CEA’s growth prospects look good, but can every start-up be a winner?

Controlled environment agriculture has played a part in the Netherlands becoming the second-largest exporter of ag goods, with many new players inspired to replicate the country’s success.

The Netherlands is widely cited as a leader in agricultural innovation and with good reason too – the country is recognized by the Food and Agriculture Organization as the second largest food exporter behind the US.

That’s no mean feat, especially when you consider the US has a total land area of 9.8 million square kilometers, which massively dwarfs that of the Netherlands at 41,500 square kilometers.

The country has a long history of government backed research and education programs for its food industry, one part of which is the controlled environment agriculture sector.

Horticulture, fruit and vegetables accounted for three of the country’s top agricultural goods exports in 2021, all of which are supported in some way by indoor ag.

“We feel like we have the wind at our backs in terms of the macro trends,” Equilibrium CEO Dave Chen told Agri Investor in one our deep dive articles on the sector, which looked at the reasons why it could be in line for growth in Australia.

“We see CEA as being at the intersection of multiple drivers: the move towards climate adaptation, the move towards food security and regionalism, the move towards food safety, and the move towards a more resilient and reliable food system,” said Chen.

Equilibrium closed the largest private markets CEA vehicle in July 2021 and partnered with PSP Investments and Temasek at the start of this year for an expansion of CEA in Asia.

The Middle East and Asia-Pacific are two regions that have backed the industry in the last three years to the tune of hundreds of millions of dollars, and are banking on it to form a significantly larger part of their food security puzzle.

“By 2050, more than seven billion people will live in urban areas [globally],” Erez Galonska, co-founder and CEO of vertical farm distributor Infarm told Agri Investor. “The current food system cannot meet the needs of the growing urban populations – there is great need for more diverse and efficient food production.”

New beachheads in Asia-Pacific and the Middle East were key growth targets announced alongside the German start-up’s $200 million Series B in December 2021.

But as AppHarvest president and board member David Lee tells Agri Investor in a podcast being released tomorrow, while the company and others like it want to emulate the Dutch model of higher and sustainable yields achieved through tech and innovation, not every start-up will live to tell the tale of CEA’s expansion from the seat of success.

“The need for young companies to deliver on unit economics, on a path to eventual profitability, on the fundamentals to be sustainable financially, those have not changed,” Lee said.  “I think what’s changed is you’re seeing consumers demand products that are better, which helps all of us in this initiative to do well by the world, but also to do well by investors.”

Three key challenges for vertical farms, for example, include capex and opex costs; being able to justify their higher prices to consumers; and the location of vertical farms. While locating your operations in urban environments is possible, it may actually not be the most efficient way to tap into supply and logistics networks, writes IDTechEx technology analyst Brendan Beh.

And lest we forget, roughly 180 hectares of greenhouses in the UK largely went unplanted this year due to high energy prices and labor shortages, while 40 percent of the Dutch CEA industry body’s 3,000 members reported being in financial distress in September due to high gas prices.

So, while indoor farming is expected by many to take a bigger share of the world’s future food production mix, backing the right horse with an appropriate business model and inputs cost resilience will be critical.