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Controlled environment ag moves onto the next growth phase

Recent investments by KKR, Cascade Investment and Walmart suggest a future integration of controlled environment agriculture that could shape food system opportunities throughout the supply chain.

The social forces supporting adoption of controlled-environment agriculture are among the most potent at work in the world today. Anxiety about resource scarcity and extreme weather events, consumer demands for transparency and a sharper focus on supply chains all support the drive to bring certain crops indoors.

Degrees of this convergence have been clear to ag-focused managers for at least five years. More recent activity has solidified a build-out of indoor ag in its various forms among investment trends widely seen as having been accelerated by covid-19.

In November, Bill Gates-backed Cascade Investment entered the fray when it backed Virginia-headquartered Soli Organic, which offers organic greens from a network of indoor facilities. And in January, KKR extended a $150 million credit facility to New York-headquartered Bowery Farming to support construction of farms in Georgia and Texas, while Walmart joined a $400 million Series E round for vertical farming provider Plenty.

These endorsements have taken a variety of forms and likely stem from different investment theses. Collectively, they suggest a new phase in controlled environment ag that could shape opportunities for investors throughout the food system.

“It showcases that CEA in the US is becoming a staple of our agricultural system and it’s starting to show maturity,” said Allison Kopf, founder of CEA software provider Artemis. “It’s maturing into a place where funds like this are considering it a really fundamental part of our industry.”

Walmart described its investment – which includes a California supply agreement and plans for product development – as the first by a major US retailer into vertical farming. Kopf highlighted it comes amid a number of other direct steps by retailers to encourage indoor production, such as Wendy’s’ 2020 pledge to source its lettuce in Canada exclusively from greenhouse suppliers.

“Quietly, big, big buyers are making these announcements and starting to really change their supply chain to be shorter and more focused on regional production,” Kopf told Agri Investor. “CEA can produce essentially guaranteed volumes year-round, and that – to buyers – is going to be the thing that fundamentally shifts their thinking, especially in the world of post-covid supply chains.”

Kopf currently serves as data products head at iUNU, which acquired Artemis last year. She said that whereas the initial wave of CEA investment about 10 years ago focused on building and testing growing technology, public and private markets have recently pulled producers’ focus toward capital providers that can strengthen operational performance and project finance capabilities.

“We’re building these facilities all over the place because it’s understood how it works, but that takes a huge partnership with government. Private equity firms that can unlock that benefit regionally, locally or even federally; that’s going to be a huge benefit to producers,” added Kopf.

In its North American produce overview late last year, Rabobank noted competition from  controlled-environment ag could influence decisions of organic producers looking to relocate water-intensive crops from California. Walmart’s Plenty agreement suggests active planning for such a world of shorter supply chains and ag-focused investors will be watching closely for more signs of further integration of CEA that could influence purchasing patterns in other crop categories and regions.

Time will tell whether material, labor or regulatory constraints slow or limit the anticipated rapid expansion of CEA over the next decade. Regardless, entry by giants of farmland, and the support of financial and retail investments guarantee a key role for controlled environment ag within a food system of tomorrow, designed to respond to the most pressing concerns of today.