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🪴 The Sustainability and Scalability of Controlled Environment Agriculture
Innovation: Controlled Environment Agriculture (CEA) probably inspires the most futuristic vision of agriculture, as it places our food in urban settings and can appear pristine, sleek, and hyper-precise. Buoyed by inventions and technical innovations, this alluring vision has translated to investor confidence: for context, from 2015 to 2020, there was a 10x increase in investment dollars flowing into CEA start-ups, with these startups raising over $1B in 2020 and ~$2B between Q4 2020-Q2 2021. Recent exits this past year include the acquisition of Brightfarms, the public listing of AppHarvest, Bowery’s $300M raise in May, and Soli Organics’ recent $120M financing round. This includes all forms of CEA - greenhouses, vertical farms, indoor farms, underground farms - that mainly use practices like hydroponics, aeroponics, or, in niche cases, aquaponics to grow crops in otherwise unsuitable conditions outdoors. The main use case includes leafy greens and microgreens, though cucumbers, tomatoes, and strawberries are also being adopted (along with cannabis). The US is still a rising player in this space, with only a few thousand acres of CEA, while Spain has over 70,000 hectares and China has over 82,000 hectares.
The recently disbanded Aerofarms SPAC deal has me thinking a lot about the limitations of controlled environment agriculture (CEA) and what would need to occur for CEA to reach its full potential, both technologically and financially. Overall, CEA is here to stay due to its ability to deliver local, safe food from a resilient supply chain, but their potential climate benefits are overstated and there is a relatively low ceiling on their growth given the crops currently available for production. There is room for technological iteration to solve some of these issues - and I find soil-based CEA startup Soli Organic a uniquely well-positioned player in the space, for example. However, CEA can become a red herring when trying to create a climate-smart food value chain as of right now.
Here are my learnings on the case for promoting CEA:
CEA allows for a more resilient, traceable, and decentralized supply chain - and supplies produce retailers are valuing this more and more in the face of climate risks. Put simply, there is existing consumer demand for pesticide-free, high-quality produce year-round - and indoor farms are a way to meet it, albeit an expensive option. As Brightfarms founder and fellow newsletter writer Paul Lightfoot claims: “Retailers are shunning food supply chains vulnerable to climate change disruption. For example, major U.S. retailers are shifting their salad supply chain from the Salinas incumbents to indoor grown upstarts, at least in material part because of improved surety of supply in the face of increasing climate volatility.” Getting fresh produce in the hands of consumers is an arduous process and only 36% of the global population has adequate access to fruits and vegetables to meet WHO nutritional guidelines. Emerging and viable technologies in the space will even allow CEA to exist in marginal coastlands of MENA with relatively low-energy expenditures. CEA allows for predictability of supply which many outdoor competitors currently can’t meet. A corollary point that follows is the safety of both the plants and humans who will consume them. Given the almost total control on sanitation, potential pathogens/pests, and waste reduction protocols, CEAs stood out during COVID-19 as a reliable local food provider. Even when there is a potential outbreak, the traceability systems in place allow for clear information flows. Eliminating pesticide use is also a key advantage, as integrated pest management is viable.
CEA creates a closer relationship between urban consumers and their food supply, tackling both obesity and food insecurity. Indoor farms particularly work well as community projects give the needed nutrition education they can provide. CEA can play an increasingly important role in food policy and education because of hands-on experience and direct access to higher-quality produce. Other externalities include local job creation, as indoor farming locations tend to be low-cost industrial zones, though high-skilled workers will be necessary.
The efficiency of production - in terms of less spoilage, yields, and water usage - presents a compelling approach to replace industrial cropping. As we have previously discussed in the Regeneration Weekly, about 40% of what we produce is ultimately wasted, and roughly a third of edible produce in California is left unharvested. Indoor farmed crops are grown in conditions that reduce variability in yield, appearance, and size - meeting consumers where they are. This also enables farmers to enter predictable and favorable futures contracts to offtake produce, potentially creating a virtuous financial situation. In addition, Food spoilage accounts for ~18% of all lost fruits and vegetables. Given the local production dynamics of CEA, this could be almost entirely mitigated. Indoor farms can also use up to 95% less water than conventional farming, and given our recent discussion on agriculture and water, this would allow for areas facing extreme water shortages and restrictions to keep on producing local produce.
However, there are clear technological barriers that should be addressed as we consider the role of CEA in our food system:
CEA is inherently not regenerative, even if they employ closed-loop systems. As it stands today, CEA systems currently have a higher environmental impact than conventional agriculture because of the reliance on electricity use, according to a recent study on soilless farming by the WWF. Reliance on solar energy in the future would effectively use the sun to power artificial sunlight, as Jonathan Foley of Project Drawdown notes. While the precise accounting of sunlight in agriculture is valuable, the building and maintenance of complex energy systems for a solar-powered indoor farm would extract raw materials from across the globe and create a new series of problems. In addition, the “food miles” problem that is important for food waste is not a key driver when it comes to agricultural greenhouse gas emissions. The worst possible scenario is effectively what has occurred in Southern Spain, where a conglomeration of greenhouses known as the “vegetable garden of Europe” litter the sea and groundwater with plastic and fertilizers.
Technological innovation in indoor farming needs to accelerate to justify their investments, both in reducing operational costs and finding ways to optimize for indoor growth. The high upfront costs of CEA, especially compared to conventional farms, will make it difficult for indoor farm operations to capture market share beyond the niche premium end of retail food. One area I find quite fascinating is designing seeds to grow in CEA systems and under specific LED lights. The Foundation for Food and Agriculture(FFAR) launched a Precision Indoor Plant (PIP) partnership to research and produce seeds for this end. In the end, finding plants specifically bred for this method of production could unlock a paradigm shift - and companies like Unfold are targeting this focal point in vertical farming. Diversification of indoor farm offerings will be crucial for continual growth. At this point, it does not make financial sense to grow cucumbers, berries, and tomatoes in many indoor farms given energy costs.
CEA will remain a growing part of our food system and emerging technologies will make it more sustainable and potentially scalable. The local supply chain resilience and access to quality produce CEA provides address key issues in our food system. However, the idea that we can control all environmental factors in food production without relatively high material extraction compared to a nature-based system merits more discussion. Perhaps a system like that of Soli Organic, which grows plants in soil indoors with specific soil blends and closed-loop production, or GreenForges, which does underground vertical farming, will thread the needle. Perhaps the folks at Bowery will unlock hydroponics at scale for a variety of plants or Aerofarms will do so for aeroponics. As it stands, we are not currently there - and outdoor agriculture of both animal proteins and crops presents a clear opportunity for environmental regeneration on top of a more nutritious food system.
Shop: Ranchlands is a fascinating company: they operate large-scale cattle and bison ranches in the American West. In working with conservation-minded owners to implement ambitious conservation programs that coexist alongside our own cattle operations, they have found complementary businesses to make their conservation-minded approach financially sustainable. Ranchlands Mercantile has leather goods and a variety of niche goods (like a Bison Koozie) that merit a look around. Finding ways to utilize every part of the animals we herd and consume is the most sustainable approach possible - and Ranchlands’ high-quality goods are the best showcase for this model.
Listen: The Investing in Regenerative Agriculture Podcast is always worth a listen, but this particular episode with Mellany Klompe of Soil Heroes dives into a topic at the heart of the regenerative movement: nutrient density. Mellany’s perspective on how to commercialize food quality for farmers and how to essentially create market access for regenerative producers is thought-provoking. We need to develop infrastructure around nutrient density testing and marketing, and I’m eager to see was Mellany does moving forward.
Disclaimer: The Regeneration Weekly receives no compensation or kickbacks for brand features - we are simply showcasing great new regenerative products.
If you have any products you would like to see featured, please respond to this newsletter or send an email to Kevin(at)soilworksnaturalcapital.com