Ongoing consolidation in the retail food industry is likely to further solidify the position of existing market leaders in controlled-environment agriculture, according to a CoBank report.
The bank reckons the emergence of year-round demand for high-quality, locally produced fresh produce has rapidly helped make hydroponically grown production an important part of retailer’s food offerings, benefiting tomatoes, cucumbers and peppers in particular. Other crops, such as leafy greens, microgreens, herbs and novelties such as turmeric and ginger are appealing to growers, according to the report, due to their potential for higher margins and smaller area requirements.
“While prices fluctuate according to available supplies and consumer demand, greenhouse vegetables typically fetch higher prices than their field-grown counterparts because of their year-round availability and consistent quality,” wrote CoBank senior specialty crop economist Christine Lensing.
“More retailers are starting to implement contract pricing for six, nine or 12 months to reduce some of the higher seasonal pricing. However, the contacts benefit growers by locking in long-term sales.”
Released last week, the study defines controlled-environment agriculture (CEA) as technology-enabled production of food within an enclosed growing structure – including both vertical farming and traditional greenhouse operations.
About two-thirds of the $797 million-worth of crops grown under protection sold in the US in 2014 used hydroponic technology, according to the report. The average facility sat on less than an acre of land. There are such CEA facilities in all 50 states, but the biggest are located in the Northeast, West and Southwest. Domestic production is also supplemented by imports of food grown indoors in neighboring markets.
“The main strengths of the Canadian greenhouse vegetable industry are its expertise, high yields and consistent quality,” Lensing wrote. “Most Mexican-grown CEA produce flows north to Canada and the US counter-seasonally, although production has been extending to benefit from higher pricing in the shoulder seasons.”
“A lot of people have had their fingers burnt, because of not really understanding the costs involved”
Christine Lensing, CoBank
In tomatoes, for example, Lensing said that the five largest growers control two-thirds of the overall market. Early leaders have included, among others, San Antonio, Texas-headquartered tomato specialists NatureSweet; Canadian company Village Farms, which offers tomatoes, peppers and cucumbers; and Houwelings, a California tomato grower.
While these and other companies are likely to see their influence in the market rise as increased retail consolidation pushes the market towards a larger scale, Lensing told Agri Investor that climate-controlled agriculture opportunities remain for investors. She suggested these focus on targeting clearly defined markets, such as meeting demand for locally produced produce in specific metropolitan areas, and anticipating costs.
“A lot of people have had their fingers burnt, because of not really understanding the costs involved,” she said. “If you check all the boxes, you can be really successful.”
Vertical farming, such as that pursued by AeroFarms and Plenty, has attracted significant interest from institutional investors, Lensing noted.
“That’s sort of the sexy industry that you get the impression a lot of money has been thrown at,” said Lensing. “It’s not a very scalable model, at this point, because there are a lot of costs involved.”