Indoor Ag Can Be Financially Sustainable

The North American indoor agriculture sector has been plagued by bankruptcies recently, but if it’s done right, it can be sustainable in more ways than one.

by Tad Thompson
Indoor ag vertical farm row

The last year has not been kind to the North American indoor agriculture sector. Rising costs and interest rates have led to a slew of bankruptcies by companies that had hoped to be part of a major disruptive force in the fresh produce industry — producing more with fewer inputs, all while being independent of climatic conditions.

On Jan. 17, 2023, Lakeside Produce Inc., a major greenhouse grower based in Leamington, Ontario, filed for bankruptcy, facing total claims of $188 million. Prior to going broke, Lakeside described itself as one of the top growers and distributors of fresh hothouse fruits and vegetables in North America with facilities in Ontario, Michigan and Texas.

In June, Canary Media posted a strong in-depth analysis by Michael Grunwald, titled: “Why Vertical Farming Doesn’t Work.” The author wrote that David Rosenberg, the cofounder and chief executive of AeroFarms, based in Newark, New Jersey, told him that he was creating a new agricultural paradigm.

AeroFarms had recently built the world’s largest vertical farm in its hometown. It was growing leafy greens using aeroponics — a plant-cultivation technique in which the roots hang suspended in the air while a nutrient solution is delivered to them in the form of a fine mist — with 99% less land and 95% less water than a traditional farm. At that time, Rosenberg was preparing to take AeroFarms public at a $1.2 billion valuation. In June of this year, the company filed for Chapter 11 bankruptcy.

Lakeside Produce and AeroFarms are not alone in their commercial failures. Other indoor pioneers such as Orlando, FL-based Kalera, Pittsburgh-based Fifth Season, Brooklyn, NY-based Upward Farms, and Netherlands-based Future Crops and Glowfarms have gone bankrupt or shut down since around mid-2022.

An Energy Hog?

In his article, Grunwald notes that it’s not yet clear whether vertical farming is “an overhyped, premature, expensive business model that can still help change the world someday, or whether it’s just a dumb and impractical idea.

“Its biggest immediate problem is that it’s a ludicrous energy hog, because even though LEDs are much cheaper than they used to be, they’re way more expensive than sunlight,” he says, adding, “Outdoor agriculture has been around for 12,000 years, and it’s a bit surprising that nobody’s come up with a better way to grow food.”

Dr. Bruce Bugbee, a member of NCERA-101 — a USDA committee organized to help plant scientists understand how to use controlled environment technology effectively and consistently — and professor of crop physiology in the Department of Plants, Soils and Climate at Utah State University, Logan, UT, says that huge challenges remain for indoor agriculture growers.

“Indoor agriculture continues the 100-year agricultural evolution of substituting energy for human labor,” he says. “On an energy basis, this trade-off is not sustainable. But since labor is increasingly expensive, automated indoor agriculture can be profitable because it reduces labor costs. We should not confuse profitability with sustainability.

“The energy inputs for indoor agriculture are reduced when sunlight is used, but the energy use skyrockets when electric lights are used in vertical agriculture,” he says. “I am a proponent of indoor agriculture, but I have significant concerns about the massive energy inputs to farming without sunlight.”

Also on the NCERA-101 committee is Dr. Kimberly Williams, professor of horticulture in the Department of Horticulture & Natural Resources at Kansas State University in Manhattan, KS. She cites many advantages of controlled environment agriculture (CEA) — which includes indoor agriculture and vertical farming — but energy costs are at the top of her list of concerns. Even in sunlit greenhouses, the energy associated with cooling and heating for year-round production can be very high, depending upon the geographical location, she notes.

The Key to Sustainable Operations

According to Dr. Bahram Rashti, the cofounder and chief executive of Fresh Green Farms and UP Vertical Farms in Vancouver, British Columbia, the key to sustainability is infrastructure design and operations. He and his partner, cofounder, and brother, Shahram, planned UP Vertical for years before their first production early in 2023. The business has been an immediate, profitable and commercial success.

“This is the first time in human history that outdoor food production is coming indoors to be completely independent of outdoor elements,” says Rashti. “We don’t need sunlight anymore. A lot of people don’t realize the significance of that. They don’t realize what we’re living through.”

Rashti says this is the start of a “huge emerging market and a new trend,” in which food can be grown in a reliable and controlled manner, no matter where it is. “There are huge, vast potential possibilities. Eventually, everyone in different corners of the world will benefit from indoor vertical farming.”

He is betting that efficient LED lights and lower costs of green energy in a completely enclosed space and other sustainable components will make food production more feasible.

Recently, in New York City, Rashti was a panelist at the Indoor Ag Tech Innovation Summit. He addressed accelerating automation to reduce operational costs and increase yields. He says that these matters “shed some insight into how you become profitable, how you’re supposed to design and operate them to be profitable.”

Rashti says that at June’s CEA conference, it was noted that over the years a vertical farm had raised over $800 million. Another reportedly had raised over $600 million. “These are big, staggering numbers being mentioned, and we’re looking at how much they’re producing per year, and it’s not that far from what we’re doing.” The Rashti brothers’ construction costs were in the tens of millions of dollars. Yet, in New York, they learned “one of the major players is only producing four million pounds with these hundreds of millions of dollars. Our building cost is a small fraction of their costs, and we will be producing one million pounds per year.”

Rashti adds that this supply of leafy green production comes from UP Verticals’ first phase. “Once we add in the additional racks and complete the actual facility potential to meet market demand, we’ll be producing two million pounds annually” with a relatively very low infrastructure cost. He notes that the company is “one of the few vertical farms to operate on a large commercial scale and be profitable.”

It is essential to have profitability top of mind during the design process, he explains. “As we design, build and operate, you have to have your infrastructure costs low enough to make sense from the very beginning. As a result, you have to be very careful as to how much automation you put in and how your systems are designed because if you don’t, you will have these issues. At the end of the day, we are a business just like any other.”

He continues: “Your feasibility has to make sense and your business plans have to make sense — whether it’s for yourself or working with investors. It is something that you always have to be conscious of. We’re all getting paid back by the leafy greens’ retail or foodservice value. It is a low-margin business, so you have got to be careful and design for profitability. But if you do it right and you design it well, you can be profitable from the very beginning, and the market opportunity is incredible.”

The Human Element

Among North America’s greenhouse operations that have a long record of success is VivaOrganica, which is based in Mexico. The company is tied into Grupo Alta in Hermosillo, Sonora, and its marketing company, Divine Flavor, in Nogales, AZ.

Michael DuPuis, quality assurance and public relations manager of Divine Flavor, says VivaOrganica has been producing organic vegetables and tomatoes in Ensenada, North Baja, for a decade. The firm has also operated first-class, high-ceiling greenhouses in Culiacan and Jalisco for about eight years.

DuPuis asserts that operational longevity hinges on profitability, likening it to the commitment required to maintain high-end vehicles, such as Mercedes or BMW. Investments in technology and innovation, employee retention programs and infrastructure upkeep are key, but they come at a cost. He implies that superior infrastructure, while costly, yields both sustainability and economic benefits.

He highlights the critical role of natural resources in sustainable agriculture. However, organic farming and practices such as integrated pest management, soil improvement and the use of energy-efficient machinery have notably boosted their overall performance. DuPuis also emphasizes the increased focus on innovation, technology and data collection across their facilities, including VivaOrganica and others in the Divine Flavor network. Without data to measure results and track resources like water and energy, it would be impossible to set and achieve improvement goals, notes DuPuis.

While their facilities require less labor than traditional agriculture, thanks to technology, says DuPuis, “There needs to be a balance to all of this. It is very important that the human factor is still involved in agriculture.” He suggests that despite the speed and efficiency technology brings, especially in packing, the human element remains vital.

Clean Energy Development

Rashti points out that increasing field production costs and ongoing supply issues are making indoor vertical farming, especially for commodities such as head lettuces and romaine, increasingly viable.

UP Vertical, in collaboration with The Oppenheimer Group based in Vancouver, BC — a part of Dole plc — sells its cultivated greens to major retail chains. Its inaugural facility in Vancouver caters to retailers across Western Canada and the U.S. Pacific Northwest. The company is planning to replicate and expand its efficient production facilities eastward across Canada and the northern U.S., streamlining both operations and transportation.

Working with national accounts, UP Vertical is set to maintain a steady customer base. The company has proven its reliability year-round, backed by rigorous pre-launch commercial test research. They think that once initial customers are onboard, more will follow, and that the demand for fresh, regionally grown food, with minimal environmental impact and availability year-round, is strong in both Canada and the U.S.

Rashti notes that before the indoor production surge, “There was a huge movement towards organic because it was the cleanest method of eating produce.” Now with fresh, local, pesticide and chemical-free, sustainable closed-system indoor facilities, conscientious consumer interests are satisfied, and “our products are flying off the shelves.”

In the years of planning UP Vertical design and operations, there was always an awareness that, “The cost of everything matters when you’re working in the leafy green sector or any kind of fresh produce,” asserts Rashti. “We’re very conscious of the cost of the lights, whether it’s the purchase or the use of them as well as the electricity source and costs.”

In British Columbia, about 95% of the electricity is generated by highly sustainable, renewable hydroelectric sources. UP Vertical’s heat source is its production lights. The facility also uses an “insignificant” volume of natural gas.

More than 60% of power generated in Canada in general is hydroelectric, and there are other green forms that add to that, according to Rashti. As the firm expands south of the border, different percentages of clean energy will be available. “Then, we have to see what, where, when and how we consider the energy sources we have.”

Rashti adds, “As time goes on there’s a tremendous amount of advancements being done on clean energy, and the cost of clean energy will come down with time. Also, there will be advancements such as hydrogen fusion and hydrogen fission as electric sources. In the near future that will tremendously increase the availability of energy in these forms resulting in lower costs, as well.”

UP Vertical’s roof catches rain, all of which is used in its production supplemented by municipal water in the summer months. “We reuse and recycle 99% of the water we have,” notes Rashti.
The design was a balancing act for automation, certainly automating areas that would need low-skill workers. UP Vertical’s highest input cost is energy. Rashti says labor is typically agriculture’s greatest input cost, but automation changes that for his firm, which has only a few people operating on site to ensure the machines and ecosystem are working properly for ideal plant growth.

UP Vertical’s sustainability factors are “tremendous compared to traditional outdoor agriculture. We do use 99% less water, 99% less fertilizer and also 99% less agricultural land. These numbers are becoming more and more relevant now as we move forward because of climate change effects ravaging outdoor production and because we are running out of fresh water and agricultural land.”

At the same time, Rashti adds, the world’s population is escalating. All these global developments present challenges to agricultural producers. The problems are “going to get worse and worse, but we’ve created a large-scale solution for that. Bring it indoors, using very little and very efficient use of the actual inputs.”

UP Vertical takes its name seriously, rising to have 12 levels of very high dense, clean produce production “without anybody actually touching the produce and automating the ecosystem.” The system has no runoffs, so there is no contamination of the environment.

“We recycle everything and just top off what’s used, including our CO2. We don’t have anything escaping — it is a very controlled environment. The concept of indoor farming is incredibly beneficial, having very little impact on Mother Nature or the planet while producing good clean food all year round.”

The Future

Williams, Kansas State’s horticultural professor, notes that one of the reasons indoor farming of greens is so successful is that energy is concentrated on producing a plant that is entirely edible. She notes growing an apple tree in a closed building is also a technical possibility, but a tremendous amount of energy would be dedicated to growing inedible wood, branches and leaves. The relatively tiny apple would cost a fortune to pay for requisite inputs.

Rashti agrees: “Indoor trees won’t be coming anytime soon. There will always be outdoor production. But we are bringing indoors what we can.” He notes plant breeders are developing berry bushes to have shorter, less woody branches and high-yielding large berries that may be suitable for indoor production. The technology exists to mechanically harvest this fruit, which would be adapted for indoor production harvest.

As open-field production costs rise with escalating human demand, as people continue to innovate and create new technological breakthroughs, Rashti says it seems likely there will one day be a time when commodity staples such as wheat and rice can feasibly be produced indoors in a profitable way.

Many companies of late may have slipped up due to the unprofitability of their expensive operations amid a challenging global financial landscape. However, if done in a certain way, not only can indoor farming be sustainable, but it could also play a pivotal role in the survival of the planet, and in the process change the fabric of one of humanity’s most ancient practices. It may have been a tough year for the sector, but indoor agriculture will be an increasingly powerful force in the future.