGE 40
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
excludedfromotherfederalfundingprograms,suchasthe$3.5bn26newmarkettaxcreditprogram,which
providesforgivabledebtmostlytoinfrastructureprojects.Theprogramspeci�icallyexcludesfarming
activitiesatpresent,thoughweunderstandthatsomeequipmentpurchasesmayqualifyfortheprogram.
Asmanyindoorfarmsareinurban,industrialorsuburbanareas,theydonotqualifyforrural-focused
USDAgrants.Moreover,theindooragricultureindustrylacksthespeci�icprogramsthathavefueledother
newagriculturalindustrysectors.Forexample,inJanuary2013,theUSDA’sFarmServiceAgency
introducedapopularmicroloanprogramtoaidbeginningfarmers.Afundingprogramwhichextendedlow
costloansorotherformsofcapitaltoindoorfarmerswouldbehelpful.
Createclearstandards.Onebarriertoentryforindoorfarmersisthelackofclarityaroundfoodsafetyand
organicstandards.Giventhis,weencouragesafetyauditorstoincorporateindooragricultureguidelinesfor
GAP,HACCP,GFSI,andotherfoodsafetystandards,andtoformallydelineatestandardsforthesector’s
producetoqualifyfororganiccerti�ication.
3. HOW UNIVERSITIES CAN SUPPORT INDOOR CROP PRODUCTION
Continuegroundbreakingresearch.Academiahasundoubtedlybeenthedrivingforcebehindmanytechnical
advancesintheindooragriculture�ield.OfparticularnoteintheUSisthepioneeringworkofDrs.Gene
Giacomelli,MerleJensenandCheiriKubotaattheUniversityofArizona’sControlledEnvironment
AgricultureCenter.Examplesincludethedevelopmentofalunargreenhouse.Elsewhere,ProfessorToyoki
KozaiatChibaUniversityhasdonemuchtochampionthedevelopmentofplantfactories.Forexample,one
ofhisrecentpaperscomparedtheresourceutilizationofgreenhouseandplantfactories,andconcluded
thatthelatterwasamoreef�icientuseofresourcessuchaswater,carbondioxideandenergy.More
recently,theinitiativesofDr.CalebHarperatMIT’sCityFARMprojectonopendataandDr.JanJanseofthe
DutchWageningenUniversityonthenutritionalbene�itsofindoorcropshaveextendeddiscussionsof
indooragriculturetonewaudiences.
Expandcollaborationwithindustry.Whilepreparingthispaper,anumberofindustrystakeholders
commentedtousthattheyfelttheindustrywouldbene�itfromacenterofexcellenceestablishedalongthe
linesoftheFraunhoferInstitute,aGermanorganizationthatoffers“demanddriven,appliedresearch
combinedwithscienti�icexcellence”27intheserviceofindustryandinclosecollaborationwithacademics.
Itderivesabout70%ofitsrevenuesfromspeci�icindustrycontracts.Themodelhasbeensuccessfully
replicatedacross67disciplines,wouldallowforgreatercollaborationbetweenacademiaandindustry,and
wouldbeespeciallyhelpfultosmallerindustryplayersthatlacktheirownresearchanddevelopment
capabilities.
262014allocationperCommunityDevelopmentFinancialInstitutionsFund27FraunhoferInstitutequote
MARCH 2015 | PAGE 41
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
Source:FarmedHere
AN OVERVIEW OF GRANT FUNDING FOR INDOOR FARMS
For-pro�itindoorfarmersareeligibleforgrantfundingandincentivesunderanumberof
differentgovernmentandutilityprograms.Chicago-areaverticalgrowerFarmedHerehasput
togetherthefollowinglistofprogramsthatmaybeavailabletoindoorfarmers.Pleasecheck
withtheindividualfundingagencytodeterminewhetheryourprojectiseligible.
Ÿ UnderUSDA’sRuralEnergyforAmericaProgram(REAP),indoorfarmsmaybeeligiblefor
fundingtopurchase,install,andconstructrenewableenergysystemsandenergyef�iciency
improvements.Renewableenergyprojectsmayincludeanaerobicdigesters,solarpanels,
andgeothermalsystems.Energyef�iciencyprojectsmayincludeimprovementstoHVAC
systems,switchingfrom�luorescenttoLEDlights,andreplacementofenergy-inef�icient
equipment.
Ÿ UnderUSDA’sSpecialtyCropGrantProgram,indoorfarmsinparticipatingstatesmaybe
eligibleforfundingrelatedtospecialtycropresearch,solongasthefarmpartnerswitha
researchorganizationorcooperativeextensiontopublicizetheresultsoftheresearch.
Ÿ USDAValue-AddedProducerGrantProgram.Indoorfarmersareeligibleforthistopromote,
market,anddistributevalue-addedproducts,suchasFarmedHere’sbasilsaladdressing.The
fundsmustbeusedformarketingandpromotioncosts,whichincludepackaging,labels,
delivery,etc.
Ÿ Manylocalutilitiesprovideincentivesformakingenergyef�iciencyimprovements.
FarmedHere,forexamplehasreceivedincentivesthattiedirectlytotheamountofenergy
savedbychoosingLEDsinsteadof�luorescentlights,undertheComEdSmartIdeasforYour
Business®program.Inaddition,FarmedHerehasbeenacceptedintotheComEdandNicor
GasNewConstructionServiceprogram,pursuanttowhichitmayreceiveincentivesfor
increasingtheenergyef�iciencyofitsfarm.
Ÿ Certainstatesmakegrantfundingavailablefortechnologicaladvancesinfarmingthatcreate
jobs.Forexample,in2014,FarmedHerereceivedasubstantialgrantfromtheIllinois
DepartmentofCommerceandEconomicOpportunity,EmergingTechnologicalEnterprises
Program,foruseinpurchasingLEDlights.FarmedHerebecameeligibleforthegrantby
demonstratingthattheinstallationofLEDlightswouldincreaseitsplantyields,and
increasedplantyieldswouldcreatenewjobsrelatedtoharvestingandpacking.
MARCH 2015 | PAGE 42
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
CASE STUDY: HOW AN URBAN ORDINANCE FUELED CHICAGO’S INDOOR AGRICULTURE INDUSTRY
TheChicagoareaishometothelargestclusterofindoorfarmsinthecountry,withthreeexistingfarms
(FarmedHere,Gar�ieldProduceCo,ThePlant)shortlytobejoinedbyafourthfromNewYorkrooftop
farmerGothamGreensinconjunctionwithconsumergoodscompanyMethod.Fouryears’ago,therewere
none.
OneoftheenablingfactorsforthisdevelopmentisanUrbanFarmOrdinanceintroducedinSeptember
2011,throughwhichtheCityofChicagoprovidesclearguidelines–forrooftop,indoorandoutdoorfarms–
tourbanfarmers.AccordingtotheCityofChicago,it“clearlyde�inescommunitygardenandurbanfarm
uses,identi�ieswhereeachuseispermittedandestablishesregulationsdesignedtominimizepotential
impactsonsurroundingpropertyandhelpmaintainthecharacterofChicago’sneighborhoods.”Previously,
Chicago’surbanfarmershadoperatedinagrayarea,wherethelegalityoftheirfarmswasunknowable.
Theordinancewasdevelopedandenactedoverasummer,ledbytwoChicagonon-pro�its–theChicago
FoodPolicyAdvisoryCouncilandAdvocatesforUrbanAgriculture–alongwiththeCityofChicago.
MeganKlein,alawyerwhoworkedontheinitiativewiththeChicagoFoodPolicyAdvisoryCouncil,makes
threerecommendationswhenitcomestoenactingsuchordinances:
1.Findanin�luential�iguretospearheadtheinitiative.“OncewehadMayorEmmanuelonboard,and
heallocatedapolicydirectortotheproject,thingsreallystartedtomove”commentsKlein.
2.Involvestakeholdersinthedraftingprocess.Sharingearlydraftsoftheordinancewithfarmersand
otherstakeholdersmeantthatunworkablesuggestions,suchaslongsetbacksfromresidencesin
denselypopulatedurbanareas,werenixedearly.InChicago,acoupleofpublicmeetingsallowed
stakeholderstolearnabouttheordinanceandaddtheiropinionsandsuggestions.
3.Developanimplementationplan.Oncetheordinanceisinplace,citydepartments(especially
buildingandlicensingdepartments)andfarmersneedinformationonhowtheinitiativeworksin
practice.Forinstance,theCityofChicagodevotedasectionofitswebsitetooutliningitsordinance.
Klein–nowChiefLegalCounselatChicago-areaverticalfarmerFarmedHere–seestwobene�itsfromsuch
ordinances;betterpublicawarenessofurbanfarmingandmoreurbanfarmsinthelocalarea.Forinstance,
localnon-pro�itAdvocatesforUrbanAgriculturelists49farmsandcommunitygardensinthearea.
MARCH 2015 | PAGE 43
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
4. HOW THE PRIVATE SECTOR CAN SUPPORT INDOOR CROP PRODUCTION
Incorporatingindoorcropsintomenus.Chefshaveledthechargewhenitcomestoorganic,sustainablelocal
food,andpartneringwithindoorfarmerstoincludenew�lavorpro�ilesinmenuswouldbeafurther
enhancementtothismovement.ExamplesincludeChefDarrenBrown,whoincorporatedVillageFarm’s
greenhousegrownproduceintoFairmontHotelmenusduringhistenurewiththecompany.
Collaboratingonproductdevelopment.Asarelativelysmallindustry,indooragriculturedoesnotalwaysget
the‘shareofvoice’thatlargeronescommandwithindustrysuppliersandthiscandeterthedevelopmentof
productsbene�icialtoallindustryplayers.Asolutionisforcompaniestobandtogethertorequest,for
example,thedevelopmentofseedswithspeci�ictraits.
Gatheringdataonnutritionalcontentofproduce.Currentlythereisnoconclusiveevidencethatindoor
produceis,onaverage,healthierordenserinnutrientsthantraditionallygrownproduce,thoughtheDutch
WageningenUniversityhasreleasedtwostudiesthatshowimprovedVitaminCcontentinstrawberries28
andtomatoes29grownincontrolledenvironmentsystems.Growerscouldregularlyconducttissuesample
analyses,aggregatethedata,andworktogethertocommunicate�indingsifthereissigni�icantevidenceto
suggestindoorproduceishealthier.
Improvingaccesstocapital.Aswasoutlinedabove,thereareplentifulopportunitiesfordeploymentof
capitalintotheindustry.Weencouragebanksandotherfunderstoestablish�inancingmodelsthatsupport
indoorfarmsandtechnologiesthatenablethem.
5. HOW NON-PROFITS CAN SUPPORT INDOOR CROP PRODUCTION
Advocatingfortheindustry.Itisimportantthatindoorgrowersthemselvesworktogetherasanindustry,
potentiallythroughearlyformationofacentralizedbodyadvocatingforbene�icialpoliciesatstateand
federallevels.Suchabodywouldadvocateonbehalfofindustryforregulationandzoningchangesthat
enableurbanfarmsatthegubernatoriallevel,andforashareofexistingfundingprogramsandclearer
organicstandardsatanationallevel.
Gatheringdata.Anyyoungindustryishamperedbyalackofdata,andindooragriculturewouldbene�it
fromdataoneverythingfromitsimpactonlocalfoodsystems,tocomparativegrowingandcapitalcosts.
OnemodelthatcouldbeusedforsuchaninitiativeistheKauffmanInstitute,whichfocusesonproviding
dataandthoughtleadershiparoundentrepreneurship.
Educatingconsumersonthebene�itsofindoorfarming.Non-pro�itshavealengthyhistoryofeducatingand
in�luencingconsumerswhenitcomestofoodandagriculturematters.Examplesincluderaisingawareness
ofgeneticallymodi�iedfoods,ofchildhoodobesity,andofanimalwelfareissues.Nutrition-focusednon-
28“TastystrawberrieswithLEDs”,WageningenURGreenhouseHorticulture,December201429“TomatoeswithextravitaminCviaLEDlamps”,WageningenURGreenhouseHorticulture,May2013
MARCH 2015 | PAGE 44
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
pro�itshadrevenuesinexcessof$300mnlastyear,morethan
doublethatofoneoftheindustry’slargerfarmers,Village
Farms.30Non-pro�itshaveauniqueopportunitytoleverage
indoorcropproductiontofurthermissionspertainingtofood
access,nutrition,orpromotionoflocaleconomies.We
proposethattheyincorporateindooragricultureintotheir
advocacywhererelevant.Generalnutritioncampaignsdon’t
educatetheuninitiatedaboutthebene�itsofindoorcrops,so
onesfocusedonthebene�itsofindooragriculturetothe
environment,tofarmlaborersandtolocalfoodsystemswork
best.
Providingphilanthropy.Indooragriculturehasthe
disadvantageofrequiringarelativelyhighupfrontinvestment
inequipment,andthiscanbetoughforbeginningfarmers.
Consequently,philanthropic�inancing,whetherintheformof
grantsorlowinterestloans,wouldbebene�icial.Thereare
templatesforthisintheformofprogramssuchastheMaine
OrganicFarmersandGardenersAssociation'sOrganicFarmer
LoanFundwhichmakesloansofupto$20,000tolocalorganic
farmersworkingtobuildacredithistoryfortheirfarms.
6. HOW CONSUMERS CAN SUPPORT INDOOR CROP PRODUCTION
Supportlocalindoorfarms.Byseekingouthydroponically-
grownproduceratfarmers’marketsandgrocerystores,and
purchasingdirectlyfromlocalindoorfarms,manyofwhich
offereitheronlinesalesorcommunitysupportedagriculture
(CSA)subscriptions,consumerscanbolsteryear-roundlocal
foodsupplies.
Requestlocalfoodatrestaurantsandgrocerystores.Asinmost
industries,theconsumervoiceisextremelyimportanttothe
foodandbeverageindustry,soweencourageconsumerstoask
questionsattherestaurantandgrocerystore;“wheredoes
yourproducecomefrom?”,“howdoyousourcefreshproduce
inthewinter?”,“doyouworkwithlocalfarms?”.
30AnnualrevenueforK40Nutrition501c3NTEEcategoryof$304mnperNationalCenterforCharitableStatisticsasatDecember2014.AnnualrevenueforyeartoSeptember2014forVillageFarmsof$134mnperYahoo!Finance.
MARCH 2015 | PAGE 45
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
INDOOR FARMING TECHNIQUES GREATLY REDUCEPRODUCTION VARIABILITY AT THE FARM LEVEL AND
ENABLE UNPRECEDENTED ACCURACY IN COSTFORECASTING.
MARCH 2015 | PAGE 46
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
The Future of IndoorCrop Production
G
G. THE FUTURE OF INDOOR CROP PRODUCTION
Inordertosecurebroadmarketpenetrationandscalebeyondanicheindustry,indoorcropproduction
mustbecomecostcompetitivewithoutdoorcrops.Priceparityhasalreadybeenreachedforsomehigh-
valuecropsandincertainmarketsduringwinter,suggestingthatthetruetippingpointforrapidindustry
expansionhasalreadytranspired.Astechnologiescontinuetoadvance,theprimarycostdriversofthe
industry–capitalequipment,andlabor,electricity,andnutrientsperharvestedplant–willcontinueto
decrease.Simplyput,economicmomentumisonthesideofindoorgrowers,andweenvisagetheindustry
playingagreaterpartinthenation’sfoodsupplychainasexistingfarmerssupplementproduction,and
grocers,restauranteursandstateentitiesbegintogrowtheirownproduce.
Beyondthis,weexpecttheindooragricultureindustrytoplayapartintheongoingreintegrationoffarms
intourbanandsuburbanlife.Weenvisionafuturewhereof�iceatriumsprovidefoodforin-building
cafeteriasandlocalrestaurants.GreenbuildingssuchasUrbanarbolismo’sverticalgardencomplexinSpain
continuetogrowinpopularity,completewithgreenwalls,balconygardensandrooftopfarm.In-home
appliancesautomaticallygrowingvegetableandherbgardenswillprovidefamiliessupplementalfresh
producegrownrightintheirkitchens.Andcountlessotherapplicationswecan’tnowforeseewillcontinue
toinspireentrepreneursforgenerationstocome.
Indoorfarmingwillneverreplaceconventionaloutdoorfarmingmethods.Itwillinsteadaugmentthefood
chaintocreateadiverse,distributedsystemmoreresilienttosupplyshocksandbetterpreparedtomeet
thedemandsofagrowingglobalpopulation.
MARCH 2015 | PAGE 48
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
APPENDIX: CALCULATING THE ADDRESSABLE MARKET FOR INDOOR CROPS
TocalculateanaddressablemarketsizefortheUSindoorcropindustry,webeginbytakingalistofcrops
thatcanbecommerciallygrowninsuchsystemsfromaUniversityofFloridapaper.31 Next,wematchthese
cropstoUSDA’sNationalAgriculturalStatisticsService(NASS)productionstatisticsfor2013,themost
recentlyavailablesetofdata,toreachthefollowingpotentialmarketvalue:
TheNASSstatisticsaccountforstrawberries($2.4bn)andmushrooms($1.1bn)separatelyinthefruits,tree
nuts,andhorticulturalspecialtiessection,soweaddtheseestimatestoourvegetabletotalof$5.8bn.
Combinedthisyieldsatotaladdressablemarketof$9.3bn,ornearly17timesthecurrent$555mn2revenue
estimate.
Wenotethatthis�igureexcludesthefollowingcropsforwhichdatawasnotavailable:Arugula,Basil,
Chervil,Dill,EdibleFlowers,Eggplant,ItalianParsley,Kale,Microgreens,MiniCucumbers,MuskMelon,
Mustard,OtherHerbs,SwissChard.Further,theydonotaccountformarketgrowthbetween2013and
2015.
Crop
BabySquash
BellPeppers
Cantaloupe
ChilePeppers
EuropeanCucumbers
HeadLettuce
LeafLettuce
RomaineLettuce
Spinach
Tomatoes
TOTALCOMMERICALVEGETABLES
Value($1,000)
248,725
627,540
325,337
175,145
420,807
805,658
444,082
621,771
240,677
1,874,527
12,067,897
Notes
Allsquash,notjustbaby
Fresh&forProcessing
Fresh&forProcessing
Fresh&forProcessing
Source:"2013AgriculturalStatisticsAnnual",USDA'sNationalAgriculturalStatisticsService
TABLE TWELVE: PRODUCTION VALUE BY CROP ($1,000)
3¹“AlternativeGreenhouseCrops-FloridaGreenhouseVegetableProductionHandbook,Vol3”,R.HochmuthandD.Cantliffe,UniversityofFloridaIFASExtension
MARCH 2015 | PAGE 49
INDOOR CROP PRODUCTION | FEEDING THE FUTURE
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