The great indoors beckons for agri investors

Iceland’s volcanic Reykjanes Peninsula is one of the most desolate places on Earth. Other than clumps of moss that cling to the blackened rocks, hardly any vegetation can be found in this windswept, rain-lashed landscape.

Except, that is, in the greenhouse operated by local company ORF Genetics, where row upon row of barley stalks are sprouting under the tender glow of LED lights. Here is a glimpse into the future of agriculture – where, under carefully controlled indoor conditions, crops can be grown even in locations where the climate outdoors is hostile to food production.

The barley grown by ORF Genetics has an unusual application – it has been genetically modified to carry ‘growth factors’, proteins taken from stem cells that enable other cells to proliferate. The growth factors that ORF Genetics cultivates are mainly used in the production of cultivated meat.

“We need to change the way we get nutrition. We need to change the way we get proteins,” says Berglind Rán Ólafsdóttir, the company’s CEO. “The cultivated meat industry will need growth factors at a scale that has not been produced before.”

ORF Genetics claims that a single cow that provides stem cells could produce enough meat for 175 million cultivated meat burgers. This could reduce carbon emissions by up to 96 percent, compared with traditional methods of producing meat.

“We need to change the way we get nutrition. We need to change the way we get proteins”

Berglind Rán Ólafsdóttir
ORF Genetics

Across the world, agribusiness operations are increasingly looking to produce a wide range of foodstuffs in controlled environments. The environmental benefits are potentially huge. But can the industry scale-up in time to meet the world’s food needs and contribute to achieving net zero?

There is no shortage of investors who are enthusiastic about the potential of controlled environment agriculture, such as ‘vertical farming’ – including in parts of the world that lack Iceland’s advantages.

A vertical farm is essentially a more technologically sophisticated version of a greenhouse – using water-efficient hydroponic systems and LED lighting to produce optimum conditions for producing food year-round. Pesticides are not needed, and fertilizers can be applied much more selectively.

Gresham House has invested in Fischer Farms, which is about to start production at one of the world’s largest fully automated vertical farms in eastern England. Peter Bachmann, managing director for sustainable infrastructure at the asset manager, tells us that the new site occupies just four acres of land – but will produce food that would require up to 2,000 acres if it were grown in fields.

“In respect of how food is produced, historically, we’ve been incredibly land inefficient,” says Bachmann. Globally, around half of habitable land is used for agriculture. In the UK, the figure is almost 70 percent – and yet the country still imports 46 percent of its food, according to the UK government’s 2021 Food Security report.

Vertical farming offers a route to reducing dependence on imports. By producing food much closer to consumers, ‘food miles’ can be drastically reduced. At the same time, the shelf life of produce can be greatly extended, helping to cut food waste.

Given the environmental advantages tied to its resource efficiency, it is no surprise that ESG-conscious investors are willing to place significant bets on vertical farming.

“We’re at an inflection point now,” says Fuad Yusibov, senior investment manager at Foresight Group, which announced an investment in Harvest London, another UK-based vertical farming start-up, in March. Yusibov notes that vertical farming “bears the characteristics of infra,” with its ability to produce food year-round, thereby achieving stable and predictable revenues.

Despite high start-up costs, Accenture predicted in a recent report that controlled environment agriculture will become cost competitive against traditional agricultural methods as early as 2027. For this to happen, however, the industry will have to overcome its key challenge – the cost and availability of renewable energy.

Bananas in Iceland

Iceland is an unlikely candidate to lead the next agricultural revolution

The volcanic systems that rumble beneath its surface provide Iceland with a key advantage. Magma flows produce superheated water and steam, which can be harnessed to provide electricity and heating. Indeed, ORF Genetics chose to build its greenhouse close to Svartsengi geothermal power station so it could access the facility’s surplus heat and water.

“Iceland is well suited for the operation of greenhouses, because we have a very reliable supply of electricity and hot water, and it’s also reasonably priced,” says ORF Genetics CEO Berglind Rán Ólafsdóttir. The electricity grid is entirely powered by renewable sources – meaning the country has been immune to the price inflation that the rest of Europe has endured since Russia invaded Ukraine.

For ORF Genetics, having honed its production methods in its Icelandic greenhouse, the long-term plan is to scale up the production of growth factors using field-grown barley. However, many other companies remain firmly wedded to growing foodstuffs in Iceland, either in greenhouses or other indoor facilities.

Geothermal energy has been used to heat greenhouses in Iceland for almost a century. Today, the country is able to produce 43 percent of its vegetables domestically. It even boasts Europe’s largest banana plantation.
Another company to take advantage of the geothermal resources in Iceland is VAXA Technologies, which is producing microalgae at a facility attached to another geothermal power station in the south of the country. The algae it produces can be used in fish farms or consumed directly by humans in ‘superfood’ supplements.

Kristinn Haflidason, VAXA’s general manager, believes Iceland is a unique environment for a foodtech start-up, thanks in large part to its geothermal power. “Iceland can be a place where you can change the world,” he says. “You can do things in Iceland that you cannot do anywhere else.”

Power struggle

Vertical farms, along with other forms of controlled environment agriculture, need less land, water, pesticides and fertilizer – but they do require huge amounts of energy. The argument that vertical farming is good for the environment therefore rests on the ability of developers to secure access to renewable power.

“Broadly, it’s access to renewables that drives location for us,” says Bachmann. Like most large vertical farming operators, Fischer Farms generates much of its own power through solar assets, but still requires a grid connection. “The single biggest challenge we have, particularly in the UK, is access to a grid that could take more renewables,” says Bachmann. He warns that vertical farming businesses will head overseas unless the UK’s grid access challenges can be solved.

“I do envisage a future where vertical farming is a predominant method by which we grow
our food”

Peter Bachmann
Gresham House

In some cases, operators have been able to mitigate high energy costs and grid access constraints through partnering with facilities that generate power from intermittent sources such as solar.

“There’s a big opportunity for logistic warehouse sites to generate solar energ,” says Wim Roosens, chief operating officer at Smartkas, a Dutch agtech firm. “However, the problem is they cannot deliver it back to the grid because it’s full.

“Companies like ourselves can be a solution as we can absorb the overcapacity of the energy to grow food, which is beneficial for both parties.”

Yet several vertical farm operators have not been able to cope with the impact of rising power prices over the past 18 months. Future Crops, a Dutch company that once claimed to operate Europe’s largest vertical farm, went bankrupt in January, while German firm InFarm was forced to lay off half its workforce last November.

Finding finance

Some of the hype that vertical farming has generated in the past has proved to be premature. Roosens emphasizes that companies need to be cautious in their approach, given the very large capex required to establish a vertical farming operation.

“Sometimes you hear that vertical farming is going to feed the world,” he reflects. “I don’t think it is – it’s going to feed certain urban locations where it makes sense economically and logistically.

“That’s always an exercise that you need to do. Is there a need for this from local supermarkets? Is it worth spending €20 million to set up a vertical farm here or not? Or is a greenhouse better? Or maybe an open field?”

Smartkas now plans to raise €100 million through debt and equity to fund future expansion, but has so far relied on debt to finance its operations. “We think if you have a profitable business model, then debt can be a good solution,” says Roosens. “For us, it was the easiest way to get access to capital, without going to the big equity investors and maybe losing 30 percent of the company.”

For some vertical farming investors, however, securing profitability has not always taken center stage. “Expansion was prioritized, especially in the US, where you had venture capital funding,” says Yusibov. “In the US, expansion and scale came before profitability.”

Yusibov adds that a more financially sustainable approach requires moving away from a VC-style pursuit of breakneck growth. Developers, he says, need to find patient capital. “Vertical farming developers need to partner up with the right funder in order to be able to execute their strategy, which is going to take a number of years – it’s not something they can realize at short notice.”

Despite the challenges of raising capital and weathering the energy price storm, the potential for vertical farming to deliver significant environmental benefits is clear – even if the industry cannot refashion the world’s food system overnight.

“It’s going to take, realistically, quite a long time for us to build all of the vertical farms that we need,” Bachmann acknowledges. But he is convinced that vertical farming will enable countries like the UK to reduce food imports, and eventually to take marginally productive land – which relies heavily on chemical fertilizers and pesticides to grow food – out of the food system.

“I do envisage a future where vertical farming is a predominant method by which we grow our food.”