Vertical Farming: Definition and Background

History and key developments

Protected culture farming – a broad category of production methods that includes floating row covers, plastic hoop houses, low-tech greenhouses, and high-tech automated/climate controlled glass houses – has a long history of use in agriculture. Throughout modern times, farmers have used these technologies to extend the growing season, exclude pests, manage input use, and ensure produce quality.

Greenhouse/glasshouse technology developed largely in the Netherlands over the past 150 years might be considered one of the immediate ancestors of today’s vertical farms. The proportion of the world’s crops being grown under some kind of protected culture (also referred to as controlled environment agriculture) has risen dramatically over the past 20 years, as illustrated by the growth in area in the United States shown in Figure 1.1 below. This illustrates not only the strengths of these production practices (especially higher yields per area), but also a growing level of technical know-how and a concurrent decrease in the costs of indoor farming technologies. The situation in Canada parallels that of the U.S., with growth in greenhouse area leveling off in recent years after strong growth in the early 2000s, which was also driven by changing consumer preferences for greenhouse-grown tomatoes.

Greenhouse vegetable area in Canada is estimated at approximately 140 million square feet in 2015, with approximately 75 percent of the area concentrated in Ontario and British Columbia. Approximately half of Canada’s greenhouse production consists of bell peppers, with most remaining space devoted to tomatoes (25%) and English cucumbers (10%).

U.S. greenhouse vegetable area is estimated at 95 million sq ft., with about 45 percent of the total concentrated in California and Arizona. Approximately half of this area is devoted to tomatoes, with the remaining categories distributed as shown in Figure 1.

Figure 1. U.S. crops grown under cover, 1998-2014

Sources: USDA, BC Greenhouse Growers Association

The development of greenhouse agriculture has set the stage for vertical farming, considered by some to be the next stage in the evolution of agricultural production. Advancements in technology and growing practices have been driven by market factors, such as the popularity of greenhouse-grown tomatoes with consumers, adapted from other sectors, such as commercial and industrial lighting, and, in the case of cannabis (until recently), the need to grow in clandestine, compact, climate controlled environments.

Another similarity between already-established greenhouse production and vertical farms is the similar range of crops grown: predominantly leafy greens and herbs. The market situation will be addressed in later sections of this report.

Also driving the growing feasibility of indoor/vertical farming is the under-appreciated (until recently) development of “plant factories” in Asia over the past 30 years. Referred to more formally as Plant Factories with Artificial Lighting (PFALs), these facilities are quite numerous in east Asia (over 500, according to a recent estimate by Newbean Capital). While their overall contribution to food production in these countries is relatively small, their numbers have been increasing rapidly in the past decade. In addition, PFALs have provided an important learning environment for new production systems and automation, and more recently, companies with experience in Asia are now gearing up to supply international markets with growing technologies.

It also bears to mention the advocacy of futurists such as Dickson Despommier, a Professor of ecology at Columbia University and founder of the Association for Vertical Farming (AVF). Nearly ten years ago, through a series of articles aimed at popular audiences, Despommier and others laid out a vision for vertical farming that is emerging, largely intact, with today’s enterprises.

Vertical farming defined

Consistent with definitions used elsewhere (e.g., Newbean Capital, AVF), we define vertical farms as operations started in the past ten years that share most of the following characteristics:

1. They are located in or very near dense urban centers
2. They make creative reuse of land and/or buildings
3. They are based on soil-free growing methods (hydroponic or aeroponic)
4. They provide, through stacked or vertically-oriented growing containers, additional growing space than their footprint would suggest
5. They employ advanced systems to control growing conditions in order to optimize resource use and/or plant productivity
6. Inputs (water, nutrients) are recycled and resource consumption is radically reduced
7. In the case of food production (as opposed to pharmaceutical crops), they preferentially serve local markets

The above definitions generally distinguish vertical farms from the existing greenhouse operations associated with traditional agricultural producers.

Based on a lack of representative operations in the market, commercial scale aquaponic (a closed-loop combination of hydroponic and aquacultural systems that produce leafy greens and tilapia or other freshwater fish species) are not included in this analysis. Also not included are systems designed for home or personal use.

Current industry in North America

The combined attention to high-value segments (food, biopharma, and cannabis) have accelerated technology and know-how to the point where start-up operations in any of these segments can reach commercial scale production in a short period of time, given adequate capital and expertise (complications such as dealing with urban land reuse are addressed in Part 2).

Some of the key developments in the North American vertical farming segment include:

• At the beginning of 2015, there were 15 commercial-scale vertical farm enterprises operating in North America, with another 30 in “active” development
• As of September 2016, the total number of active enterprises is approaching 20, though this depends on where one draws the line between demonstration farms and commercial enterprises.
• We tentatively estimate the total amount of floor space currently devoted to commercial vertical farming at approximately 900,000 square feet
• The real story may be with the growth of individual companies, rather than with the number of active startups:
  • Two firms in particular (AeroFarms and BrightFarms, both based in the New York City area) have expanded considerably over the past 18 months, adding close to 400,000 square feet of growing facilities (nearly half of present capacity).
• In 2014, indoor cultivation (food and cannabis) represented $32 million (12%) of ag tech investment. This increased to $77 million in 2015, but has tapered off recently, totaling $21 million for the first half of 2016 even as investment in other ag tech sectors has increased dramatically
• Some analysts have estimated the potential market for indoor-grown produce in North America at $9 billion per year. We believe this overstates the potential market, a topic we turn to later in this report.

Unless economic fundamentals change drastically in the coming years, indoor growing is not likely to be used for certain crops, such as grains, forage, and tree fruit. Nonetheless, there is a consensus among many observers that vertical growing methods will continue to expand their footprint over the next decade.

The specific ventures profiled in this study combine these elements in different ways, and often include their own unique elements, such as hiring only from the local community, or only building on rooftops, or combining growing operations with retail, research, or educational activities.

Key advantages of vertical farming (compared to field grown)

• Year-round growing season to meet consumer demands for otherwise off-season produce
• Significantly higher yields per unit of floor space
• Granular control over growing conditions
• Very active development environment for supporting technologies: future cost reductions are very likely
• Shorter supply chain (sometimes, but not always) may increase effective shelf life, especially for baby/micro greens
• Pesticide-free product (for completely enclosed systems)

Disadvantages of vertical farming (compared to field grown)

• High capital costs, especially in higher-priced urban locations
• High energy requirements for lighting, climate control, and motors. Technological improvements (e.g., LEDs) will improve this, but heating/cooling in extreme environments may still be costly
• Very small size of the sector means producers are subject to lower-priced competition. Differentiation is key.

Problems unique to vertical farming

• Cost recovery requires near 100% utilization at all times, regardless of market conditions: size of facility must be precisely matched to local demand.
• Fresh market is the only viable outlet for most production
• Many indoor farms profiled in this report pack their product in plastic clamshells. This adds to the waste stream, even if the containers are recycled.
• The hyper-local urban farm model requires low real estate prices
• Over-reliance on hyper-local supply can reduce resilience (for example, Atta Farms in Moncton, New Brunswick was put out of service for over six months following a fire that destroyed its facility. If this had been the only supply of critical foods, the community would have been devastated. Some balance between local, regional, and global supply is required.
• Other claims (e.g., higher nutritional value, improved food security, food miles) sometimes stretch credibility and may risk consumer backlash

Additional sources:

Newbean Capital. Indoor Crop Production: Feeding the Future. March 2015.
AgFunder. AgTech Investing Report: Year in Review 2015. February 2016.
AgFunder. AgTech Investing Report: Mid-Year 2016. August 2016.
USDA Census of Horticultural Specialties
Statistics Canada
BC Greenhouse Growers’ Association

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