“High costs make it hard for vertical farms to compete”

Vertical farming initiatives are popping up everywhere. According to RaboResearch, some business models could be viable within five years. However, they are unlikely to replace traditional farming any time soon.

In vertical farming, crops grow indoors in vertically stacked growing trays that are artificially lit (mainly using LED lighting). As vertical farms use limited space, they are ideal for densely populated areas. The system allows for very efficient crop production in a relatively small area. One of the main benefits is the controlled production environment which allows for a predictable supply of produce free from pesticides, dust and dirt.

“Vertical farming of vegetables is an attractive proposition in some countries,” says Cindy van Rijswick, Senior Fruit and Vegetables Analyst at Rabobank. “For instance if these have an inefficient infrastructure, lack cold-chain logistics, or if their horticultural sector is underdeveloped.

Big cities and remote islands

“Fast-growing conurbations in particular can benefit: transportation costs are limited because vertical farms are often located in cities, close to the consumer. Thanks to the low shipping expenses it also has potential for isolated locations like remote islands, while the controlled growing environment makes it promising for areas with extreme climates such as deserts.”

However, vertical farming systems are unlikely to become competitive within the next few years for the large scale production of horticulture crops in countries like the Netherlands. That is mainly because (potential) urban farmers face a relatively high initial investment and steep electricity bills. In fact, vertically farmed vegetables (mainly leafy greens) cost about twice as much to grow as the same crop produced in a greenhouse.

Van Rijswick: “The Netherlands already produces vegetables very efficiently and many traditional growers are located close to large concentrations of consumers. High costs make it difficult for vertical farms to compete. Still, the gap will narrow if electricity rates and the price of LED lighting drop as expected.”

“High costs make it hard for vertical farms to compete”

- Cindy van Rijswick, Rabobank

The price factor

Until then, the price factor is a serious disadvantage. When the bank’s research arm, RaboResearch, polled Dutch consumers about vertical farming, it became clear that the vegetables must be competitively priced if the concept is to succeed. “Our survey indicated that price is a key factor for consumers here,” explains Lambert van Horen, Analyst Floriculture and Horticulture at Rabobank. “They seemed less concerned about growing methods. Our respondents said the idea of a crop being vertically produced in an indoor environment would neither attract nor repel them.”

According to RaboResearch, there are currently five feasible business models for vertical farms in the Netherlands. In each case, they have benefits over traditional farming that override the higher outlays:

  1. Research, for example by seed breeders or universities. Vertical farming makes it possible to conduct faster, more targeted research.
  2. Production of high-value crops for non-food applications in the pharmaceutical and cosmetics industries.
  3. (Small-scale) production of crops for targeted consumers who are willing to pay a premium, like restaurant visitors who value products that are grown locally or organically. Interestingly, because of different certification rules, vertically farmed produce may be sold as organic in the US, but not in Europe.
  4. Vertical farms with a high degree of supply chain integration like manufacturers of ready meals or salads which value the more predictable delivery.
  5. Vegetable or flower growers that use vertical farming methods to produce young plants instead of buying these from specialized plant nurseries. This gives growers more control over quality and consistency.

But can vertical farms feed the world sustainably? The answer is no – at least not for the time being. However, they can help to feed it in the niche markets where the advantages offset the higher setup and running costs.