Controlled-Environment Agriculture: Where Horticulture and Technology Meet
May 1, 2022 
Controlled-environment agriculture (CEA) means different things to different people. It’s a wide umbrella that covers hoop houses and wind tunnels with low technology, greenhouses with medium technology, and vertical farms (e.g., hydroponics, aquaponics, etc.) and other types of indoor growing with high technology and full control. For investors, it’s the shiny new toy in agriculture. To others, it is a panacea for the future of food security and the presumptive upstart disruptor that will reinvent the food system. But this burgeoning market is maturing and with that comes the inevitable growing pains that will define its future and determine whether it can deliver on all its promise.
“In my opinion, we’re at the end of the beginning,” says Robert Colangelo, founding farmer and CEO of Green Sense Farms Holdings, which provides horticultural consulting and turn-key CEA solutions by designing and building vertical farms, greenhouses, and integrated facilities. “The market is no longer brand new; it’s established and has critical mass. There are enough players now to weather the ebb and flow of the marketplace.”
CEA promises to be part of the solution to sustaining a growing world population coping with challenges exacerbated by climate change, water scarcity, and supply chain disruptions. The current food supply chain system begs for an overhaul that concentrates on improving food safety and quality and creating greater resiliency at all levels. With environmental issues escalating, the entire food production industry also needs to be more cognizant of conserving natural resources and reducing its carbon footprint.
With urbanization and limited arable land, outdoor food production is unlikely on its own to meet the food requirements of future generations. Indoor growing is here to stay and a critical part of the future. Investors are banking on it.
Venture Capital: A Blessing or a Curse?
KD Market Insights reported that globally, the CEA market is projected to grow from more than $74 billion in 2020 to an estimated more than $172 billion in 2025. A flood of investment money is propelling expansion and opportunities in the U.S. CEA market. S2G Ventures predicted in its 2020 “Growing Beyond the Hype: Controlled-Environment Agriculture” report that the U.S. CEA market will grow five times in U.S. market share over the next 10 years and “this is likely to start with leafy greens — where indoor agriculture could become 10% plus of sourced product by 2025. More broadly, there is a clear path for U.S. indoor to grow to $1 billion in leafy greens alone by 2025.”
S2G Ventures also reported in 2020 that early stage and growth investment in indoor companies and applications exceeded $1 billion. As recently as 2021, the indoor vertical farming company Plenty secured $400 million in its Series E funding round, while sweetening the deal with a long-term commercial agreement to supply fresh produce to Walmart, one of its backers for Series E funding. BrightFarms is now well-positioned to concentrate on becoming a major leader in the indoor-ag space, thanks to its megadeal acquisition by Cox Enterprises, and that came after it raised $100 million in Series E funding.
Yet, investors expect results, and the timelines for return on investment and performance for produce and live goods operations can be quite different from a factory mass-producing widgets. Scaling-up in size takes time, and it is costly.
While CEA in the U.S. saw some successes in 2021, it also experienced some setbacks. After securing backing from SPACs (special purpose acquisition companies) in 2021, AppHarvest and AeroFarms both ran into some trouble delivering on promises to investors. These setbacks, while disappointing, are part of the growing pains the industry is experiencing, and growers remain optimistic that things will improve in the future as operations fine-tune their processes and as technology develops further.
“Investors need to be patient and give this market some time,” Colangelo says. “I think the big investors are looking at big trends, and the capital will continue to flow. With that said, revenue must come in at some point. Investors first look at top-line growth, so revenue must start flowing, and then eventually profits will need to follow.”
Soli Organic (formerly Shenandoah Growers) is a lot further along with equity funding than some of the newer start-ups. Decennial Group, a real estate and investment development platform, financed Soli Organic with a $120 million agreement supporting construction of three indoor farms.
During his keynote address at the 2022 Indoor AgCon, Matt Ryan, CEO of Soli Organic said, “Investment money won’t last if we don’t make a profit. Farming is a business, and we need to figure out how to win.”
Ryan asked the packed audience to join him in using ingenuity rather than relying solely on investor money to help bring down the pricing of indoor-grown products. Related to too much reliance on venture capital, Ryan hits on two of the challenges that the CEA industry is working to overcome. One, investment money will only go so far in assisting the industry with building out the scaled-up infrastructure it will need to gain a significant share in the produce market. Building this infrastructure is an expensive prospect requiring a significant amount of upfront capital. Thus, as compelling unit economics enable profitable growth, the industry will unlock additional ways to fund growth and expansion that go beyond venture capital.
Colangelo says operations are raising large amounts of venture capital and it may be better to have a blend of funding sources that include asset-based financing.
“If they’re buying facilities or property, it’s more efficient to fund it with debt, not with venture capital. As this market matures, the sophistication on how to finance these deals will also mature to where more traditional finance methods are used, not only high-octane venture capital,” he says.
Two, the industry must bring down the costs of growing produce indoors to compete with outdoor producers. And while not there yet, it is moving quickly in that direction thanks to technical advances and more efficient production methods. Ryan told the Indoor AgCon audience, for example, that Soli Organic plans to be growing leafy greens for less than the cost of outdoor-grown products by 2024, as it is already doing with herbs.
CEA Needs to Tackle Energy Use as an Industry
CEA also faces significant difficulties around energy use. The World Wildlife Fund published an “Indoor Soilless Farming: Phase One — Examining the Industry and Impacts of Controlled-Environment Agriculture” report in 2020. The report shared results from a Life Cycle Analysis comparing the environmental impacts of conventional agriculture and four types of indoor agriculture systems — combinations of two different production methods and two different growing environments — to produce one kilogram of romaine lettuce that is packaged and transported to a grocery store in St. Louis.
Researchers found that in three categories — climate change, land use, and water use — “conventional agriculture has the lowest impact associated with climate change, primarily because of its lower electricity footprint and cleaner mix of electricity in California. However, greenhouse hydroponic agriculture received the lowest scores for land use and water use, with vertical hydroponics in second place, and then conventional agriculture.”
With investor and end consumer awareness increasing about the environmental impacts of indoor and outdoor farming, CEA growers will need to be able to not only tell their story about the environmental benefits they can provide, but also back it up with indisputable facts, and they have some work to do in this area.
Derek Smith, Executive Director of the Resource Innovation Institute, a leading non-profit for energy and water benchmarking that is actively sharing best practices for water and energy efficiency with CEA growers, told attendees at Greenhouse Grower’s 2021 GROW Executive Summit that only about 59% of CEA farms track their energy usage and only 40% can produce credible data on their energy use.
The Life Cycle Analysis also looked at new technologies and innovations, such as lighting, fiber optics, and artificial intelligence (AI)/machine learning that could change things for CEA in
the future.
“As more money comes into the industry, it will incentivize more companies to tackle some of the challenges facing the industry,” the report said. “However, they may still be thinking as individual farms rather than as an industry that could partner and make use of existing systems, such as stranded or under-utilized assets. We want to build upon what is already happening to see if there are further ways to tackle some of the hurdles. One of the biggest hurdles remains the use of energy, but there are already innovations attempting to bend the cost curve to be able to grow more types of food in more locations at affordable prices.”
There’s Room for All to Feed the World
Indoor-outdoor and environmental impact debates aside, there is more than one way to farm, and each operation or growing system is unique, producing different results and impacting the environment in distinct ways.
“I just ask that everyone who is looking at CEA not to look at CEA monolithically,” Ryan says. “Companies are very different from one another. They have very different profiles of their capabilities and technologies.”
“We need it all,” says John Purcell, CEO and President at Unfold, a new joint venture between two of the agrifoodtech world’s biggest players dedicated to developing crop varieties for tech-driven vertical farms. “You’re not going to replace [the] Salinas Valley. You’re not going to replace the glasshouses in The Netherlands or Canada. We need a supply chain that’s robust and versatile. All the pieces need to be there, whether it be an open field, greenhouse, glasshouse, or vertical farm; there’s room for everyone.”
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