World Reimagined: Can Hydroponics Become the Next Big Thing in Agriculture?

The global food industry has, for centuries, been concerned with increasing yields and keeping costs down, but in recent years, technological advances have accelerated. Some would argue that the science of doing this has not always led to the best outcome for both the environment and in some cases, humans as well. But the convergence of both hard and soft science over the past decade has prompted many companies to refine existing methods and, in some cases, develop entirely new approaches. As tends to be the case, this brings fresh opportunities for investors.

There have been plenty of innovations in the technology of agriculture over the ages, from upgrading wooden tools to metal ones, going from oxen to tractors, and so on. But the one thing that has remained constant over the millennia is that no matter what you are growing, you start by putting seeds into soil.

In a meaningful way, that is beginning to change.

Hydroponics, or growing plants in nutrient rich-water without using soil, is a practice that has been around for decades but has only been used in relatively small-scale applications and generally focused on high-value crops like tomatoes, cucumbers, peppers fresh leaf lettuce, basil and spinach. In recent years, a number of forces have aligned to bring costs down and economies of scale up. Estimates are that a 30-story building with a 5-acre basal area would be able to produce the same amount as a 2,400 acre farm. Bringing crops indoors also means climate control, so issues like an unexpected freeze in Florida wouldn’t have any impact on say, orange juice markets. Another positive impact is that hydroponic growing uses anywhere from 70% - 95% less water than conventional farming.

As crops are grown indoors and in highly controlled environments, the need for pesticides is eliminated entirely, which is not only better for consumers, but also agriculture workers and of course, the environment.

Vertical farming does have at least one major hurdle, which has to do with pollinating all those crops: With no bugs flying around, pollination needs to be done manually, which is manageable in small scale operations but potentially problematic at scale.

Another potential issue is that in traditional farming, plants need sunlight and in vertical farming, light bulbs are used. Getting light isn’t the issue but electrical infrastructure and redundancies are must haves. In the case of agriculture, some countries that would benefit greatly from agritech solutions often are countries that lack the infrastructure required to support this innovation.

Let’s put some figures around this - the North American fresh fruit and vegetable market is estimated to have been approximately $90 billion at the end of 2019 and is expected to grow to $134 billion by 2026. The U.S. vertical farming industry is estimated to have been $3.3 billion in 2020 and growing at compound annual growth rate of 25.2%, is expected to reach $31.6 billion by 2030.

Fertile opportunities for investors

Publicly-listed companies planting the way in vertical farming include companies like Appharvest (APPH), Hydrofarm Holdings (HYFM), and Village Farms International (VFF). Spring Valley Acquisitions (SV) recently announced it will acquire privately held Aerofarms, which is focused on indoor vertical farming. While traded on over-the-counter markets in the U.S., Norwegian based Kalera (KSLLF:OTC, KAL:Oslo Børs) and Canada’s Cubicfarm Systems (CUBXF:OTC, CUB: TSX Ventures) are both companies that are striving to bring commercial scale innovation to this emerging segment.

The combined market capitalization of these companies sits just above $5.1 billion, which suggests this segment is still in its infancy from an investor perspective. Investment in indoor agriculture more than doubled to $1.3 billion in 2020 as part of the larger doubling of agri-food tech investment that reached $22.3 billion last year. Vertical farming still needs to be optimized before a truly global scale can be achieved, but the clients of the companies mentioned above include names like Costco (COST), Target (TGT), Kroger (KR) and Walmart (WMT) as well as Sysco (SYY), US Foods (USFD) and Marriott (MAR) which, in our view, bodes well for the industry.

While there are only a handful of public companies, there are scores of private companies entering this space. Speaking of space, one of the projects recently completed aboard the International Space Station focused on how best to irrigate plants in space. This is technology that will serve humanity as we begin to contemplate interplanetary, if not interstellar, travel.

Produce grown using vertical farming is starting to become commonplace at the clients of these agritech companies listed above. Given that the global population has been estimated by the United Nations to reach 8.5 billion by 2030 and, according to the World Bank, available acres of arable land are in decline, there are those who would invoke the ghost of John Malthus and raise resource alarms. We would say that like every time since his first publication of “An Essay on the Principle of Population” in 1798, there always seems to be new technologies that wring even more efficiency out of existing agricultural practices. After all, creating efficiency by going vertical has been applied to many things, ranging from real estate to solid state drives. It would seem that the technologies underpinning hydroponics could be the latest example of vertical innovation.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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