As rising heat across the United States disrupts the growing of leafy green vegetables, more investors are putting up money to help develop farming inside specialized buildings with controlled environments.
The latest greenhouse investment fund from Equilibrium Capital raised $1.022 billion, more than doubling its target when launched two years ago. Equilibrium is based in Portland, Oregon, where temperatures reached a searing 116 degrees in late June. The strategy of Equilibrium’s Controlled Environment Foods Fund II, like its predecessor, is focused on investing in high-tech greenhouses and indoor farms.
The fund has already made two investments in the United States, most recently last month when it backed Minnesota-based Revol Greens with $110 million to build a 40-acre greenhouse in Temple, Texas. Equilibrium teamed up previously with Revol on a 2.5-acre farm in Medford, Minnesota. That project was the subject of a New York University Stern Center for Sustainable Business case study in March.
“The supply of fresh leafy greens and lettuces in the U.S. is threatened by the increased frequency of extreme weather events, as well as increasing labor shortages and recurrent food safety recalls,” according to the case study. “To mitigate these risks, as well as grow a better, fresher product, Revol Greens grows leafy greens and lettuces in a greenhouse to supply consumers 365 days a year.”
Other recent examples of investment preceded Equilibrium’s capital raising. Bowery Farming, one of the largest vertical farming companies in the country, secured $300 million in additional funding in a June round led by Fidelity Management & Research Co. Other investors included GV, formerly Google Ventures, as well as NBA player Chris Paul, actress Natalie Portman and singer Justin Timberlake. Bowery plans to use the funds to continue expansion of its network of smart indoor farms.
In a so-called blank-check merger, controlled-environment grower Local Bounti entered into an agreement with Leo Holdings III Corp. The deal, announced last month, will provide up to $400 million of gross proceeds including $125 million from Fidelity, BNP Paribas and strategic partners Cargill and Gulf Energy Development.
There are barriers to widespread use of commercial greenhouses, according to NYU, mainly their cost and associated land-use policies.
Investment can exceed $1.3 million per acre for vine crops and $2.5 million per acre for lettuces, making it financially challenging to fund the growth needed to achieve economies of scale, especially given the limited capital sources currently available to operators of these assets, NYU said.
And operators must consider zoning laws that increase the availability of public land, height restrictions on greenhouses and navigating legislation organizing farm operations and logistics.
$30 Billion Market
Even so, Craig Hurlbert, Local Bounti co-founder and co-CEO, estimated that the current western U.S. market opportunity for vegetables and herbs is about $10.6 billion and projected the total U.S. market will reach up to $30 billion by 2025.
AeroFarms is another player in the controlled-environment space. In May, the New Jersey-based company started construction in Virginia on what it’s touting as the biggest and most advanced indoor farm in the world.
The advanced aeroponic indoor vertical farm is designed to grow crops in stacked trays, misting their suspended roots with water, oxygen and nutrients.
The facility is expected to help AeroFarms build upon existing relationships that include Whole Foods Market, ShopRite, Baldor, Amazon Fresh and FreshDirect. The company secured major investor support and plans to go public propelled by a $1.2 billion blank-check deal with Spring Valley Acquisition Corp.
Peter Tasgal, a food and agriculture consultant with Strategic Capital Consultants in greater Boston, told CoStar News in an interview that there are a handful of other reasons driving investment.
For one, it’s part of the larger growing interest in the environment and social issues in general. Also, food is not cyclical; whether the economy is up or down, fruit and vegetables are still consumed. And operators are becoming more professional and not just dominated by local farmers anymore.
“There’s profitability, or at least positive cash flow in a lot of these areas, which not only allows for high-risk equity capital, but you’re also now at sort of moderate- to lower-risk equity capital and even some of the more junior debt providers are paying into the space or investments,” Tasgal said.
Deal size is also growing, which is bringing in larger-dollar investors.
“Five years ago, I’m not sure where you would have put $100 million unless you were going to build the first greenhouse,” Tasgal said. “But I think today, those opportunities are out there for big companies like Equilibrium or even much more mainstream investors."
Indoor Farming Advantages
Such projects carry multiple environmental benefits, including reduced food transport miles, the creation of family-wage jobs, produce that is free of pesticides and herbicides, and less water-intensive methods compared to traditional farming, the NYU study said.
Field production of leafy greens is under long-term pressure due to labor shortages and frequent extreme weather, according to NYU. Continued disruptions in the supply chain for fresh leafy greens are expected in the coming years.
Specifically, the geographic concentration of the U.S. lettuce supply in California and Arizona is a material risk to the produce industry, NYU said. Climate change and increasingly extreme weather — historic droughts, fires and rain — in the Western United States create long-term questions about the resiliency of the supply chain, in addition to concerns about the effect of long-distance shipping on produce quality and freshness.
One solution, NYU concluded, is to build more controlled-environment facilities in markets outside of California and Arizona.
“However, greenhouses are extremely capital- and energy-intensive. Access to capital has heretofore hindered the growth of greenhouses as an alternative production option,” according to NYU.
Equilibrium has pioneered the development of controlled-environment agriculture into an institutional asset class and is one of the largest investors globally in this space.
“Agriculture is ground zero for sustainable use of our natural resources, climate risk, and climate adaptation,” Dave Chen, CEO of Equilibrium, said in a statement. “In the next decades, the agriculture industry, globally, will be called on to provide more food, more safely, of higher quality, with greater diversity, in a more climate challenged world with a shrinking arable, and more inhospitable, landscape. [Controlled-environment agriculture] addresses many of these emerging global realities.”
Investors and retailers are increasingly looking for more sustainable and less volatile ways to invest in and scale agriculture, Chen said. Commercial greenhouses shift agriculture from a land-centered industry where the land, geography and weather determine what can grow, into a climate-resilient industry.
Development Bank of Japan is among Equilibrium’s backers. The Tokyo-based bank invested an unspecified amount in December.
“In the midst of climate change, the world is seeing rapid change in food demand, both quantity and quality, and limited natural resources, and as we address these social issues, advanced greenhouse technology is expected to become more widespread not only in the U.S. and [European Union] but also in Japan and elsewhere, because it can be installed independent of geographical considerations,” Development Bank of Japan said in announcing the investment.