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The purpose of this report is to look at the emerging trends, challenges, and benefits of farming indoors. This report not only provides an overview of the indoor farming industry, it also gives a new, updated analysis of the industry, following our 2016 report. This year, we received over 150 responses from growers around the world. We had growers participate from 8 countries, with 81% coming from the United States, 12% coming from Canada, and the remainder coming from other countries.
Indoor farms can use different growing systems and structures, from urban and small-scale farming, to high-tech fully controlled and semi-automated greenhouses in rural areas, to everything in between.
As in last year’s report, respondents primarily operate greenhouses and indoor vertical farms and the majority of respondents use hydroponics as their growing system.
The indoor farming industry in the United States has been predominantly dominated by greenhouse crop production in the past. Tomato production is a staple greenhouse crop because growers can produce the crop more efficiently indoors. Now, due to decreases in technology costs (LEDs in particular) and an increase in local demand for food, we’re seeing an increase in alternate growing systems, particularly fully enclosed vertical systems.
This year, we asked respondents to describe their location as either urban, suburban, or rural. About half of the respondents indicated rural locations. The other half comprised of urban and suburban locations.
When we look at the physical location of farms in the United States, there is a large concentration of greenhouses in rural areas of the Northeast, South, and Southwest. In the Midwest, 42% of responding farms are indoor vertical operations and 50% of respondents are located in urban areas. The highest concentration of container farms was located in the Southwest and the largest percentage of urban farms was in the West.
This year, we divided farms up into the same two categories: large and small farms, however we changed the threshold to 10,000 square feet. This year, 61% of respondents were small farms and 39% were large farms.
The five main crops grown were: leafy greens, microgreens, herbs, flowers, and tomatoes, with more than half of respondents growing leafy greens.
It’s important to note why these make good crops to grow indoors. It is costly to operate an indoor facility (we’ll dig into these costs in a later section). In order to operate profitably therefore, farmers have to grow crops that are high revenue generating. To do this, you can grow crops that are specialty items, like flowers, or you can target crops that have quick growth cycles, like leafy greens. If you think about a vertical growing system, you want to grow crops that are physically short (so you can get many layers), that have short growth cycles (so you can turn your facility over many times), and are highly perishable (more valuable when grown locally).
One of the main advantages of indoor agriculture is its higher yield compared with conventional farming. Enclosing facilities creates ideal growing environments so farmers can grow a crop from seed to harvest in less time, realize higher yields in each cycle, and repeat the harvest more times in a given year.
The average yield of conventionally grown tomatoes in 2016 was 805 cwt per acre, or 1.85 pounds per square foot, according to USDA data. Greenhouse hydroponic tomato growers on the other hand, reported an average yield of 10.59 pounds per square foot.
Similarly, the average yield of conventionally grown head, leaf, and romaine lettuce is 0.69 pounds per square foot, compared with 8.71 pounds per square foot for leafy greens grown hydroponically in a greenhouse.
Indoor vertical growers reported yield of 5.45 pounds per square foot for leafy greens and container farms reported the lowest yields at 3.75 pounds per square foot for leafy greens. Indoor vertical farms can increase their overall yield by stacking additional layers and increasing their growing area as a percentage of available square footage.
Looking at both profitable and unprofitable operations, we see a pretty large range of revenue data. Hydroponic operations, for example, reported a minimum of $6.67 per square foot to $42.86 per square foot, averaging at around $21.15 per square foot. Aquaponic operations, on the other hand, reported more than double the revenue per square foot. Similarly, for facility types, indoor vertical farming operations reported double that of greenhouse revenue. Because of the wide ranges in revenue, it’s more important to analyze profitability than revenue alone.
One of the big criticisms of indoor farming is the high cost of operating facilities. This is a huge challenge for growers. In fact, only 51% of respondents reported operating profitably. The average age of profitable farms was 7 years and farms that are not yet profitable were on average 5 years old. With less conventional financial sources available to indoor farmers for both capital and operational expenses, as well as higher operational costs, it takes growers a long time to realize profits.
Of the facility types we surveyed, the most profitable appeared to be indoor deep water culture, followed by greenhouse operations. Of the five most commonly grown crops, 100% of flower operations reported profitability, along with 67% of tomato growers, and 60% of microgreens growers. The most profitable system types were hydroponics and aquaponics.
The facility types with least profitability reported were indoor vertical farms and low-tech plastic houses. Similarly, herbs and leafy greens were the least profitable crops. The combination operations (using multiple system types) were overwhelmingly unprofitable.
Tomatoes, microgreens, and flowers are most likely profitable because microgreens have extremely high revenue per pound, and flower and tomato producers have lower operating costs. Vertical farms reporting limited profitability is most likely because it is a new industry that is just beginning to mature.
Looking at only profitable operations (for data stability), the most profitable operation is leafy greens grown hydroponically in a greenhouse at a 46% profit margin. When we analyzed revenue alone, and among both profitable and unprofitable operations, we saw that hydroponics and greenhouse operations both had average revenues of about $20 per square foot. Here we see that when farms get to profitability, the revenue per square foot increases significantly, to nearly $40 per square foot. And despite not having the highest revenue per square foot of all operations, growing leafy greens hydroponically in a greenhouse has one of the lowest operational costs per square foot, at $20 per square foot. This nets a grower $17 per square foot in profit. For an acre facility, that amounts to about $750,000 in profit.
On average, leafy greens and microgreens had the highest profit margin at 40% across various facility and system types, flowers came in at 30%, and tomatoes came in at 10%.
In this section, we focus on breaking down the operating costs for the most common types of operations, starting with hydroponic operations.
For hydroponic operations, the largest single contributor to cost is labor, averaging 49% across both small and large farms. We categorized inputs as: seeds, nutrients, and grow media. Across all operations, inputs account for 10% of hydroponic operating costs. Shipping costs accounted for 2% of the cost, and the remaining 38% of costs includes: rent, packaging, energy, and miscellaneous costs.
For aquaponic operations, the cost of labor increases pretty significantly to 79%. The cost of inputs reduces slightly to about 6%, shipping stays low at 4%, and the other costs decrease proportionally.
We also analyzed indoor vertical operations. Vertical farms mirror hydroponic operations from a percentage perspective.
Another difference between indoor vertical operations and greenhouse operations is energy use. Supplemental, or artificial, lighting is a key component to vertical farming operations. Growers reported running their lights 16 hours per day every day all year round in vertical farming operations. On the other hand, only 43% of greenhouse growers reported using supplemental lighting at all, and of those growers the most light applied to plants was 9 hours per day in the winter.
Energy accounts for a large percentage of operating costs for both vertical farms and greenhouses. For large vertical farms, energy made up about 25% of total operating expenses at around $8 per square foot. For small farms, energy cost $3.45 per square foot, or about 12% of the operating expenses. This is primarily lighting costs. For greenhouses, energy makes up about 8% of total operating expenses for large farms and 11% of small farms. This is primarily heating and cooling costs.
This year, we also looked at water usage. This is one of the metrics often used in media regarding indoor agriculture. Conventional farming methods produce one pound of lettuce using 15.5 gallons of water (this is a citation). Our respondents reported only 4 gallons per square foot per year for hydroponics and as much as 10 gallons per square foot per year for aquaponics. For hydroponic lettuce, that equates to less than 0.5 gallons per pound, or around 3% of the needs of conventional lettuce.
Labor is the largest component of indoor farming budgets. Data held pretty steady from last year’s report. Large farms employed an average of 37 full time employees and 14 part time employees per year, totaling 86,712 labor hours annually. The number of employees total is interesting, but we also have to look at the rates per square footage for different facility types. Comparing greenhouses with indoor vertical farms shows a more complete picture as operations scale, with indoor vertical farms needing many more employees than greenhouses. This makes automation technologies incredibly important as the industry matures.
Interestingly, we found that large farms pay employees double what small farms pay per hour. Large and small farms also reported spending between 1.37% and 6.85%, respectively, collecting and analyzing data.
On average, small farms have an annual budget of $7.68 per square foot to invest in technology. Large farms on the other hand, spend about $9.34 per square foot.
Automation tops the list of technologies growers are most excited about. Second to automation is HVAC (heating, venting, and air conditioning) equipment. Third was a tie between data analytics, LEDs, and sensors. Note this was an open-ended question and for sensors, most growers indicated an interest in sensors specifically for nutrient applications. Automation is not a surprising number one. With the high cost of labor, most growers are thinking strategically about investing in technology that can bring costs down.
While LEDs are one of the things growers are most excited about, it also came in second on the list of things growers think are over-hyped. The overwhelming number one on the list of doubtful technologies was container farms.
We asked growers if they would buy technology from a startup and 78% indicated they would. Growers are interested in innovation. However, they’re hesitant to take risks and indicated they wouldn’t buy unproven or untested technologies. Most growers specified they don’t want to be "beta testers." Startups need to work with farmers from the onset to be successful.
When asked to indicate one or more new technologies or improvements they’re planning to make in the next 12 months, most farmers selected data analytics technology, while climate control systems ranked second.
This largely has to do with the impact growers believe data and analytics can have on their operation. Over 70% of growers believe they can increase crop yields by up to 30%, with a minimum expected growth of 14%.
While farmers are aware of the importance of data analytics and climate control systems, the use of production and inventory management software is still limited. When asked their tools of choice, most farmers - in both small and large facilities - reported using either Excel or pen and paper.
Despite its explosive growth, the indoor farming industry is not without its challenges. When asked what their number one challenge is, 25% of growers responded with an answer related to capital - from access to working capital to expansion capital to cost of production. The second challenge was building-related, including things like pests or challenges managing the environment.
When asked about their number one goal for 2018, 46% of farmers indicated either increasing profitability or revenue. For an additional 7%, the primary goal is decreasing costs, which takes financial-related goals to 53%.
If the industry can figure out these challenges and help growers become profitable faster, the industry will continue to see additional growth. Of the survey respondents, 30% expanded in the past year, adding over 450,000 square feet in new production area. On top of that, 16% of respondents were new farms created in 2017. Small farms added 50% more area in 2017 and large farms added 20%.
The vast majority of growers, 84% of survey respondents, are planning to expand their facilities in the next five years and they’re planning on growing significantly, with plans to add 22.3 million square feet of growing area. This expansion primarily comes from leafy greens growers, with expectations of adding 15 million square feet in new growing area.
We would like to thank the following people for their input and contributions to this report: Chris Higgins, Urban Ag News, Henry Gordon-Smith, Dr. Neil Mattson, Cornell University, Nick Burton, AgFunder News, Newbean Capital, Andrea Tolu, and Jordan Koschei.