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Vertical Agriculture Heading Towards “Bottom of the Bubble”

  On October 15 this year, a humble news briefing made people in the field of facility agriculture blow up: the vertical agricultural technology company AeroFarms' SPAC listing plan failed! Soon after, some investment institutions stated that they would not invest in the facility agriculture industry as originally planned, because they were not ready yet in view of the unsatisfactory performance of AppHarvest and AeroFarms. After AppHarvest's poor performance in the first quarter, its stock price plummeted continuously. All of a sudden, time seemed to have stopped. Everyone seemed to question the economics of facility agriculture, including high-tech greenhouses and vertical farms. Is this over? Where will this field go?

  AeroFarms' termination of the SPAC listing plan may be related to the volatility of the stock market, and once listed, the company will have to bear the pressure of quarterly performance, just like AppHarvest's stock price. In recent months, many people in the industry have expressed concerns about the development of facility agriculture, especially vertical agriculture, so this is worth digging deeper.

  The "Gartner Technology Cycle Curve" may provide us with some enlightenment. So, let us first briefly review how vertical agriculture has come to today. Vertical agriculture represents the most "extreme" form of facility agriculture, but understanding the past also helps us prepare for the future; unfortunately, most people who are new to this field, whether entrepreneurs or investors, are very concerned about vertical agriculture. Little is known about its history.

  Vertical agriculture is an agricultural method that grows crops on vertically stacked planes, vertically inclined surfaces, and integrated into other structures. It uses technology to control all environmental factors that affect crop yield, quality and consistency, such as lighting, climate control, and fertilization. High-level technology means that vertical agriculture has huge transformative potential, but it also seems to be over-advertised as a "magic bullet" to solve the problem of human food security.

  The first vertical farms in history were far more visionary than practical. The industry has developed through research, including players like NASA also participating in the game. At the initial stage when the concept was put forward, profit was not the goal, because the huge cost of lighting and energy is something that needs to be considered in the future. With the rapid advancement of technology, many aspects of vertical agriculture will be improved by 2021.

  First of all, the basic technologies of vertical farming, including lighting, automation, climate control, etc., have made significant progress, significantly reducing costs. Second, consumer interest in local and pesticide-free foods continues to grow, driving demand. Companies like Bowery Farming are leading the way in product sales, selling in thousands of supermarkets. Vertical farms have sprung up all over the world, but nothing can compare with the financing their American counterparts have received. Vertical farming companies such as Plenty, AeroFarms, and Bowery Farming received billions of dollars from well-known investors such as Google, SoftBank, and Jeff Bezos.

  Finally, the macro-driving factors for vertical agriculture have been prominent in the pandemic, including supply chain disruptions, as well as concerns about climate change and food safety, which have driven investors and policymakers to support the industry. This is obviously a good thing!

  However, vertical agriculture is not perfect, and its construction costs are still incredibly high. Despite rising demand, the ability of large farms to achieve the expected economic benefits is still immature. This makes one wonder, with the number and scale of farms, how fast can vertical agriculture grow? For some companies, it makes sense to grow bigger: they can get the best economies of scale, they can establish partnerships with equipment/technology suppliers, and they can get preferential treatment from local governments by increasing employment. Venture capital also wants them to grow bigger to get a return on investment, otherwise they would not be so interested.

  But as every professional in agriculture knows, the real challenge of agriculture is that it takes time to learn how to effectively manage and operate a farm. This means that a responsible and gradual approach to expansion is more practical and reasonable, rather than the super-growth mentality of "only fast but not broken" in Silicon Valley. In the eyes of investors, these farms are full of technologies with potential for exponential growth, but operators must master the handling of complex and diverse businesses, from production to sales, from recruitment to training, and most importantly, food safety. This process is much more complicated than people think, and it is in sharp contrast with the traditional agricultural model in farmland. What outsiders see may be shiny brands, cool technologies, and fresh products; only the operators themselves know the chaotic days experienced by the farms, and they often see wasted vegetable products in the first few years of operation. . In the final analysis, the reason why large vertical farms are difficult to satisfy investors is because they operate extremely complex businesses that require time and precision to scale up.

  Another challenge is that, as the leading companies in vertical agriculture obtain more funds and are pressured to be surpassed by other companies, the "unicorns" have become less open and even mysterious. In fact, data sharing is relatively common in the industry, but they are closed until the company obtains a substantial financing. On the one hand, this helps protect intellectual property rights and the interests of investors, but on the other hand, it stifles innovation and learning at the industry level. Even if they hire dozens of top Silicon Valley engineers to re-research and develop, these agricultural companies will face a simple and rude "awakening": despite all their efforts, agriculture just takes time. During the development period, it is important to compare data among peers to help achieve their own leapfrog development, but this is largely lacking in vertical agricultural companies with strong capital.

  Excessive hype and green bleaching are the "enemy" of vertical agriculture and facility agriculture. According to the 2021 Global Facility Agriculture Census Report, 70% of facility agriculture operators believe that the industry is vulnerable to excessive green bleaching; moreover, vertical farm operators will deliberately exaggerate the facts about sustainability, so that many companies have announced that they will be in the world. The expansion plans everywhere have never been realized. In fact, if vertical agricultural companies cannot realize the economic benefits of scale, it will be difficult to continue to expand. This is not to say that it won't work, but that usually the farm needs more time than the investor allows.

  According to the 2020 Facility Agriculture Survey, up to 73% of operators said that if they could re-select, they would re-select equipment, technology or crops. In reality, the only thing they can do is to continue to rush forward, which may mean using more investment to correct past mistakes. Investors are afraid of missing it, and operators know this well, which creates hype. Everyone is scrambling to get a share of the pie instead of focusing on solving the fundamental problem; Therefore, to describe vertical agriculture as a panacea that feeds the world is easier to be accepted by the market and investors than just admitting that it is a very important part of the future of agriculture.

  So, is there no future for this industry after all? Wrong! So, where will vertical agriculture go?

  As AeroFarms, the oldest and largest vertical agricultural technology company, failed to go public, Appharvest, a listed facility agriculture giant, failed to meet revenue expectations; we can safely say that on the Gartner technology cycle curve, vertical agriculture Has fallen off the peak of high expectations. People's expectations of this innovation exceed its current practical capabilities. What follows will be a period of industry depression and correction.

  This sounds terrible, but it's not a bad thing, and it can mean an opportunity. At this stage, only smart players can survive. Performance problems and failure to achieve financial returns will cause disillusionment in the field. Especially for investors, the impatience with the investment results gradually began to replace the initial excitement about its potential value.

  However, for those investors who insist on or spread the risk to the entire industry, they will see a new chapter in the industry. At this stage, inter-industry mergers and acquisitions began to occur, and the market became more mature, which also meant more honest valuations, healthier economic conditions, better facility planning, and responsible growth plans. For investors, there will be a huge opportunity to enter those start-ups that continue to advance in technology.

  It should be noted that the bottom of the bubble in vertical agriculture has not yet fully arrived. We will still need to observe how investors react to market changes in this industry in the coming year, and how existing vertical agricultural companies will weather the storms in the future.

  Finally, in view of the fundamental drivers of climate change and the accelerating consumer demand for food quality, we are still very excited and optimistic about the future of vertical agriculture and facility agriculture. The industry has also started some internal cooperation projects, such as the "CEA Food Safety Alliance" organization of facility agriculture, which aims to ensure that greenhouses and vertical farms bring clean and safe agricultural products to consumers. At the same time, related urban farming laws and government investment in urban agriculture are increasing, such as in the United States and the United Kingdom.

  There are also some vertical agricultural technology companies that are adapting to the over-hyped market in their own unique ways and maintaining their vigorous development. For example, some companies focus on distributed small vertical farms, which have high profit margins and can maintain product transparency and sustainability; some companies focus on vertical mushroom cultivation, with impressive yields and low Operating costs; some companies are expanding their social enterprise models, focusing on the impact on local communities; some companies are focusing on smart vertical planting solutions, serving some of the world’s largest vertical farms with a technology-as-a-service model .

  Entrepreneurs, companies and policy-making institutions in facility agriculture all over the world hope that facility agriculture will play a role in responding to the threat of supply chain and climate change. Generally speaking, the prospect of facility agriculture is bright, but to make this future a reality, we must first go beyond market hype and discuss the issue of vertical agriculture frankly. Pigs can also fly to the sky, which is true, but it will always land, so everyone in the industry must be prepared for changes in the industry.