Controlled environment agriculture (CEA) is gaining momentum in the farming industry as the demand for localized food systems continues to rise. This has led to increased capital investment in vertical farms and greenhouses, as well as advancements in technology. However, the misaligned expectations of treating vertical farming as a tech investment have resulted in high-profile closures and a pullback from investors.
One of the challenges faced by the CEA industry is the lack of understanding about agriculture among individuals coming from other industries. To address this issue, due diligence projects have been conducted to assess CEA operations and identify common mistakes. These assessments are categorized into six areas to provide a comprehensive evaluation for potential investors.
The first category is cultivation technology. It is crucial to examine the cultivation system being used and determine if it provides a competitive advantage. Many companies opt for novel cultivation technologies to lower their capital expenditure, but often these systems perform no better or even worse than off-the-shelf options. Companies developing novel systems may face challenges in integrating them with existing automation and mechanization systems, leading to extended development timelines.
The second category is commercial strategy. It is essential to assess if the company is growing the right products for the right markets and distributing them effectively. Some companies may focus on niche products without considering the market demand, resulting in challenges in distribution. Matching niche products with niche market offtake opportunities is crucial for success.
Economic feasibility is the third category. It is important to develop economic models to compare the current performance of a CEA company with its theoretical maximum potential. Unrealistic scenarios and expectations of rapid market saturation can hinder economic feasibility. Labor reduction is a key consideration for lowering unit economics, and tracking the unit cost of production is essential for accurate financial planning.
The fourth category is the management team. Assessing the expertise and experience of the team is crucial in determining if they can execute the company’s objectives. Drawing from traditional farms and experienced greenhouse growers can be beneficial, as they have a deep understanding of agricultural systems. Hiring a grower with experience in growing a specific crop on a commercial scale yields better results than focusing solely on technology expertise. Additionally, having a marketing and sales team with a food industry background is important for effectively differentiating CEA products from field-grown alternatives.
By considering these six categories of assessment, investors can make informed decisions when investing in CEA. Understanding the cultivation technology, commercial strategy, economic feasibility, and management team of a CEA operation is essential for success in this rapidly growing industry. As the demand for localized food systems continues to rise, it is crucial to invest in CEA with confidence and a holistic understanding of the agricultural landscape.
