Can vertical farming be a viable method of controlled environment production?

Austin Webb, co-founder and CEO at Fifth Season, said even though significant dollars have been invested in vertical farming, much of it has been wasted. Photos courtesy of Fifth Season

Fifth Season is using its fully-integrated, automated operating system to crack the economics code for vertical farming with the potential to integrate with greenhouse operations.

To say that controlled environment agriculture is drawing a lot of interest and dollars from the investment world would be an understatement. Austin Webb, co-founder and CEO at Fifth Season, a vertical farm operation in Pittsburgh, Pa., estimates that over $3 billion has been invested in the CEA industry during the last four years alone, excluding debt and merger and accusations activities for greenhouse operations.

“For indoor ag overall, including both vertical farming and greenhouse, about half that equity investment has been for vertical farming,” Webb said. “There were a lot of dollars that came into this space early on. The unfortunate piece to that is there was a lot of overhype and false promises made in this space. A lot of those dollars came in too early for some of these companies, and overall were wasted.

“There has been an industry-wide struggle to make the economics of vertical farming work. All of these companies talk about what they are going to do in the future, but the issue is they have negative unit economics. They lose money for every pound of produce they sell. In many cases, they will say that they will make the economics work in the future, but only after they build more production facilities.”

Webb said negative economics has had a major impact on the vertical farm industry.

“The false promises and the negative economics have held the industry back, overshadowed companies that are building substantial vertical farming solutions that work and pushed additional dollars to incremental greenhouse solutions,” he said. “Moving forward we will continue to see more dollars come into CEA and into vertical farming specifically. This will include public markets and SPAC (special purpose acquisition company) activity.

“Overall, there will be more money invested in CEA. This will include investments that are mediocre. The important element will be investments made into tech platforms designed for scalability and repeatability. This is the only way that volume requirements for wholesale buyers can be met to unlock indoor ag as a material participant in overall market share.”

Need for a mindset change

Even with additional investment dollars coming into the CEA industry, Webb doesn’t expect it to be enough to make traditional vertical farming companies a success.

“Unfortunately, even though significant dollars have been invested in vertical farming, much of it has been wasted,” he said. “The incremental mindset a lot of people in this industry have had is to simply convert farming from outdoors to indoors. In doing so, all they inevitably did was bring people from outdoors and put them indoors. The mindset was to create a growing platform to produce leafy greens and then sprinkle on some technology. The technology was sort of an afterthought.

“There were a lot of companies throwing out buzz words without having actual practicality in regards to robotics, artificial intelligence and automation. All the money that has been invested has been going toward continued R&D, but at a level which has companies creating technical debt.”

The thing that has helped Fifth Season avoid the technology issues other vertical farms have encountered is the way the company developed and designed its operating system.

“We had a completely different mindset,” Webb said. “We took a blank slate to really design this holistically from beginning to end. We think of this as manufacturing a living organism. As a result, we’ve created an IoT–connected smart manufacturing platform that is an industry-first, industry-only, fully end-to-end automated platform—not just growing, but also processing and packaging. There are other operations that have automation here or there, but nothing else truly automated from beginning to end.

“More importantly, we have integrated the system so it is completely run by our proprietary software platform. We don’t have a bunch of automated equipment that runs on its own controls. Instead, we have a combination of our own proprietary tech and some off-the-shelf equipment such as conveyors. All of the electromechanical systems sit within our software skin and are run by our in-house built firmware and software brain. We have a pathfinding algorithm where when we receive an order from a customer, our system is sequencing out the schedule completely on a daily, weekly and monthly basis.”

Fifth Season worked with Hort Americas and GE Current, a Daintree company, to develop its automated grow room.

“Partnering together on our solution helped us validate that there was a path for our vertical farm to have favorable economics,” Webb said. “Being able to bounce ideas and technologies off of the Hort Americas team allowed us to push the boundaries of innovative thinking in terms of our approach and how we wanted to use technology to solve the complex issues that are limiting vertical farming. We were able to think differently, knowing we had the Hort Americas team as both a check and enabler, which ultimately created a successful collaboration.”

Partnering with Hort Americas also gave Fifth Season the opportunity to incorporate Current’s LED technology into its unique growing platform.

“We did a lot of things differently with our proprietary design and in so doing there were certain things that we couldn’t necessarily handle ourselves,” Webb said. “Working with Hort Americas and Current enabled us to move very quickly while making smart, capital-efficient decisions, as opposed to designing the LEDs ourselves or over-paying for unnecessary functionality.

“We worked with Current in key areas that made big differences related to the integration of our design. We leveraged Current’s significant expertise in regards to light spectrum strategy and the corresponding impact on plant science and quality.”

Creating an economic advantage

Webb said Fifth Season’s unique platform has allowed the company to unlock positive unit economics where it can offer a market price that works for wholesalers and consumers.

“We have been able to make money per pound and make vertical farming economically sustainable,” he said. “Our platform has enabled us to make a stepwise function change in labor costs and efficiency and in energy costs. For labor we have 2x+ less labor costs than other companies in this space. We also measure and track energy down to every individual bot. We have over 60 bots that are all integrated into one robotics system. We measure and track how to optimize energy utilization to all of those bots.

“Finally we have made a stepwise function change in pounds to fixed costs ratio. That’s because we have been able to remove large aisle ways and manual inefficient storage and retrieval. We have created a patent pending solution around our automated storage retrieval, which ties to the rest of our system. In the end, we are able to remove all human involvement from the grow room and are able to achieve 2x+ the growing capacity.”

Another advantage of the platform Fifth Season has created is the need for raising additional capital compared to some other vertical farms.

“We have raised just over $40 million to date,” Webb said. “There are multiple vertical farm companies that have raised $200 to $400 million+. The reason we haven’t had to raise that much capital is because of our mindset about engineering, grow science and operations in the same R&D pipeline. It has allowed us to catch up and to surpass the rest of the industry in a fraction of the time with a fraction of the capital.

“As we move forward and look at raising additional capital, what’s different is we don’t have to use our equity capital to build more farms for all the hard costs associated with real estate, equipment and building facilities. We can if we want to and if it makes sense for our equity partners, but it is not required. We have been able to unlock positive unit economics which means we have been able to unlock non-dilutive capital to build additional facilities more capital efficiently. Overall, we have built a scalable, repeatable platform, which is what investors need to see.”

What’s ahead for vertical farming?

Webb said there will be a few select companies that have approached indoor ag and vertical farming with a solution that works and will thrive. There will also be a number of companies that are large and excessive that will eventually disappear.

“There will be some consolidation in this industry,” he said. “Some companies won’t be consolidated because they don’t have a tech platform that is investable in terms of the synergies of wanting to acquire that footprint. Consolidation will be selective in some cases.

“There is a lot of production regardless of footprint and money going into leafy greens. There are companies in this space that have no intention of doing anything different than that. I think that focus will run them into a leafy greens race to the bottom. It all comes down to no sustainable competitive advantage.”

Webb also sees the potential for synergy between vertical farms and greenhouses.

“We have built a scalable system that allows us to do a number of crops and then do asset management across different applications,” he said. “We also have the technology that is applicable from an asset management production operations standpoint that works for greenhouses as well.

“We will be able to unlock with this technology what many others won’t necessarily be able to do. Fifth Season will not only be a company that has vertical farm and greenhouse footprints, but also is one that uses those footprints in a collaborative way for specific crops. For example, a crop could be in a vertical farm environment for part of its life and in a greenhouse for another part of its life. This will create cross category and cross footprint combinations.”

For more: Fifth Season, (412) 899-2268; hello@fifthseasonfresh.com; https://www.fifthseasonfresh.com/.

This article is property of Urban Ag News and was written by David Kuack, a freelance technical writer in Fort Worth, Texas.