Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
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AeroFarms goes public starting a new era of vertical farming
Peter Garnry
Chief Investment Strategist
Summary: AeroFarms was founded in 2004 and is thus one of the pioneers in vertical farming using layered production facilities of vegetables using artificial lighting. AppHarvest which is an indoor farming company listed earlier this year and has had troubles scaling up production causing investors to dump the shares. While the potential is huge for the industry many bumps likely lie ahead and the pressure will be enormous on AeroFarms to deliver on this growth path. We take a look at the industry, its outlook, and the key risks investors should be aware of.
Update as of 23 August 2021. A press release was published on Friday announcing that the special meeting between Spring Valley Acquisition Corp and AeroFarms has been postponed until the 30 August 2021 at 10:00 Eastern Time. The postponement is intended to permit more time to satisfy the closing conditions.
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Today a special meeting will be held between Spring Valley Acquisition Corp. (SPAC vehicle) and AeroFarms finalising an agreement back in March to merge the companies and bring the first vertical farming company to public markets. This is a key milestone for the industry and follow listings of AppHarvest and Village Farms International that are indoor farming companies. The term controlled environment agriculture (CEA) is also used by the industry.
What is vertical farming?
Indoor farming, also called greenhouses, works by growing plants indoor but using sunlight and stacking everything in one horizontal plane. Vertical farms use LED lighting as synthetic light can thus layer plants vertically and thus take up less space and gives opportunity to have vertical farms closer to urban areas reducing transportation time. Vertical farming also has the benefit of recycling water, clean rooms reducing pesticides and herbicides to an absolute minimum, and increase the yield due to optimizing light exposure.
Recent years of more extreme weather due to climate change have also shown that food disruptions will likely increase across many types of food from coffee, wheat, wine, and cocoa. Vertical farming has the potential to reduce the negative effects on food from climate change and also shorten the distance between food production and the urban population and thereby reducing carbon emissions related to transportation.
Can AeroFarms avoid AppHarvest’s stumble?
There was a lot of excitement in the industry when AppHarvest listed through a SPAC merger, but the lofty expectations have since come down as the company has reduced its outlook for production facilities and run into labor and productivity issues in scaling up production. The shares are down 83% from the peak in February. As a result of these developments there will be a lot of pressure on AeroFarms to deliver good results and with the company founded in 2004 many will ask whether this is in fact a technology that can be profitable.
The table below shows the current publicly listed companies within vertical and indoor farming. This emerging industry is still small, although you have giant greenhouse companies in the Netherlands and Spain, but these newer indoor farming companies have much more research and development angle to how they grow plants and crops. This article goes through some good details on AppHarvest and AeroFarms.
As the table above also shows, Village Farms International is getting close to profitability. Analysts expect EBITDA to reach $33.8mn over the next 12 months reaching an EBITDA margin of around 10%. Village Farms delivered $213mn in revenue in the past 12 months and is expected to grow to $352mn in FY22.
The big potential of vertical farming
In August 2020, an interesting paper with the title Wheat yield potential in controlled-environment vertical farms was released describing the physics and economics of a 10-layer indoor facility producing wheat. Under different assumptions the scientists could existing crops models for wheat and see what the yield and output would be. Their findings show the yield of producing wheat in this facility would lead to a 220-600 times increase in yield using less water, using less land, greatly reduce pesticides and herbicides. The controlled environment could theoretically lead to five harvests per year compared to one harvest in the current outdoor environment. However, the current LED technology in terms of costs make it impossible to compete at current market prices for wheat. But it is a peek into the future and what can maybe be possible. If LED lighting technology improves further or gets improved by technologies such as quantum dots or laser diodes, or prices on wheat increases dramatically due to supply disruptions from the weather changing, then maybe the future is stacked layers of wheat in buildings.
Risks to indoor farming
The key risks for the industry is if LED lighting technology slows down in efficiency which is key to roll down the cost curve. Higher energy prices are also a key risk as they are important for the overall cost of producing plants and crops in indoor facilities. The industry is dependent on capital to build physical facilities so higher interest rates lower the future profitability of indoor farming and thus we expect a rather high interest rate sensitivity, also because valuations in the industry are high, which is another risk to investors.
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