Recently, the recent news of the entry of the once-sought-after French vertical farming company Agricool into the receivership process has once again highlighted the challenges facing the vertical farming industry.
Since the establishment of Agricool, a French vertical agritech company, the two co-founders have documented their journey on the blogging platform Medium, providing an unusually transparent display of France's traditional business culture.
The French agritech startup was once considered a symbol of France's newly discovered entrepreneurial spirit. In 2020, French food giant Danone participated in a $28 million financing of Agricool through its venture capital division, bringing its total financing to a total of 30 million euros.
Even three weeks before the company filed for bankruptcy protection, French Channel 2, which aired on January 6, 2022, featured Agricool.
During the show, the host tasted strawberries grown by Agricool in the container vertical farm and blessed them with a French Pas mal. However, this did not save Agricool from the receivership proceedings.
In short, Agricool had everything but a sustainable business model.
According to court documents, the reason for Agricool's declaration of bankruptcy was insufficient turnover to fund the high structural costs of startups, which were mainly related to the costs incurred by R&D investments and the insufficient shipments required to achieve operational balance.
In addition, Agricool has a large amount of short-term debt (about 6.3 million euros) to repay, and the plan for a new round of financing has clearly never materialized.
Along the way, Agricool has also suffered a series of setbacks, including the failure of its international expansion into Dubai, cyberattacks in 2020 and the impact of the COVID-19 pandemic.
The output of vertical farms can be very precise because the input and growth environment are precisely controlled. However, achieving a high level of accuracy may be much more expensive than automating greenhouses and much more expensive than growing on outdoor farmland.
This is because the structure of vertical agriculture is determined by the inputs required, including equipment, seeds, light, nutrients, temperature, humidity, carbon dioxide, labor and time.
Therefore, when deciding to enter vertical agriculture, it is important to weigh the advantages and costs of this precision. So, what do the real cases of Agricool teach us?
Cost considerations
Vertical farms are complex systems that require lighting, irrigation, heating, ventilation, air conditioning, mobility, software waiting. All of this must be well combined to achieve the desired results.
When these factors add up, they can make a vertical farm capital investment 4 times higher than a high-tech greenhouse cost, or more.
While automated vertical farms require less labor than traditional farms or greenhouses, they require more highly skilled workers, such as engineers, software developers, and agronomists, meaning high wages are paid. As a result, vertical farm products may be priced twice as much as organic products.
According to CNBC, a 16,000-square-meter vertical farm built by experienced vertical farm operator Five Season in Columbus, Ohio, costs $70 million, equivalent to $17 million per acre.
Although vertical farms are planted in layers, so the expenditure per square meter of planting space will be lower than that of high-tech greenhouses, it still requires high cost of investment and maintenance.
Five Season
Market considerations
Products suitable for vertical farms must have attributes such as products that require high precision and/or products that are not easily replaced.
Similarly, customers who grow products vertically also need very specific populations: land and water premiums in their regions are very substantial; and a demographic structure that is able and willing to pay for premium products.
Products that focus more on precise attributes than price are ideal candidates for vertical farming, such as: pharmaceuticals, highly specialized fruits and vegetables (e.g., premium strawberries), premium and specialty vegetables and spices, and hemp products.
For example, in the cannabis industry, cannabis products that pass microbial testing have a high price premium and can be upgraded to medical-grade medicines. If precise indoor growing conditions can improve the pass rate of microbial testing, cannabis may be a strong candidate crop for vertical agriculture, but depending on national conditions.
Return on investment
If investors are able to get the right risk-reward on their investments, the vertical farm industry will continue to grow. Investment considerations should include the following: total target market, pricing analysis, margin analysis, farm size relative to demand expectations, and investment size.
The improper size of the overall target market so far has led to the underperformance of many investments in the sector.
For example, fresh spice plants are often attractive to vertical farms because of the high precision required for their specific flavor characteristics and the limited alternatives to spices. However, consumers don't usually buy large amounts of spices at once, so that's a problem.
When Agricool expanded from growing and selling strawberries to spices and vegetable crops, it set the price of 11 grams a packet of spices at 1.99 euros.
Assuming a sales target of $1 million for fresh herbs, Agricool's retailer would need to sell 448,000 packs of fresh spices; if the Agricool agreement gave retailers a 50 percent commission, the sales would reach nearly 900,000 bales. Almost impossible task!
Since vertical farms are capital intensive, farm output needs to provide significant profit margins and generate high levels of cash flow. When the target market is exaggerated, the time required to achieve an appropriate return will be extended, and the return of investors will be reduced, so it is not difficult to understand why the fourth round of financing that saved Agricool's life failed.
Of course, vertical technology, like greenhouses and traditional outdoor farms, already has a place in the agricultural supply chain. But investors and operators must carefully analyze and compare them with other growing methods to find the target market for vertical farm construction and operation and the corresponding product.
Making vertical farming profitable requires a lot of effort, money and investment. We're basically in an industry peer with a new invention that will change agriculture for the next 100 years, but it will certainly take time.
Hubei Future Agricultural Industry Research Institute
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