Exploring Opportunities for CEA Innovation to Address Food and Nutrition Insecurity
Controlled environment agriculture (CEA) is an industry that has not shied from the spotlight in recent years, with mainstream headlines covering perspectives from sector advocates to skeptics, and venture capitalists pouring over $7.1B into CEA farms and technologies, propelled by the promise of sky-high yields, anytime and anywhere.
While controlled environment production has been established for decades, funding in the recently invigorated CEA segment has undergone unprecedented acceleration since 2017, driving company creation and rapid technology innovation. Among recent highlights are Plenty’s record-setting $400M Series E financing round in January 2022 (which drew investment from their new strategic partner, Walmart, among others), closely followed by Gotham Greens’ $310M Series E round in September. In parallel, regional food and nutrition security challenges have been amplified by the Covid-19 pandemic, along with inflation, rising interest rates, and extreme weather events. With the opportunity to build resilience in agricultural production and supply chains, the potential role of CEA in improving both global and regional food security makes the production method unarguably compelling.
Despite excitement around the sector’s potential, there have been significant growing pains. Recent events suggest that CEA has entered a period of market correction, amplified by the global economic downturn and a tightening of VC purse strings. With concerns around high costs, elusive profits, and limited crop diversity, there’s likely a long road ahead before CEA has gained significant market share over outdoor production, let alone is a viable tool to serve food insecure communities. At a time when volatile markets, rising costs, and climate change are placing pressure on both CEA innovators and food insecure populations, we’ve focused our lens on the future of CEA and social impact: where are the opportunities for innovation and capital investment in CEA to improve access to cost effective and nutritious food?
Opportunities to tangibly improve healthy food access remain complex, despite ongoing public policy, programming, and education efforts. Regional food and nutrition security is a challenge experienced by vulnerable populations globally. In the U.S., approximately 1 in 10 households are food insecure, a rate that is elevated in single-parent families, racial minorities, and low-income populations. Food security is a significant predictor of ill health, with diet- related diseases reported as the leading cause of death. Food insecurity also has significant economic impacts, including lower worker productivity and increased healthcare spending.
The root causes of food and nutrition security are heavily debated, but ultimately boil down to a long term imbalance between supply of and/or demand for healthy food options. While conventional research, policy efforts, and media have largely focused on the relationship between income and proximity to grocery retailers, recent studies have challenged concepts such as the “food desert” and point towards household income as the dominant variable, with other indices of economic disadvantage, nutrition education and awareness, and dietary habits and lifestyle all being highly interconnected. In any case, the factors influencing food and nutrition insecurity are location and population- specific, and are amplified by trends in natural systems, including intensification of climate change and the related impacts on agricultural production, supply chains, and food prices.
Recent growth in CEA innovation has been paired with discourse on its opportunity to improve healthy food access, though not all CEA production methods are created equal. Broadly speaking, CEA encompasses a range of operation types and approaches, including greenhouses, vertical farms, and container farms, all providing growers with the ability to control environmental variables that influence plant health and growth.
Operations vary in terms of structural and operational characteristics, use of sunlight and/or artificial light, and the level of automation employed, all of which influence energy requirements, capital and operational costs, as well as the crops that can be grown profitably. Indeed, CEA production boasts unique attributes that suggest it may be well positioned to tackle food and nutrition security, providing an opportunity for local, year-round, and consistent production that is resilient to impacts of climate change and supply chain volatility. Plenty’s CEO, Arama Kukutai, spoke to this in a recent interview, sharing his perspective with THRIVE on development of the new “hybrid agriconomy” in which there is growing investment in new forms of indoor production, including CEA, cultivated meat, and fermentation. “This is a new modality of thinking about not just production, but about supply chain proximity to customers.” However, there are significant hurdles to be overcome before this still relatively nascent sector will scale to meaningfully complement outdoor production, let alone support food insecure populations. Critical factors such as retail price, product variety, food location and supply channels, and consumer awareness and education must be considered for CEA to have a meaningful social impact.
Even with recent efficiency gains, profitability remains elusive and unarguably the leading for CEA producers regardless of the end consumer in question. With food and nutrition security driven largely by economics, pursuit of cost parity is a critical next step. It’s expected that initial expenditures may be reduced with further standardization of common infrastructural and technology components such as lighting and climate control systems. Little Leaf Farms’ CEO, Paul Sellew, recently shared his perspective on this with Greenhouse Grower. “If you visit greens facilities, they are all different. If you visit tomato greenhouses, they are all the same. They’ve found the right answers to the production problem. I think we will get there with leafy greens as well.” Little Leaf produces 42% of indoor-grown lettuce in the U.S.
From an OpEx perspective, labor and energy are the largest drivers hampering cash flow. Total energy use per kg of food produced in a vertical farm is estimated to be seven times higher than for an average greenhouse, accounting for approximately 50-70% of the cost of goods sold. Operational costs can be cut by reducing energy use via technological advancements such as optimization of LED lighting and climate control, sensing data and AI integration, robotics, and automation. Dave Chen, CEO at Equilibrium Capital, notes the sector’s high energy use but is optimistic on opportunities for optimization. “In both greenhouse and more extreme in vertical farms, energy consumption is a huge expense item and a sustainability blind spot” Chen said in a recent interview with THRIVE. “The good news is that we have enough data at this point on ways to improve usage and energy productivity, that it is possible to cut energy use in most greenhouses by up to 30-40%, but these processes have to be built into the climate management control system.”
Biological innovation presents an additional opportunity to drive production gains through leveraging plant breeding and seed genetics to develop crop varieties designed to thrive in controlled environments. Chen agrees that genetics provide a pivotal opportunity for the industry. “Almost all plant genetics have been driven by optimizing the plant for logistics, transportation, disease management, and weather volatility.
The genetic attributes of flavor, nutraceuticals, or nutrition have been secondary. Now that we have controlled environments, we can start to reoptimize genetic constraints for consumer facing attributes.” When asked about optimization, Plenty’s Kukutai emphasized opportunities with both lighting and biology. “I personally think that the biggest opportunity for innovation that we’re continuing to invest in is on the biology side. The other big one is lighting. Energy use in our farms is concentrated on providing a very high light density environment to achieve higher plant productivity and unmatched yields. When you talk about reducing cost, you have to focus on both the numerator and denominator to reduce the cost per kg.”
From a crop diversity perspective, established greenhouse production includes a portfolio of vegetable varieties, while the vast majority of recent CEA development and investment has focused on high-production crops with short growing cycles such as leafy greens and herbs. Overall, a broader variety of crops will be required to complement conventional production at scale, as well as to move the needle on food and nutrition security. Kukutai commented on Plenty’s commitment to the R&D required to get there. “Crop diversity is what you need to be a winner in this industry, because retailers and consumers want more than just leafy greens.” Plenty’s technology stack and patented vertical architecture drives its crop diversity – it’s grown more than 50 different crops in its unique system so far. Over the last few years, Plenty has been developing technology to take strawberries from nursery to production, along with snacking tomatoes, and is committed to continued expansion.
CEA financing models are also poised for transition. While venture capital is often an appropriate lever to scale disruptive innovation, the time and patience required to fine tune CEA production and bring down costs is misaligned with the models of many who have injected billions in the sector in recent years. Additionally, recent shutdowns and layoffs in the market signal that disillusioned investors, combined with rising energy prices and other macro headwinds, are putting increasing pressure on CEA operations to focus on cash flow and deliver returns. As the sector matures, these metrics will be critical for attracting more traditional financing as CapEx-heavy CEA operators shift to capitalization models similar to those of traditional agricultural production and support a transition from lean, pilot-based iterative development to production-scale commitments.
In turn, we can expect to see shifts in business models and value chain dynamics. Over 80% of sector investment to date has gone to full-stack CEA operations, but industry maturation may lead to further segmentation between operators and technology providers, with future investments focusing more on the enabling tools and technologies.
IGS is bullish on this approach, with CEO David Farquhar recently quoted in AgFunder on his perspective on what’s next. “We need a separation between the users of the technology and the vendors. Only then will the sector ‘Cross the Chasm.’ That’s why we are strongly styled as an infrastructure vendor to the global agricultural industry.”
The division between production, packing, distribution, and retail components of the value chain may also be reexamined to drive efficiencies and reduce supply disruptions.
These factors, combined with cost reductions, will contribute to the CEA sector’s ability to scale and augment conventional production, as well as to provide food insecure populations with better access to nutritious food.
While the path ahead for CEA remains uncertain, it’s clear that the sector is still in its relative infancy and that opportunities for innovation and impact alike remain untapped. We can expect that CEA will scale to complement outdoor production to serve a changing world, and is one potential tool in an array of solutions needed to address regional food and nutrition insecurity. Industry learnings will feed the next generation of CEA innovation and growth. Focus on cost efficiencies, crop diversification, business model innovation, and examination of how CEA can best add value within our food supply chains will be paramount. As this happens, opportunities for a maturing CEA sector to address social challenges are expected to open as retail costs are reduced, crop variety is expanded, and produce supply channels are optimized.
Thanks to contributions from Dave Chen and Arama Kukutai
