By Wilfried Aulbur and Giovanni Schelfi

Controlled Environmental Agriculture (CEA) is a technology-based approach to food production that leverages exterior growing structures and indoor systems. These CEA systems are designed to optimize growing conditions for the health of the crop and reduce the risk of diseases and pest damage, while evading susceptibility to outdoor weather conditions.

CEA systems range from simple structures, such as shade and hoop houses, to greenhouses and vertical farms. Greenhouses and vertical farms are the primary structures used in CEA. These structures use extensive interior growing technologies like hydroponic, aeroponic, aquaponic, and aquaculture to optimize plant health. To date, CEA farms generally have a limited product catalogue, with leafy greens and herbs currently the primary crop focus.

When comparing the three main CEA systems (traditional greenhouses, high-tech greenhouses, and vertical farms), each has strengths and weaknesses. Traditional greenhouses offer the most proven method and the lowest cost structures but require the most land and are most subject to weather conditions. Conversely, high-tech greenhouses offer year-round production and better unit economics than vertical farms but have a slightly limited crop catalog. Lastly, vertical farms provide year-round production and the smallest land requirements, but the highest cost structure.

CEA is currently estimated at less than 2 percent of the total U.S. fresh produce market, with most CEA produce being supplied by traditional greenhouses. Looking ahead, the CEA industry has several important tailwinds, including customer preferences for local and healthy produce, predictable growing conditions, and less reliance on manual labor than traditional open-field growing. However, the industry also has headwinds, including the nascent stage of the technology, lack of proof in the business model, competition from traditional players, and the limited product catalogue it can offer to date (with focus primarily on leafy greens).

Increased Activity & Funding

While CEA farms have been around for over a century in the form of traditional greenhouses, recent technological innovations have spurred increased funding and attention from financial investors. Technological innovations have led to the creation of high-tech greenhouses and vertical farms, which many consider integral to the future of the agriculture industry in the face of challenges such as a growing population and lack of resources like arable land and fresh water.

Indeed, CEA start-ups in North America, Europe, and the UK have attracted close to USD 7 bn in funding since 2015. This funding has been concentrated slightly among vertical farms, which have received around 65% of total funding since 2015 (high-tech greenhouses receiving 35%). Funding has also been concentrated among a relatively small number of vertical farm and greenhouse start-ups, with several companies receiving substantial funding.

Economics & Challenges

Despite substantial funding, CEA farms continue to have difficulty realizing cost parity with traditional open-field growers. Indeed, when compared to traditional open-field costs, high-tech greenhouses are around 1.5x more expensive and vertical farms are around 3x more expensive. Additionally, CEA farms can use anywhere from 30-120x more electricity, largely explaining the current cost gap. On the other hand, CEA farms are able to generate significantly higher yields on a per acre basis and they enable substantial reductions in water consumption compared to open-field practices. With water scarcity becoming an increasingly pressing issue globally, this is a key advantage of CEA farms.

While CEA start-ups in general have had good access to capital, inadequate economics have caused many CEA start-ups to experience financial difficulties. These inadequate economics have been exacerbated over the last year due to volatile economic conditions, leading to a flood of bad news within the industry.

Recently, two CEA startups were forced to make large layoffs. More established publicly-listed companies have also had trouble, with one recently approving reverse stock splits in order to avoid being delisted from the Nasdaq.

Opportunities remain

While CEA farms are currently not yet able to reach cost parity with outdoor-field grown produce, they can find niche areas in which they can establish themselves.

CEA farms (and especially vertical farms), have much lower land requirements than traditional open-field farms, which allows them to operate in or around large urban areas. This geographic proximity to large city centers allows them to provide fresher produce to the largest demand centers, such as New York City and Chicago, since produce does not need to travel as far. As such, they can provide pesticide-free, locally-grown produce – which can often merit a price premium when targeting the right audience.

Furthermore, CEA can establish itself as an important source of specialty crops in inhospitable growing areas, for example regions with lack of fresh water and lack of arable land. Areas like this, which also have high population density fueling crop demand, will likely be important opportunities for CEA production going forwards - even more so when growing structure could be powered by abundant renewable energy, thus limiting greenhouse gas emissions. Examples could include the Middle East, Japan, and Singapore.

Conclusion

In the future, it will be important to keep a close eye on the quickly evolving CEA industry. CEA methods are far from cost parity with open-field farming, and current rising raw material and electricity costs will make bridging the cost gap difficult. Accordingly, some start-ups will likely continue to face financial difficulties, however the long-term outlook is more optimistic.

Certain CEA players may be able to gain cost parity with open-field farming, allowing them to gain share. Meanwhile, most CEA players will likely need to settle into premium-priced niches or focus on certain geographies where outdoor growing conditions are inhospitable. Additionally, the inevitable disparity between winners and losers in this industry will pose interesting opportunities for investors. Whether they are picking up distressed assets at a discount or looking for players with the most likely path towards scale and cost parity with open-field farming, CEA will be a strategic decision for each.

This article has been co-authored by Eva Barbier. We would like to express our sincere appreciation for her valuable contribution.