Controlled environment agriculture’s progress toward cost parity with outdoor production in certain markets is leading to increased bankability for the sector, according to the chief investment officer of S2G Ventures.
Sanjeev Krishnan highlighted a multi-million-British-pound supply agreement announced in September between Intelligent Growth Solutions and Jungle as an indication of the market’s trajectory. IGS is a Scottish company offering an indoor growing platform that reduces electricity costs associated with LED lighting. French indoor farming company Jungle has secured long-term contracts to supply major retailers in France.
Krishnan added that project finance investors and others that have traditionally underwritten outdoor agricultural production and related infrastructure had also shown increased interest in CEA. S2G published a white paper on the CEA market, entitled Growing Beyond the Hype, at the end of last year. The firm expects the sector to contribute 10 percent of US vegetable and herb production by 2025, up from the 6 percent it provides today.
“They remind me of things that happened in the renewables space, where you have multi-year offtakes and you are providing a supply chain solution that is stable and close to market,” Krishnan told Agri Investor.
He said the bankability of indoor ag projects ultimately relies on cost comparisons with outdoor production that vary by region and energy costs. However, he added that similarities to earlier developments in wind and solar markets suggest the capital intensity and income potential of CEA will eventually attract more pensions, sovereign wealth funds and sophisticated public market investors.
“All of the things we’ve talked about covid inspiring, you are now seeing in business model design, POs [purchase orders] and infrastructure getting built,” he said. “It’s exciting. It’s going from rhetoric to reality.”
S2G’s white paper notes how numerous environmental and consumer preference developments have accentuated the perceived value of CEA in recent years. The resulting infusion of capital, the firm said, suggests both a near-term expansion of market share in leafy greens – where CEA is best established – and a longer-term evolution toward decentralized production and customization of novel products in other crop categories.
The North American vegetable greenhouse market has experienced 20 to 25 percent annual growth since 2007 and attracted more than $1 billion in early-stage growth investment, according to S2G. The firm estimates another $1.35 billion in capital will be required to support an expansion of CEA if it is to supply 10 percent of US leafy greens and herbs by 2025. Opportunities to invest in energy and labor cost-saving technology also exist.
S2G’s CEA-related investments have included Morehead, Kentucky-headquartered AppHarvest; organics-focused Shenandoah Growers of Shenandoah Valley, Virginia; and Seattle-headquartered iUNU, which offers a precision agriculture technology platform designed for indoor growing.
Krishnan said one of S2G’s indoor ag-related companies recently attracted an investment from “one of the largest produce land investors.” He declined to identify the investor but cited the deal as evidence that S2G’s approach of targeting the CEA market’s “picks and shovels” was proving successful.
“Our portfolio is ahead on cost parity compared with what we see in the market,” he said, adding that the firm does not expect consumers will pay any premium for indoor or vertical production. “That’s why we are going to even put some gas into further reducing the cost.”
One key factor driving the growth of indoor production outside the US, Krishnan said, is increasing attention from investors working with the governments of import-dependent states looking to increase their food self-reliance. In addition to the Singaporean government’s 30 by 30 effort to meet 30 percent of its own nutritional needs by 2030, he said support for CEA has been provided by governments in Abu Dhabi, Canada and elsewhere.
S2G’s paper notes that globalization has facilitated exposure to a greater variety of flavors and nutrients. Krishnan said that during a period when the outlook for global trade is less clear, he hopes future developments in genetics and indoor efficiency will help ensure stable supply of difficult-to-source crops such as cacao and saffron.
“You could regionalize and decentralize and at the same time have new options for nutrition and flavor,” he said.