INDOOR CROP PRODUCTION FEEDING THE FUTURE · About the White Paper The purpose of this paper is to consolidate knowledge on the current state of the indoor agriculture industry, demonstrate

INDOOR CROP PRODUCTIONFEEDING THE FUTURE

MARCH 2015

About the White Paper

Thepurposeofthispaperistoconsolidateknowledgeonthecurrentstateoftheindooragricultureindustry,demonstrateitsgrowingimportancetoourfoodsystem,andpresentthecaseforitslong-termeconomicviability.Ourtargetaudienceisthosethatdonotknowtheindustrywell;thepaperisintendedasanintroductiontoindooragriculture.Asitsauthors,wedonotconsiderourselvesexpertintheindustry,norareweboundbyanylegalorcontractualrelationshiptooneanother.Wecametogethertocreatethispaperoutofasharedbeliefthat,bybetterunderstandingthecurrentstateandtrajectoryoftheindooragricultureindustry,wecancollectivelyworktoexpediteitsgrowthandcreatenewopportunitiesforeconomicgainaswellaswide-scaleimprovementintheUSfoodsupplysystem.

About the Authors

NewbeanCapitalisaregisteredinvestmentadviserthatmanagesearlystageventurecapitalmandatesforinstitutionalinvestors.Itsfounder–NicolaKerslake–hasalongstandinginterestinagricultureinvestment,havingpreviouslycoveredagriculturestocksasanequityanalystandmanagedinstitutionalinvestmentportfoliosthatcoveredthesector.ShefoundedtheIndoorAg-Coneventthreeyears’agotoprovideameetingplaceforthosewhoareaspassionateassheisaboutthepromiseoftheindooragricultureindustry.

[email protected] www.newbeancapital.com

LocalRootsisathoughtleaderinindooragriculture,dedicatedtosolvingsystemicfoodchaininef�icienciesthroughinnovationandtechnology-drivensolutions.LocalRootsiscurrentlypioneeringmodularcontrolledenvironmentagriculturetechnologiesthatenableyearroundcropproductioninanyclimate,inanygeography.LocalRoots’Missionistoprovideeveryoneaccesstofresh,healthy,andaffordablelocally-grownproduce.

[email protected]

ProteusEnvironmentalTechnologiesprovidesbothmarket-basedsolutionstofacilitatethesuccessfulcommercializationofnewtechnologiesaswellasconsultingservicesthathelpitsclientstoimprovetheirbottomlinethroughthecarefulimplementationofsustainabilitytechnologiesandpractices.Weprovideclientswithacomprehensiveanalysisofsustainabilityoptionsthatisweightedbyboththeeconomicandsocietalbene�its.Commercializationandconsultingde�inesentrepreneurialstrategiesforachievingsustainabilitygoalsandcanhelpimplementthechosenstrategies.

[email protected] www.proteusenv.com

Acknowledgements

Theauthorswouldliketothankthefollowingfortheirinputintothispaper:MeganKleinatFarmedHere,ChrisHigginsatHortAmericas,AndrewMefferdatJohnny’sSelectedSeeds,WendyMilletandDougMillaratTomKatRanch,MattRoyatUSFoods.

Disclaimer

ThispublicationhasbeenproducedbyNewbeanCapital,aregisteredinvestmentadviser.Readershipofthispublicationdoesnotcreateaninvestmentclient,orotherbusinessorlegalrelationship.Itprovidesinformationabouttheindooragriculturemarkettohelpyoutobetterunderstandthisindustry.Thispublicationdoesnotpurporttoprovideinvestmentadvice,normayitberelieduponasasubstitutefor,speci�icinvestment,legalorotherprofessionaladvice. You should seek such advice only from a qualifiedprofessional.

NewbeanCapitalhasactedingoodfaithtoprovideanaccuratepublication.However,NewbeanCapitaldoesnotmakeanywarrantiesorrepresentationsofanykindaboutthecontentsofthispublication,theaccuracyortimelinessofitscontents,ortheinformationorexplanationsgiven.NewbeanCapitalhasnoobligationtoupdatethisreportoranyinformationcontainedwithinit.

NewbeanCapitaldoesnothaveanydutytoyou,whetherincontract,tort,understatuteorotherwisewithrespecttoorinconnectionwiththispublicationortheinformationcontainedwithinit.Tothefullestextentpermittedbylaw,NewbeanCapitaldisclaimsanyresponsibilityorliabilityforanylossordamagesufferedorcostincurredbyyouorbyanyotherpersonarisingoutoforinconnectionwithyouoranyotherperson’srelianceonthispublicationorontheinformationcontainedwithinitandforanyomissionsorinaccuracies.

PAGE 3 | INDOOR CROP PRODUCTION | FEEDING THE FUTURE | MARCH 2015

ndooragricultureisquicklygainingmomentumintheUnitedStates.Indoorfarmsmostlyuse Ifarmingtechniquesandtechnologieswhichallowforimprovedcontroloverthevariablesinvolvedin

thegrowingofproduce.Weestimatethatthereare15commercial-scaleverticalfarmsandrooftop

greenhousesinNorthAmericatoday,andthatafurther30willbeaddedin2015alone.Withatotal

addressablemarketsizeofover$9bn–or17xthecurrentUSmarketsize-indooragricultureispoisedto

bethenextmajorenhancementtotheAmericanfoodsupplychain.

Stronggrowthin“localfood”demand,themarketforwhichhasexpandedfromanestimated$1billionin

2005tonearly$7billionlastyear,hasmeantauniquemarketentrypointforindoorfarms’higherprice-

pointproducts,whetherthismeansleafygreensharvestedthatmorningforlunchserviceormicrogreens

growntoorderforalocalsupermarket.Whileseasonality,soilconditions,andaccesstolandhave

traditionallymadeyear-roundlocalproducesourcingimpossible,indooragricultureiswellpositionedto

satisfythelargelyunmetneedforlocalproducebygrowingyear-roundinanyclimate.

Indoorfarmshavehistoricallystruggledtocompeteoncostwithoutdoorcounterpartsbut'�ieldparity'–

growingatthesameperplantcostasinoutdoorfarms-isquicklybecomingarealitythankstorapidfallsin

technologycostsinareasasdiverseaslighting,seeddevelopmentandcontrolsystems.Continuedadvances

intechnologyaredrivingtheindustrytowardswide-scaleeconomicviability.

Indoorcropproductionhassecondarybene�itsthatincreaseef�iciencyinournationalfoodsupplychain.

Indoorfarmscantheoreticallybelocatedanywhere,includingretailerparkinglots,urbanrooftops,vacant

lots,andrurallocations.Farmerscanmore easily grow“justintime”andcansupplementoutdoorgrowing

bysupplyingproduce“offseason”.Combined,thismeanslowertransportationcosts,lessspoilageandbetter

qualityproduceonthesupermarketshelf.Ithelpssupermarketscutthe$15bntheyloseannuallyonunsold

andspoiledproduce.This�lexibilityhasencouragedsupermarketchains,restaurantsandcampusestosource

producefromindoorfarms.

Investorstoohaveanewfoundinterestinthesector,withabout12%ofglobalagtechinvestmentdollars

goingintoindoorcultivationsystemslastyear.IntheUS,atleast$32millioninventurecapital-likefunds

wasinvestedinindooragriculturein2014,morethan60%ofthetotalraisedfrom2011onwards.

Likemanyyoungindustries,theindooragriculturesectorlookstoavarietyofstakeholderstoaidits

expansion.Localgovernmentshavearoletoplayinclarifyingregulationandzoningforindoorfarms,

whiletheirfederalcounterpartscanprovidebetterdataandextendexistingfundingprogramstothe

indoorsector.Chefscanusetheirvoicetoincorporateindoorcropsintomenus,toeducateconsumerson

itsbene�itsandtoworkwithfarmersoninnovative�lavorpro�iles.

Indoorfarmingwillneverreplaceconventionaloutdoorfarmingmethods.Itwillinsteadaugmentthefood

chaintocreateadiverse,distributedsystemmoreresilienttosupplyshocksandbetterpreparedtomeet

thedemandsofagrowingglobalpopulation.

EXECUTIVE SUMMARY

©NewbeanCapital2015

Executive Summary

A. An Introduction to Indoor Agriculture

Diagram One: Indoor Agriculture Industry Timeline

Diagram Two: Indoor Agriculture Industry By Structure

Diagram Three: USA’s Large Greenhouse Companies

Diagram Four: Canada’s Large Greenhouse Companies

Diagram Five: US & Canadian Commercial Scale Vertical Farms

B. Primary Factors Driving Indoor Agriculture Growth

Diagram Six: State Fruit & Veggie Production As Share of Demand (%)

Case Study: Lufa Farms Brings Local Food to Montreal

C. The Technologies Behind Indoor Crop Production

Diagram Seven: Hydroponic System Components

Case Study: The Rise of the Greenhouse Tomato

Diagram Eight: Retail Tomato Dollars

D. Secondary Benefits of Indoor Crop Production

Diagram Nine: Non-Organic Green Leaf Letuce Prices By Hub, $/Carton 24S,Nov 2012-Nov 2014

Diagram Ten: Year on Year Changes in Incidence of Laboratory-ConfirmedBacterial Infections, US, 2013

Case Study: Feeding A Grass-Fed Herd In A Time Of Drought

E. The Indoor Agriculture Investment Landscape

Table Eleven: Venture Capital Investment In North American Indoor Agriculture

F. Expediting Industry Growth

Case Study: How an Urban Ordinance Fueled Chicago’s Indoor Agriculture Industry

G. The Future of Indoor Crop Production

Appendix: Calculating the Addressable Market for Indoor Crops

Table Twelve: Production Value By Crop ($1,000)

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PAGE 5 | INDOOR CROP PRODUCTION | FEEDING THE FUTURE | MARCH 2015

TABLE OF CONTENTS

INDOOR CROP PRODUCTIONFEEDING THE FUTUREMARCH 2015

An Introduction toIndoor Agriculture

A

A. AN INTRODUCTION TO INDOOR AGRICULTURE

Between1930and2000,UnitedStatesagriculturaloutputquadrupledwhiletheUnitedStatesDepartment

ofAgriculture’s(USDA)indexofaggregateinputs(land,labor,capital,andothermaterials)remained

essentiallyunchanged.1Theprimarydriverofincreasedproductivityhasbeentechnologicalprogress,

fueledbyrapidimprovementsinirrigationtechniques,developmentofsyntheticnitrogenfertilizers,

widespreaduseofpesticides,advancedplantbreeding,andahostofotherinnovations.

IndoorAgriculture,onesuchfamilyoftechnologies,hasreceivedincreasingattentionoverthepastdecade

foritsabilitytosupplementfoodsystemsinasustainablemanner.Businesseshavestartedtacklingthe

challengesofyear-roundlocalfoodproductionbydesigninganddeployingsystemsimpervioustoweather

andotheroutdoorenvironmentalconditions.

Indoorproductionofcropsisnothingnew;thefoundationsofmoderngreenhousesdatebacktoRoman

timesasisshownindiagramoneoverpage.Sincethecreationofkeyenablingtechnologiesinthe1960s,

thegreenhouseindustryhasgrowntobeasigni�icantpartoftheUSproducesupplychainandgreenhouse-

grownvegetablesareprevalentinallnationalsupermarketchains.Insulatingthemselvesfromtheoutside

environment,thesefarmsextendthegrowingseasonbeyondthelimitsofconventionalagriculture.The

freshtomatoindustry,forexample,hasexperiencedrapidtransformationoverthepasttwentyyearsas

greenhouse-grown“on-vine”varietiesoftomatohavecapturedmarketsharefromtraditionaloutdoor

growersandforeignimportmarketsduringwintermonths.

Anewwaveofinnovationhasrecentlyemergedthataugmentstraditionalgreenhousetechnologiesby

extendingwidercontrolsoverthevariablesinvolvedwiththegrowingofplants–includinglight,water,

carbondioxide,airtemperature,nutrients,andavarietyofotherfactors.Thesesystemsarepredominately

soilless,insteadusinghydroponic,aquaponicandaeroponicgrowingtechniquestofacilitateplantgrowth.

Hydroponicsystemsworkbysubmergingplantrootsinaclosed-looprecirculatingwatersystem�illedwith

dissolvedessentialmineralsandnutrients.Aeroponicsystemsaresimilarinconcept,deliveringwaterand

essentialnutrientsinamisttoincreasewateref�iciencyandexpediteplantgrowth.Aquaponicsisa

couplingofhydroponicplantgrowingmethodswithconventionalaquaculture.

Theburgeoningindustryisreferredtobyanumberofdifferentnames:closedloopsystems,Controlled

EnvironmentAgriculture(CEA),plantfactories(acommonterminAsiainparticular),protected

environmentagriculture,soillessgrowing,urbanagriculture,verticalfarms.Forthepurposesofthispaper,

weusethetermindooragriculturetorefertothegrowingofproduceusinghydroponicandaeroponic

technologieswithingreenhouses,warehousesandcontainers.Itisanintentionallybroadde�inition

intendedtoencompassthefullrangeofsoillessgrowingtechniquesandenvironments,fromthemostbasic

greenhousetofullyautomated,remotelycontrolled,cleanroomsystems.

MARCH 2015 | PAGE 8

INDOOR CROP PRODUCTION | FEEDING THE FUTURE

1 “USAgricultureintheTwentiethCentury”,BruceGardner,UniversityofMaryland,EconomicHistoryAssociation

th th16 - 19Centuries

stPre 1Century

1940s &1950s 1980s

1930s 1960s 2010s

FUTUREBiodiverse SystemsCost ReductionsSystem Automation

DARK AGESLittle progress untilEuropean Renaissancein 1300s-1500s

1970sHigh oil prices &pests cause manyoperations to fail

Developmentofgreenhouseindustryforinstance

1550>1stgreenhouseatabotanicalgardenbuiltatPadua,Italy

1720>1stgreenhousewithglassonallfoursidesbuiltinBoston,whichlaterbecomesgreenhousehub

1820>1stcommercialgreenhouse

1899>Totalgreenhousecropsof2,200acres&$2.25mninrevenue

Earliestexperimentationwithindoorgrowing

600-500BC>HangingGardensofBabyloncontainterracedgrowingareas

14-37AD>Off-seasoncucumbersgrownunder"transparentstone"fortheRomanEmperorTiberius

Extremeenvironmentgrowingforwealthypatrons:

e.g.hydroponicsusedbyPanAmAirlinestogrowproduceforpassengersonWakeIslandinthePaci�ic

Technicaldevelopments

e.g.inventionofthehose

1937>GerickeatUCBerkeleycoinsterm‘hydroponics’

Introductionofcommercialplasticsleadstocheapergrowingsystems&revivalofhydroponicsin1970s

e.g.vanWingerdenbuildsdoublelayerpolyethylenegreenhouse,nutrient�ilmtechniquedevelopedinUK

Fallinsolarpanel&LEDlightprices,plusdevelopmentof‘bigdata’abilities,enablesrejuvenationofindooragriculturetechnology

USmilitaryuseshydroponicstosupplytroopsinPaci�ic&inJapanpostwar

1946>54acrehydroponicfarmopensinChofu,Japan

Commercialhydroponicindustrygrows

1950s>CommercialhydroponicsoperationsappearinFrance,UK,Germany,Israel,Spain,Sweden,US,USSR

Increasedscienti�icinterestinhydroponics,NFTsystemspopularized&newsubstrates(cococoir,perliteetc)developed

1982>LandPavilionatEPCOTCenterfeatureshydroponics

1983>FirstplantfactoryopensinJapan

1985>NASA’sBreadBoardprojectbegins

DIAGRAM ONE: INDOOR AGRICULTURE INDUSTRY TIMELINE

Sources:MiscellaneousincludingUniversityofArizona’sControlledEnvironmentAgricultureCenter,ShizuokaUniversity,NewbeanCapitalanalysis

MARCH 2015 | PAGE 9


Ascanbeseenfromdiagramtwo,thewidespectrumofindooragriculturesystemscurrentlyonthemarketcanbesummedupinfourbroadcategories:

Ÿ HydroponicGreenhouses–likesoil-basedgreenhouses,thesegreenhousesgrowcropsinasinglelayer.Transparentroofsareemployedtoutilizenaturalsunlight,augmentedwithsupplementallightingduringdarkdaysandoff-peakgrowingseasons(i.e.winter).

Ÿ WarehouseFarms-industrialwarehousespaceisbuiltorretro�ittedwithhydroponic,aquaponicoraeroponicequipmentandcropsaregrownverticallytoachieveeconomiesofscale.Arti�iciallightingsystemsareusedatalltimes.

Ÿ ContainerFarms–standardized,self-containedgrowingunitsthatemployverticalfarmingandarti�iciallighting.Incontrasttocustom-designedwarehouses,containerfarmsstriveforstandardization.

Ÿ InHomeSystems–smallstandardizedgrowingunitsforusebyconsumersinhomesettings.Thesefocusmoreonconvenienceanddesignthanonyield,andarenotafocusofourpaper.

Asofthiswriting,theindooragricultureindustryisstillinitsinfancy.Itssubstantialmarketpotentialhasbeenonlymarginallypenetratedbytraditionalgreenhousehydroponics,whichin2013hadtotalrevenuesof$555mn2,withlargegreenhousesacrossNorthAmerica(seediagramsthreeandfour).Thoughverylittleindustry-widedataexistsonotherformsofindoorcropproduction,weestimatethattherearenomorethan50businessesintheUnitedStatesfocusedoncommercialscaleverticalfarming,mostwithsinglefarmlocationsandlimitedinvestmentfrominstitutionalcapital.Approximately15arecurrentlyfarmingatcommercialscale–thatiswithmultiplelargepurchasecontractssupportingadedicatedfulltimestaff;theirlocationsareshownindiagram�ive.Therewerenoneasfewasfouryears’ago.Eventhelargestplayersarestillsolidifyingbusinessmodelsandexploringstrategiesforrapidgrowth.

Butthisisquicklychanging,andthepotentialislarge.WeestimateanaddressableUSmarketsizeof$9bn,thecalculationforwhichisintheappendixtothispaper.Thediversegroupofindooragricultureentrepreneursisrapidlyexpanding,attractingthoselookingfornewsolutions,andinspiredtomeetthechallengesofcreatingthefoodsystemoftomorrow.

Thispaperwillprovideanoverviewoftechnologies,opportunitiesandmarketfactorsdrivingthisindustryforward,andoutlinewaysinwhichthisgrowthcanbebolsteredandaccelerated.ItwillfocusoncommercialfarmsusinghydroponicandaeroponicgrowingsystemsintheUS.

2 "HydroponicCropFarmingintheUS”,IBISWorld,January2015

MARCH 2015 | PAGE 10


DIAGRAM TWO: INDOOR AGRICULTURE INDUSTRY BY STRUCTURE

Source:Miscellaneouspublicsources,greenhousedatafromCuestaRobleConsulting,NewbeanCapitalanalysis

HYDROPONICGREENHOUSES

Likesoil-basedgreenhouses,thesegreenhousesgrowcropsinasinglelayer.Transparentroofsareemployedtoutilizenaturalsunlight,augmentedwithsupplementallightingduringdarkdaysandoff-peakgrowingseasons(i.e.winter).

250greenhousevegetablecompanies,(notallhydroponic)further20+greenhousesunderdevelopment

Houwelings,Mastronarti,NatureSweet,VillageFarms,Windset

VERTICALFARMS

Industrialspaceisconstructedorretro�ittedwithhydroponic,aquaponicoraeroponicequipmentandcropsaregrownverticallytoachieveeconomiesofscale.Arti�iciallightingsystemsareusedatalltimes.

15fullycommercial,atleast30moreinactivedevelopment

FarmboxGreens,FarmedHere,Gar�ieldProduceCo,GreenSenseFarms,PodPonics,

CONTAINERFARMS

Standardized,self-containedgrowingunitsthatemployverticalfarmingandarti�iciallighting.Incontrasttocustom-designedwarehouses,containerfarmsstriveforstandardization.

3commercial,atleast4-5othersinprocessofcommercializinge.g.LocalRootsFarms

Daiwa’sagri-cube,CropBox,FreightFarms,Growtainers,PureGenius(formerlyAquaHarvest)

IN HOMESYSTEMS

Systemstargetedatconsumersforsmallscaleinhomegrowth,whetherasfridgesinkitchensorasstandaloneunitselsewhereinthehome.

Atleast20offeringsomeformofin-homesolution

agrilution,GroveLabs,ModernSprout,UrbanCultivator,Windowfarms

Description

CompanyExamples

EstimatedNo. of Cosin US Market



Vertical Farm



HydroponicGreenhouse



DIAGRAM FOUR: CANADA’S LARGE GREENHOUSE COMPANIES

ONTARIO|65%OFCAPACITYLargeGreenhouseOperators:AgrivilleFarms,AMCOFarmsCliffordProduce,DiCiocco’sDoubleDiamondAcres,FlavourPictProduce,GreatNorthernHydroponicsMucciFarms,NatureFreshFarmsOrangelineFarms,PlatinumProducePrismFarms,RedSunFarms,SabelliFarms,SmartyBrand,St.DavidsHydroponics,Sunset,Suntastic,WestmorelandSales

BRITISHCOLUMBIA|29%OFCAPACITYLargeGreenhouseOperators:Canagro,Houweling,MeromFarmsMilleniumPaci�icGHs,RandhawaFarms,SouthAlderGreenhouses,Sunselect,VanderMeulenGreenhouse,VillageFarms.WestCoastVegetables,Windset

QUEBEC|5%OFCAPACITYLargeGreenhouseOperators:LesSerresduStLaurent

29%

65%

Source:DatafromCuestaRobleConsulting,analysisbyNewbeanCapital.Companieslistedarethosewithgreenhousesof30acresormore.FiguresareforshareoftotalCanadiangreenhouseacreage,remaining1%isoperatedbysmallcompanies

DIAGRAM THREE: USA’S LARGE GREENHOUSE COMPANIES

CALIFORNIA|28%OFCAPACITYLargeGreenhouseOperators:Hollandia,Houweling,PrimeTimeInternational,QuailMountainHerbsSunSelect,WindsetFarms

ARIZONA|19%OFCAPACITYLargeGreenhouseOperators:NatureSweet

TEXAS|14%OFCAPACITYLargeGreenhouseOperators:VillageFarms

RESTOFUSA|38%OFCAPACITYLargeGreenhouseOperators:BackyardFarms,ColdwaterGreenhouse(Mastronardi),Houweling,Intergrow,SunblestSunsetgrown(Mastronardi)

38%

Source:DatafromCuestaRobleConsulting,analysisbyNewbeanCapital.Companieslistedarethosewithgreenhousesof30acresormore.FiguresareforshareoftotalUSgreenhouseacreage.

28%

19%

14%

5%



DIAGRAM FIVE: US & CANADIAN COMMERCIAL SCALE VERTICAL FARMS

BIBLEHILL,NSTruLeafMONCTON,NBLocalByAtta

NEWTON,MASkyVegetables

BROOKLYN,NYGothamGreens

MONTREAL,QCLufaFarms

CHICAGO,ILGar�ieldProduceCoThePlantBEDFORDPARK,ILFarmedHere

NEWBUFFALO,MIGreenSpiritFarms*PORTAGE,INGreenSenseFarms

NASHVILLE,TNGreenerRoots

ATLANTA,GAPodPonics*

TAMPA,FLUriahUrbanFarms

LOSANGELES,CAUrbanProduce

SEATTLE,WAFarmboxGreens

USVerticalFarms

CanadaVerticalFarms

RooftopGreenhouseFarms

KEY

Source:IndustryReports*GreenSpiritFarmshasasecondlocationinMedina,OH*PodPonicsisbasedinAtlantaGA,andalsohasafarminDubai



GROWING CONSUMER DEMANDFOR LOCAL FOODS



Primary Factors DrivingIndoor Agriculture Growth

B

B. PRIMARY FACTORS DRIVING INDOOR AGRICULTURE GROWTH

Aprimarydriveroftheindooragricultureindustryisitsabilitytosatisfytherapidgrowthinconsumer

demandforaffordable,highquality,localproduce.StronggrowthinNaturalandOrganicsegmentsoverthe

pastdecadehasestablishedaprecedentforpremium,brandedproducesoldthroughavarietyofsales

channels.Distributionoptionshaveexpandedforfarmersaslocaldeliveryplatformshavegainedtraction,

suchasNewYorkonlinegrocerFreshDirectandonlineretailerOverstock.com’sFarmers’Marketinitiative.

Indoorfarmshavehistoricallystruggledtocompeteoncostwithtraditionaloutdoorfarms,buttherecent

rapidmovementtowards“eatinglocal”,alongwiththeintroductionofnewdistributionchannels,has

providedtheopportunityforhigh-marginindoorcropstoestablishafootholdinthemarket.

1. GROWING CONSUMER DEMAND FOR LOCAL FOODS

Asacategory,“localfoods”israpidlygainingmarketshareintheproduceindustry,growingfroman

estimated$1billionin2005tonearly$7billionlastyearwithanticipatedrapidcategorygrowththrough

2017.3Theunmetneedislarge:39statesinthenationgrowfewerfruitsandvegetablesthanthey

consume,ascanbeseenfromdiagramsixbelow.

DIAGRAM SIX: STATE FRUIT & VEGGIE PRODUCTION AS SHARE OF DEMAND (%)

3“USDAcon�irmsfarmersmarkets’growth,sustainability”,AgriNews,August25,2013.



Source:NewVentureAdvisorsLLCdata,NewbeanCapitalanalysis

KEY

Lessthan50%

50%-100%

Morethan100%

ALASKA

HAWAII

NEWJERSY

CONNECTICUT

WASHINGTON

MONTANANORTHDAKOTA MINNESOTA

OREGON

IDAHO

WYOMING

NEBRASKA

SOUTHDAKOTA WISCONSIN

MICHIGAN

NEWYORK

VERMONT

MAINE

NEWHAMPSHIRE

MASSACHUSETTSRHODEISLAND

CALIFORNIA

NEVADA

UTAH

COLORADO

KANSAS

IOWA

ILLINOIS

MISSOURI

ARKANSASTENNESSEE

KENTUCKY

INDIANAOHIO

PENNSYLVANIA

ARIZONA NEWMEXICO

TEXASLOUISIANA

MISSISSIPPI

OKLAHOMA

GEORGIA

ALABAMA

FLORIDA

SOUTHCAROLINA

NORTHCAROLINA

VIRGINIAWEST

VIRGINIA

MARYLAND

DELAWARE

Thedesireto“eatlocal”isnotsimplytheproductofeffectivemarketingtacticsbycorporateexecutives.

Decentralizingthesupplychainandbringingproductionclosertotheconsumercandirectlyresultin

longershelflifeandbettertaste.Moreover,producetraditionallybredforresilienceandtheabilityto

withstandlong-distancetransportcaninsteadbecultivatedforuniquesizeand�lavorpro�iles.

Accordingtoa2014studyconductedbytheHartmanGroup;“’local’isemergingasacategorypoisedto

surpassbothorganicandnaturalasasymboloftransparencyandtrust.Withitsconnotationsof

community,economyandenvironmentalstewardship,‘local’offerscompellingnarrativesthatinclude

small-scaleproductionandcloser,reciprocalrelationshipswithfoodproducers.”4Theinternethasgiven

modernconsumersinformationonfarmingpractices,allowinginsightintogrowingmethodsandan

unprecedentedopportunityto“knowyourfarmer.”Thisdemandforincreasedtransparencyingrowing

practicesmirrorsabroadertrendofregulatorymandatedtraceabilitythroughoutthefoodchain.

Growthhasbeenseenacrossdirect-to-consumerchannels(farmersmarkets,communitysupported

agriculture)andintermediatedmarketingchannels(grocers,restaurants,regionaldistributors)alike.The

numberoffarmersmarketshasmorethandoubledoverthepastdecade,providingincreasedopportunities

forconsumersto“buylocal.”5Smallfarmstendtofavordirect-to-consumerchannelsastheyofferlogistic

simplicityandhigherper-unitmargins.Largefarmstendtowardsintermediatedchannels,contributing

towardsamorepermanentpresenceof“localfood”sectionsinretailoutlets.

2. BUSINESSES HAVE LACKED YEAR-ROUND SOLUTIONS

Commercialfoodbuyersareeagertomeetthisincreasedconsumerdemandforlocalfoods.Forretailers,

distributors,andfoodserviceprofessionals,thelocalcategoryrepresentsanopportunitytonotonlymeet

consumerdemand,butsimultaneouslydecreasefoodwaste,increaseunitmarginsandultimatelydrive

bottomlines.

TheUSDAestimatesthatsupermarketslose$15bnannuallyinunsoldfruitsandvegetables.6Alarge

portionofthislossisattributabletoshrink(producedamagedduringtransport)andspoilage,which

typicallyincreasesproportionatelytofoodmiles–thedistancefoodtravelsbetweenfarmandtheend

customer.Localproduceoffersanopportunitytomitigateshrink,asfoodisnolongerrequiredtotravel

hundreds,oreventhousandsofmilesintransportbetweenfarmandstore.Shelflifeissimultaneously

increasedasthetimebetweenharvestandcustomerdrops.Successivestudieshaveshownthat,in

commonwithpartsoftheorganiccategory,localproducecangenerallydemandapricepremiumand

increaseperunitmargins.Forexample,a2014CornellUniversitystudy7listeda27%premiumforlocally

producedstrawberriesinOhio,a27.5%oneforlocalproduceinSouthCarolina,andpremiumsforboth

tomatoesandstrawberriesinaNewYorkcounty.

4“Organic&Natural2014”,HartmanGroup5“NationalCountofFarmersMarketDirectoryListingGraph:1994-2014”,USDAAgriculturalMarketingService6“Wasted:HowAmericaIsLosingUpto40PercentofItsFoodfromFarmtoForktoLand�ill”,DanaGunders,NaturalResourcesDefenseCouncil,August20127“ACaseStudyofPricePremiumsforLocalFoodsinTompkinsCounty,NewYork”,Tang,Gomez&Park,CharlesH.DysonSchoolofAppliedEconomicsandManagement,CornellUniversity,November2014



Asaresult,manygrocershaveaddedorexpandedcategoryshelfspaceandarerapidlydevelopinglocal-

sourcedinitiatives.Sourcinglocallyenablesregionalgrocerychainstodifferentiatethemselvesfrombig

boxcompetitors,anditallowslargerplayerstomeetcorporatesocialresponsibilitytargets.Forinstance,

in2010,Walmartannouncedits‘HeritageAgriculture’initiativewherebyitaimedtodoubletheamountof

localproducethatitsourcedintheUS.8InanarticleinthemagazineTheAtlantic,Walmart’sSenior

DirectorofLocalandSustainableSourcinghighlightedthechangeinit’ssourcingforjalapenopeppers,

whereitsaysthatitworkedwithexistingsupplierstoexpandsourcingto20states,soloweringcostsand

carbonemissionswhilesupportinglocalfarmers.9

Inreality,mostfoodbuyersstruggletosourceanyportionoftheirproducelocallyonaconsistentbasis.

Seasonalitymakesyear-roundsourcingdif�icult,ifnotimpossibleformanypartsofthecountrywhere

climateconditions,soilconditionsandaccesstolandlimitthegrowthofhigh-qualityproduceformany

monthsoftheyear.Smallfarmsfrequentlycannotmeetdeliveryschedules,volumedemands,regulatory

requirements,orotherfoodsafetycerti�icationsimposedbylargeproducebuyers.Insteadtheyturnto

direct-to-consumerchannelswheretheysellatpricesunattainableformuchofthepopulation.

3. INDOOR AGRICULTURE IS WELL PLACED TO BE A YEAR ROUND SOLUTION

Bycurtailingtheeffectsofweatherandseasonalityandenablingyear-roundcropproductioninallpartsof

thecountry,indoorgrowingtechniquesareuniquelysituatedtomeetthismarketneed.Severalbusinesses

arealreadyusingindooragriculturetechnologiestodrivepro�itsandgrowindoorcropsinacost-

competitivemanner,whetherit’stogrowleafygreensduringthewinterwhenlocalproducewouldbe

otherwiseunavailable,togrowahighvalueherbcropwithparticular�lavorcharacteristics,ortosubstitute

freshbarleyfordryhayforanimalfodder.



8“WalmartUnveilsGlobalSustainableAgricultureGoals”,PressRelease,October14,20109“AnInsider'sAccountofWalmart'sLocalFoodsProgram”,TheAtlantic,November17,2010¹0Source:EnterpriseLEDMarketResearchforhistoric�igures,LuxResearchforforecasts

Themostenduringcriticismoftheindustryhaslongbeenthatitcould

notcompetewith�ieldgrownproduce,andthiscriticismstillholdsin

somecases;fewindoorfarmscanclaimtoproducelettuceatthesame

priceasCalifornia’sfamedfarmingarea,SalinasValleyinsummer

months,forinstance.But‘�ieldparity’iscomingcloserasthecostsof

indoorfarmequipmentfalls;forexample,LEDlightbulbpricesfellby

24%between2010and2012,andareforecasttohalveby2020.¹0

Moreover,thistrendisjustbeginning.Asislaidoutbelow,indoor

growershaveanincreasinglyplentifulrangeofoptionswhenitcomes

tothetechnologiesthattheycanemploytoreachcostcompetitiveness.

CASE STUDY: LUFA FARMS BRINGS LOCAL FOOD TO MONTREAL

Montreal-basedLufaFarmswasoneofthepioneersofcommercialurbanagriculture,openingits�irst

hydroponicgreenhouseinFebruary2011.Wheremostbeginningfarmerssellthroughlocalfarmers’

marketsorsmall-farmer-friendlygrocers,suchasWholeFoodsMarket,LufaFarmsinsteaddecidedtosell

itsproducedirecttoconsumers.TheapproachallowsLufaFarmstocapturethefullreturnfromits

produce,butalsoposesthechallengeofbuildingacustomerbaseone-by-one.Thecompany’sonline

platformoffersproductsfromlocalartisansalongsideitsownproduce;customersselectaweeklybasket

andcollectitfromoneofdozensoflocationsinthecity,whetheragym,of�iceorneighborhoodcoffeeshop.

Ineffect,thecompanyhascreateditsowndistributionplatform,withtheaddedbene�itofvertical

integration.

Inarecentinterview,LufaFarmsco-founderLaurenRathwellcommentedthat;“we’vemadeittoover

5,000weeklysubscribers,largelythroughwordofmouth” ,thoughthisdownplaystherolethatcustomer¹1

service,technologyandeconomiesofscalehaveplayedinthecompany’ssuccess.

AstrongtraditionalandsocialmediapresencehasdoubtlesshelpedLufaFarmsreachawideraudience.It

hasalsomadeorderingandcollectingbasketsasimpleand�lexibleprocessforconsumers,forinstance,by

allowingcustomerstotailorbasketstotheirneedsthatweek,ratherthaninsistingthattheysignupforan

entireseason’sworthofproduceasisthecasewithsomecommunitysupportedagricultureagreements.

Asthecompanygrowsover40vegetables,there’splentyofchoiceandthisissupplementedbyother

locally-sourceproducts,suchascutsofmeatandyogurt.Customerscanpickupbasketsfromthevenues

thattheyvisitaspartoftheirdailyroutines,whetherthat’sacoffeeshoporagym.

Thecompanyhasbeenateconomicscalesincetheget-go,itsinauguralMontrealgreenhousebeingcapable

ofproducingmorethan150klbsofproduceannually.Itopenedasecond,larger,greenhouseontheroofof

anewbuildinginOctober2013inconjunctionwithDutchgreenhousemanufacturerKUBO.Inmedia

reports,thecompanyhasdiscusseditsintentiontomoveintotheUSmarketwithBostonlikelytobethe

locationofits�irststate-sidefarm.

Finally,thefarmsfeatureagooddealoftechnicalsophistication,forexample,utilizingcloud-basedremote

cropmonitoringanddiseasemanagement.Itisthiswinningcombinationthathas,inouropinion,allowed

LufaFarmstodefytheoddsinbuildingasuccessfuldirect-to-consumerbusiness.

¹1“#5LaurenRathwell:Co-FounderLufaFarms”,TheEditorial,December30,2014



INDOOR AGRICULTURE IS WELL PLACEDTO BE A YEAR ROUND SOLUTION



The Technologies BehindIndoor Crop Production

C

C. THE TECHNOLOGIES BEHIND INDOOR CROP PRODUCTION

Indooragricultureisatech-industryatitscore,drivenbyrapiditerationsinthetechnologiescriticalto

plantgrowth.Newintegrationsofthesesystemscontinuetoraiseyields,increasegrowingef�iciencies,and

lowercostsassociatedwithindoorcropproduction.Weanticipatethattherateoftechnological

advancementwillcontinuetoincreaseastheindustryproveswide-scaleeconomicviability.

Whatwouldhelp:Webelievethatwehavereachedatippingpointwherethefocusofdevelopmentshould

switchfromcreatingnewandnovelformfactorstoincreasingtheyieldandsubstantiallyloweringthe

manufacturingandoperatingcostsofexistingsolutions,soimprovingpaybackperiodsofindoorgrowing

systems.Standardizationandcentralizedmanufacturingofformswoulddramaticallyreducecosts.Form

factorresearchanddevelopmentshouldcontinuetobedirectedtowardsincreasingoutputandlowering

costspercubicfoot,forinstance,byincorporatingmoreautomationanduseofsensorsintosystems.

Diagramsevenoppositeshowsthebasiccomponents

ofagenerichydroponicgrowingsystem,eachof

whichareundergoingsubstantialtechnology

upgrades.Themostimpactfulareasofongoing

developmentare:

FORM FACTOR AND GROWING SYSTEMS

Currentstate:Aspreviouslyhighlighted,indoorcrop

productionoccursinawidevarietyof

con�igurations.Onceanoverallformfactoris

selected(greenhouse,warehouse,container,etc.),

farmerscancustomizefacilitieswithavarietyof

growingsystems.TheserangefromtraditionalEbb&

FlowandNutrientFilmTechniquerackingsystemsto

ZipGrowverticalgrowrackstoevenmorenovel

conceptssuchasthepyramid-shapedgrowing

systemPyramidGardensorVolksgarden'scircular

OmegaGardens.Farmsaremostfrequentlycustom-

engineeredandmanufacturedtomeetspeci�ic

geographic,andcroprequirements.Afarm'soverall

size,shape,materialsusedforconstruction,andcrop

spatialarrangementslargelydictateupfrontcapital

expendituresrequiredtodevelopcommercial-scale

farms.

LED LIGHTING

CONTROLSYSTEM

PLANTSIN GROWINGSYSTEM

RECIRCULATINGWATER MIXEDWITH NUTRIENTS



DIAGRAM SEVEN: HYDROPONIC SYSTEM COMPONENTS

LIGHTING

Currentstate:Indoorcropproductionsystems,particularlywarehouseandmodularones,relyonhighly

ef�icientlightstoaugmentorreplacenaturalsunlight.DramaticadvancesinLEDtechnologiessince2010

haveaffordedindoorgrowersunprecedented�lexibilitytocustomizelightspectrumsasamethodto

expediteplantgrowth.ModernLEDsuseprimarilyblueandreddiodestoincreaselightef�iciencywhile

minimizingtemperatureimpactswithinagrowthchamber.Commerciallyavailablehorticulturelightsnow

allowforanaloguecontroloverlightspectrums,encouragingunprecedentedworkinplantspectrum

responseandenablinggrowerstooptimizelightdeliverytoachieveidealplantcharacteristics.

Whatwouldhelp:AdaptiveLEDswillallowlightspectrumstobefullycustomizedthroughoutthelifespanof

acropbyadjusting,lightintensity,spectrumcomposition(redvs.blueproportions),andlightheight

(distancefromplants)toensureevenspreadacrossgrowthchambers.Upfrontcostsremainhigh,solower

prices,alongwithLEDswithmoremicromolesperjoule(whichtranslatestohigheryields)wouldbe

bene�icial.

CONTROL SYSTEM HARDWARE

Currentstate:Large-scalecontrolsystemsareavailablefromindustryleaders,suchasPrivaandArgus

ControlSystems.Thesesystemsareemployedbymanylarge-scalegreenhouseoperators,designedinto

farmsfrominceptiontomonitorandregulatelighting,CO2levels,nutrientreservoirs,plumbingandahost

ofothervariables.Thesystemsaretypicallycost-prohibitiveforsmalloperationsandbeginningfarmers.As

aresult,manypractitionersaredevelopingandleveragingproprietarycontrolsystemsasacompetitive

advantage.

Whatwouldhelp:Small-scalecontrolsystemswithrobustfunctionalitywouldallowbusinessesona

shoestringbudgettobetterautomatetheirsystems,increasingyieldswhiledecreasinglaborcosts.Inthe

longrun,user-friendlyhumanmachineinterfacesshouldallowskilledtradesmentocustomizeprebuilt

systemsandhorticulturaliststomorepreciselycontroltheplantenvironment.Assensorsdecreaseincost

andmoredataiscollectedfromtightlycontrolledsystems,bigdatamethodssuchaslinearprogramming,

non-linearoptimization,machinelearning,arti�icialneuralnetworks,clusteranalysis,andotherarti�icial

intelligencetechniquesshouldbeappliedtooptimizeplantcharacteristicsandyields.

WATER CONSUMPTION

Currentstate:Closed-loopindoorsystemshavebeenshowntoreducewaterusagebyover90%compared

withtraditionaloutdoorfarms.Certainaeroponicfarmsandotheradvancedwaterrecapturesystemsallow

for95%ormorereductioninwaterusage,butcanbeprohibitivelyexpensivetoinstallandmaintain.

ExamplesofwatermanagementcompaniesinthespaceincludeBioSafeSystems,Dosatron,andDRAMM.



Whatwouldhelp:Additionalwaterpuri�ication,desalination,andatmosphericrecapturetechniquescould

bedevelopedtoincreasepotentialfarmsitelocationsandultimatelydriveoff-grid�lexibilityforindoor

farms.

NUTRIENTS

Currentstate:Awiderangeofnutrientsolutionsexistsforhomeandcommercialhydroponicsystemsthat

provideawideofmacroandmicromoleculesessentialtoplanthealth.Mostlargecommercialplayers

createtheirownnutrientmixes.

Whatwouldhelp:Manynutrientsolutionsmakeclaimsregardingeffectsonplantformation,including

increasedspeedofplantgrowthortaste,buttheseclaimsarepredominatelypoorlydocumentedand

untested.Inaddition,microbiomeswithinsoilarenotwellunderstoodandfuturedevelopmentcouldbring

vastadvantagestoplantgrowthinhydroponicsystems.

SEEDS

Currentstate:Mostindoorfarmsuseseedsbredto

growoutdoorsunderhighlyvolatile

environmentalconditions.Selectcrops–

particularlyleafygreens,tomatoes,peppersand

cucumbers–havebeenbredforconventional

greenhousesbutlimiteddataexistson

performanceundermore-tightlycontrolled

environmentconditions.Largergrowersoperate

theirownseeddevelopmentprograms.

Whatwouldhelp:Seeddevelopmentandtesting,

tooptimizegrowingqualitiesforindoorsystems

whereconditionsaretightlymanagedand

traditionaloutdoorconcerns(pests,drought,

�loods,highwinds,extremetemperatures,etc.)are

limited,wouldbehelpful.Suchdevelopment

couldalsobeinstrumentalinexpandingthe

universeofcropsthatcanbegrowncommercially

inindoorsystems.Thisdevelopmentislikelytobe

slowerthanthatforothersystemcomponents

mentionedhereasseeddevelopmentprograms

arelongtermbynature;greenhouseseedtrials

havebeenrunningsincethe1970s,forinstance.



CASE STUDY: THE RISE OF THE GREENHOUSE TOMATO

Thesecondlargestintheworld,theUStomatomarketbifurcatesbetweenthosethataregrownforprocessing(mostofthemarket)andthosethataredestinedforthefreshproducemarket.Tomatoesaregrownbothinthe�ieldandinthegreenhouse.Traditionally,FloridaandCaliforniahavebeenthelargestUSgrowersofoutdoortomatoes,withnearlytwo-thirdsoftotalUSfreshtomatoacreage,asharethathasbeensteadysincethe1960s.¹2

Inits2000-2001annualreport,theFloridaTomatoCommittee,anindustryadvocacygroup,notedthatthegreenhousetomatosector“appearstobeontherise”butthatnosolidnumberswereavailable.By2004,greenhousetomatoeswereunder10%oftotalUSsupply,butby2011,theywere40%,withahighershareinretailchannels.¹3

TheUSDA’sEconomicResearchServiceattributesthisriseto“consumerdemandforyear-roundsupply,agrowingdiversityoftomatotypes/substitutes,anddevelopingtechnologies”.²⁰Thetotalmarkethasalsogrown:USpercapitafreshtomatoconsumptionrosefromunder15lbpain1985toapeakof20.6lbpaby2010.¹4

Consumershavebecomeaccustomedtobeingabletopurchasefreshproduceyear

round,andtohavingabundantchoicesingrocerystores.Thetotalnumberofallproducts(includingpackagedgoods)intheaveragesupermarketgrewfromanaverageof8,948in1975toalmost47,000by2008.²¹Greenhouse-growntomatomajorVillageFarmsoffers10varieties,forinstance.

IntheUS,Californiaisthedominant�ield-growntomatosupplierinthesummer,andFloridainthewinter,withMexicanandCanadianimportsful�illingsurplusdemandinthewinterinparticular.Thisde�icitallowedgreenhousegrowerstogainafootholdinthemarketby,forinstance,introducingtomatoesonthevine,whicharenowthemostpopularvarietyamongconsumers.

Atthesametime,a2013UniversityofFloridapaperconcludedthattheimprovedyieldsingreenhouseproductionoutweighedsubstantiallyhighercosts,inturnrenderinggreenhousebasedgrowingmorepro�itablethan�ieldbasedproductioninsomeenvironments.15

WithcontinuedimprovementsingreenhousetechnologyandfallingUSfarmlandacreage,themarketexpectationisthatthegreenhousegrownshareofthemarketwillcontinuetorise.

35%

16%

49%

Undefined

Field Grown

GreenhouseGrown

DIAGRAM EIGHT: RETAIL TOMATO DOLLARS

Source:VillageFarmsFiguresexcludeCostcoandBJswhichare100%Greenhouseretailers



¹2USDAEconomicResearchServicedata13“Protected-CultureTechnologyTransformstheFresh-TomatoMarket”,USDAERS,September2013¹4FoodMarketingInstitute�igures15“ThePotentialforGreenhouseTomatoProductionExpansioninFlorida”,VanSickle,Cantliffe&Asci,SouthernAgriculturalEconomicsAssociation(SAEA)AnnualMeeting,3-5February2013

INDOOR CROP PRODUCTION ENABLES YEAR-ROUNDGROWING BY MITIGATING THE EFFECTS OF WEATHER.



Secondary Benefits ofIndoor Crop Production

D

D. SECONDARY BENEFITS OF INDOOR CROP PRODUCTION

Itisclearthatconsumerdemand,businessdemand,andtechnologiesareconvergingtocreatean

opportunityforrapidexpansionofindoorcropproduction.Toexpeditethisgrowthandwinbroaderpublic

opinion,theindooragricultureindustryshouldcommunicateitssecondarybene�itsaswell.

YearRoundGrowing

Indoorcropproductionenablesyear-roundgrowingbymitigatingtheeffectsofweather.Thiscontrolover

croptimingallowsindoorfarmstoincreasemarginsbygrowing“off-market”andsellingagainstoutdoor

seasonality.Inotherwords,indoorfarmsareuniquelycapableofgrowingtraditionalsummercropsduring

thewinterandwintercropsduringthesummer.Further,indoorfarmingtechniquesgreatlyreduce

productionvariabilityatthefarmlevelandenableunprecedentedaccuracyincostforecasting.For

consumers,thisallowsconsistentavailabilityandqualityofproducethroughouttheyearinallpartsofthe

country,andforproducebuyersaccustomedtoinconsistentsuppliesandvolatilemarketprices,

Source:USDAEconomicResearchServicedata,NewbeanCapitalanalysis

$36

$16$8

SAN FRANCISCO

$33

$13 $9

LOS ANGELES

$34$16

$5

CHICAGO $33$16 $10

DETROIT

$40

$18$10

DALLAS$58

$27 $13

ATLANTA

$38

$17 $12

ST. LOUIS $36

$16 $9

PHILADEPHIA$38

$16$6

NEW YORK

$38$19 $13

BALTIMORE

$38$20 $15

MIAMI

$38

$18 $12

BOSTON

KEY

HIGH

AVG LOW

DIAGRAM NINE: NON-ORGANIC GREEN LEAF LETUCE PRICES BY HUB, $/CARTON 24S,NOV 2012-NOV 2014



itrepresentsapotentialparadigmshiftasthepracticebecomesmorecommon.Suddenlyproducebuyers

donotneedtoaggregatefrommultiplefarmsonanongoingbasistohedgeagainstvolatility;asisshownin

diagramninebelow,pricesvarybyasmuchas300%acrossayearforacropascommonplaceaslettuce.

Instead,longer-termcontractswith�ixedpricingandvolumescanbeinstigated.Inthisscenariobothsides

bene�it.Farmsreceiveguaranteesthattheirproductwillbesoldandhavegreaterinsightintorevenue

metricsforstrategicplanningpurposes.Producebuyerscanaccuratelyforecastcosts,whilesavingtime

andenergybyavoidingthespotmarkets.Certainproducebuyerswhohavetraditionallyreliedupon

distributorstosmoothsupplymayhavegreater�lexibilitytodealdirectwithfarmers,increasingpro�it

marginsonbothsides.

FlexibilityofFarmLocations

Indoorsystemscan,intheory,belocatedanywhere–includingretailerparkinglots,urbanrooftops,vacant

lots,andrurallocations.Forbusinessesseekingto�itintoexistingtransportationinfrastructure,farmscan

belocatedadjacenttocold-storagewarehousesorendpointsofconsumption.Co-locationwithcustomers

reducestransportationcosts,minimizesspoilageandmitigatesqualitydegradationwhileextending

productshelflifeforconsumers.

PotentialHealthBene�its

USDA’sEconomicResearchServiceestimatesthat23.5mnAmericansliveinfooddeserts,ofwhich13.5mn

arelowincome.16Theseindividualslackbothregularaccesstonutritiousfoodsandtheabilitytoafford

freshproduce.Enablingmasscropproductioninurbanenvironmentsallowsforuniqueapproachesto

solvingfoodaccessissuesbecauseitchangestheunfavorableeconomicsoflast-miledistributionlogistics.

Byplacingindoorfarmsinsideoffooddeserts,thecostofshippingproduceisgreatlyreducedoreliminated

entirely.Thesesavingscanbepassedontocustomers,ultimatelyloweringproducepricestolevels

affordableeveninlow-incomecommunities.TheFarmery,forexample,isaprototypefacilitythatacts

simultaneouslyasafarmandaretailoutletindowntownDurham,NC.Othercreativesolutions,suchasthe

ArcadiaCenterforSustainableFood&Agriculture’sMobileMarkets,a28’farmstandonwheels,provide

relevantpartnershipopportunitiesandareasforblueoceanmarketexpansion.

WaterEf�iciencyIsImportant

Recorddroughtconditionsarecurrentlyoccurringinkeyagriculturalregions,speci�icallythelargestinthe

U.S.,California.Ifdroughtconditionspersistasisasispredictedduetothechangingclimate,therewillbe

continuingpressuretoreduceagriculturalproductionandfallowsomeland.Indooragriculturecantakeup

someorallofthisslackinproduction,inregionslikeCalifornia,usingonlyafractionofthewater,and

continuingtooperateevenunderseveredroughtconditions.

16“FoodDeserts”,USDAEconomicResearchService



Increased Food Safety and Traceability

Growingindoorsinsoillesssystemsinherentlylimitsexposuretomanysoil-bornepathogensthatmayhave

causedE.Coli,salmonella,andinturnproducerecallsinrecentyears.Thisisofparticularbene�itduringa

timewhentheincidenceandawarenessoffoodborneillnessesarerising.Someindoorfarmsarecreating

“clean-room”environmentswhereworkerswearspecialgloves,hats,anduniformstopreventoutside

pathogensfrominfectingcrops.Pestsaremucheasiertokeepout,andmanureuseisall-buteliminated.

Shouldarecallprovenecessary,indoorsystemsareoftenabletotrackindividualplantvariables

throughoutthegrowthcycle,allowingfarmerstoquicklyidentifythesourceofcontaminationandisolate

anyaffectedproducts.Theoverallresultiscleanerandsaferproducefortheend-consumer.

Campylobacter

Listeria

Salmonella

Shigella

STEC* Non-O157

STEC* O157

Vibrio

Yersinia

-15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35%

YEAR ON YEAR CHANGES IN INCIDENCE OF LABORATORY-CONFIRMED BACTERIAL INFECTIONS, US, 2013

Source:UnitedStatesCentersforDiseaseControlandPrevention,dataismostrecentavailable*Shigatoxin-producingEscherichiacoli



DIAGRAM TEN: YEAR ON YEAR CHANGES IN INCIDENCE OF LABORATORY-CONFIRMEDBACTERIAL INFECTIONS, US, 2013

CASE STUDY: FEEDING A GRASS-FED HERD IN A TIME OF DROUGHT

TomKatRanchisaneighteenhundredacrecattleranchinPescadero,CAwhichactsasa“learninglaboratoryforanimalagriculturefocusedonclimatestability,nature’sbene�its,healthyfood,biodiversity,andvibrantcommunity”.Ithousesseveralbusinesses,includingLeftCoastGrassFed,agrass-fedbeefcompanythatsellsatlocalfarmers’marketinordertoeducateconsumersaboutthebene�itsofgrass-fedmeat.

Asforanycattleoperation,feedisalargecomponentofLeftCoastGrassFed’scosts,andbecameaparticularconcernwhenhayfodderwasinshortsupplythispastsummer.OwingtoCalifornia’sdroughtandlowersurfacewaterallocationstofarmers,haypricesrose35%yearonyearbyMay2014to$320perton.17Naturally,bothpastureandhaycropsrequiresuf�icientwaterforoptimalgrowth.Worse,haywascomingtoTomKatfromeverfurthera�ield:“wewerepaying$100pertonjustfortransportationinsomecases”commentsWendyMillet,TomKat’sranchdirector.LeftCoastGrassFedholdsAnimalWelfareApprovedandAmericanGrassFedAssociationcerti�ications,sotraceabilityisextremelyimportanttotheventure,anditsvaluesleadittoseeklocallysourcedfodderwhereverpossible.

Theanswercameintheformofa self-made fodder machine from Symbi Biological, which raises insect proteinfor an aquaponics operation on TomKat Ranch. The system consists of three racks of growing trays, in whichthe ranch grows fresh barley. "The cattle really liked it once they figured out what it was" Wendy adds "andit ended up being cheaper than importing hay". There are also ready-made solutions on the market, such as that from Fodder Solutions, an Australiantechnology company thatdistributesitshydroponicfoddersystemglobally and is used by a ranch neighboringTomKat.Theproductconsistsofatruckcontainingupto108hydroponicgrowingtraysinsixlayers,whichrotateasthecropgrowssuchthataportionofthefoddercanbeharvestedandplanteddaily.Theunitcanbedriventothecattlefeedstations,andbarleytakesonlysixdaystogrowfromseedlingtofeedintheclimate-controlledgrowroom.Theseedsgrowonmatsthatareediblebycattle,sothere’snowastefromthesystem.Itallowstheranchtopreciselycontrolinputsintothefeed,andthelargestunitusesunder300gallonsadayofwater.Foraranchthatiscarefultotracksuchmetrics,italsoreducesfeedmilesandwaste,forinstance,haystoredoutsidecandevelopmoldandloseproteinqualityintimesofheavyrainaswasseeninMontanainSeptember 2014 for example.

Traditionalfoddergrowershaveoftenbeendismissiveofhydroponicallygrownfodder,citingthehighermoisturecontentcontainedinyounghydroponicallygrownbarleyandlower‘drymatter’(thepartoffeedthatcontainsthenutrientsthatanimalsneed)contentinhydroponicallygrownfodder.Theyarguethatthisrendershydroponicfodderextremelyexpensiveonalike-for-likebasis,buttheiranalysishasbeenchallengedbysomeranchers,forinstance,a2005paperbyAustralianrancherJosephMooney18argued that thecosttofattenabeastonhydroponicfodderovera90-120dayperiodisaroundasixthofthecostoffatteningthebeastongrain.

Weanticipatethatfoddersystemswillbecomemoreef�icientandeconomicasLEDlightingandothertechnologiesdevelop,andashaypricesremainatriskfromdrought(NOAA19 forecastscontinueddroughtforCaliforniain2015),itseemslikelythatranchessuchasTomKatRanchwillcontinueto�indaplaceforhydroponicfodderasasupplementtotraditionalanimalfeeds.

17USDAHayReport,comparingMay24,2013andMay23,2014pricesforSacramentoValleyFOBSupremeAlfafa18“GrowingCattleFeedHydroponically”,JosephMooney,July2005,AustralianNuf�ieldFarmingScholarshipAssociation19NationalOceanicandAtmosphericAdministration,December2014forecast



GROWING INDOORS INHERENTLY LIMITS EXPOSURETO MANY SOIL-BORNE PATHOGENS



The Indoor AgricultureInvestment Landscape

E

E. THE INDOOR AGRICULTURE INVESTMENT LANDSCAPE

Forinvestors,theindooragricultureindustryhasmuchincommonwiththesolaroneofadecadeago;detractorscriticizebothforbeingmoreexpensivethanalternatives(traditionalenergyand�ieldfarmingrespectively)anddecrythe“backyard”natureofmanyofthesolutions.Inbothcases,theymisstherapidfallintechnologycostsandtheswiftadoptionamongthoseforwhomtheindustry�ixesarealproblemofmeetingyear-roundconsumerdemandforlocalproduce.

Investmentinindooragricultureremainsafractionofthatinagtechasawhole,wherethehipsectorsofbiologicals,precisionagricultureanddistributionplatforms(suchas,SequoiaCapital-backedGoodEggs)haveattractedthegreatestattention.Globalagtechventurecapitalinvestmentsin2014alonewere$1.1bn,up34%yearonyear,accordingtoindustryconsultant,theCleantechGroup.IntheUS,weestimatethatthere’sbeenatotalof$52mninvestedsince2011byventurecapitalistsinindooragriculture,withover60%ofthisbeingin2014alone:

Company

Aerofarms

BrightFarms

BrightFarms

BrightFarms

FarmedHere

FreightFarms

FreightFarms

GothamGreens

GothamGreens

GreenSenseFarms

GreenSpiritFarms

GroveLabs

IndoorHarvestCorp

IndoorHarvestCorp

IndoorHarvestCorp

LufaFarms

PodPonics

PodPonics

PodPonics

PodPonics

TruLeaf

TruLeaf

UrbanBarns

Windowfarms

TOTAL

Funders

Quercus,21Ventures

EmilCapital,NGEN

WPGlobal,NGEN,EmilPartners

WPGlobal,NGEN,EmilPartners

PrivateInvestors

WeFunder,LaunchCapital,

MorningsideGroup,Rothenberg

Ventures

SparkCapitaletal

NYSERDA,PrivateInvestors

PrivateInvestors

PrivateInvestors

PrivateInvestors

Upfront,Vayneretal

PrivateInvestors

PrivateInvestors

PrivateInvestors

CycleCapitalManagement,

KuboGreenhouse,AndrewFerrier

NA

NA

NA

NewGroundVentures

InnovaCorp

InnovaCorp

DundeeCorp,Private

Kickstarter,PrivateInvestors

Description

VerticalSystem

Greenhouse

Greenhouse

Greenhouse

VerticalSystem

ContainerFarm

ContainerFarm

Greenhouse

Greenhouse

VerticalSystem

VerticalSystem

Consumer

VerticalSystem

VerticalSystem

VerticalSystem

Greenhouse

ContainerFarm

ContainerFarm

ContainerFarm

ContainerFarm

VerticalSystem

VerticalSystem

VerticalSystem

Consumer

Amount($mn)

$1.70

$4.30

$4.90

$2.40

$6.00

$1.20

$3.70

$2.00

$8.00

$0.65

$0.30

$2.22

$0.06

$0.46

$0.02

$4.50

$0.73

$1.25

$2.00

$3.40

$0.80

$0.25

$0.50

$0.26

$51.59

YrFunded

2009

2011

2014

2014

2014

2013

2014

2011

2014

2014

2013

2014

2013

2014

2015

2012

2011

2013

2013

2014

2012

2013

2014

2011

Sources:Crunchbase,mediareports,companypressreleases,SEC�ilings

TABLE ELEVEN: VENTURE CAPITAL INVESTMENT IN NORTH AMERICAN INDOOR AGRICULTURE



Our�iguresexcludeLEDlightingcompanies(suchas,Illumitexwhichhasraised$64mn20inventure

funding),andoverseasinvestments(forexample,the2014IPOofSwedishLEDlighting�irmHeliospectra).

Theyincludeonlyroundswhereinvestmentamountshavebeenpubliclyannounced,andwebelievethat

theyconsequentlyunderestimatetotalinvestmentinthesectorbyasigni�icantmargin.

Theseinvestmentsrunthegamutfromearlystagetechtogrowthcapitalforfarmingoperations.

HydroponicgreenhouseoperatorBrightFarms–whoseinvestorsincludeNGENPartnersandEmilCapital–

hasraisedover$9mnforitsstrategyofbuildinggreenhousesproximatetogrocerychaincustomersonlong

termagreements.Ontheotherendofthescale,GroveLabs–createdinanMITdormroom–hasraised

$2mnfromUpfrontVentures,amongothers,todevelopaquaponicfridgesdesignedforuseinresidential

kitchens.Theunitsareinbetaatthemoment.Elsewhere,TechStarsgraduateFreightFarmssellsfully

equippedcontainerfarmsthatcanbesitedanywherethatpowerandwaterareavailable.Eachsupplies

enoughlettucetomeettheconsumptionofmorethan3,400Americans,andtheCompanyhasaround20

unitsdeployedsofar.

Investorshavebeenattractedbyrapidtechnicalchange,byinnovativebusinessmodelsandbyalargeand

growingmarket:

VeryLargeandGrowingMarket

The2014domesticmarketforfreshvegetablesisestimatedat$25.2bn21,withforecastannualgrowthrate

of1.2%to2019.22Weestimatethatmorethanathirdofthisvalueisincropsthatcouldbegrownindoors

(seeappendixforrationale).Withinthis,greenhouseandverticalfarmsectorsareexperiencingfaster

growth;greenhousegrowingisexpectedtogrowby10%perannumthrough2016.23Further,awell-placed

industryconsultantestimatesthatafurther30verticalfarmsareunderconstructionintheUSalone,

doublethenumberpresentlyoperating.Insomecases,thesefarmsaresubstitutingforimports.

Elsewhere,theirproductsarecreatingnewmarkets,suchasfromthepopularizationofmicrogreens.

InnovativeBusinessModels

Onthefarmingsideoftheindustry,entrepreneursareintroducinglongtermproducepurchaseagreements

andseekingnichecropsasbusinessmodelinnovations.Long-termproducepurchaseagreements,suchas

thoseprocuredbymulti-sitegreenhouse�irmBrightFarms,havegainedpopularityinrecentyearsamongst

largebuyerslookingtolockingoodratesforhigh-quality,localproduce.Theseagreementshavean

additionaladvantageastheycanbeusedtosecurealternative�inancingtohelpoffsetupfrontcapital

expenditures.Examplesofnichecropsincludehigh-valueherbs,microgreensandtreesaplings.

20Crunchbase�igure21Thesemarketestimatesrepresentonlyafractionofthetotallettucevaluechain,astheyarederivedfromterminalwholesalemarketpricesanddonotre�lectadditionalvaluecreatedatretail,foodservice,value-addprocessing,andothermarketsegmentspriortoend-consumption22“VegetableFarmingintheUS”,IBISWorld,July201423“GlobalGreenhouseHorticultureMarket2012-2016”,TechNavio,March2013



Onthetechnologysideoftheindustry,anascentbusinessmodelissoftwareasaservice(SAAS),asdata

captureandremotefarmmonitoringbecomesamoreprevalentofferinginanindustrythathaspreviously

eschewedsucharrangements.

TechnologyDevelopment

Thebulkofventurecapitalinvestmenthas,ofcourse,gonetostartupsfocusedondevelopingnewform

factorsorgrowingsystemstodate,thesebeingtheareabestsuitedtoreturningthe35%+oncapital

commonlyexpectedbyventurecapitalists.Weanticipatethatthiswillchangeastheindustrymaturesand

focusshiftsawayfromthebasicsofgrowingandtowardsimprovingyieldsandreturnsintheindustry.

Broadly,therearethreetypesofinvestmentopportunitywithinthesector:

Farming

Producefarminghastraditionallybeenfundedbyfamilyinvestmentsandbankdebt.Outsideofthelarge

row-cropfocusedfarmlandfunds–managedbythelikesofGMO,JohnHancock,MacquarieBankandUBS–

therearefewinstitutionalinvestorsinthefarmlandspaceandtheinvestmentsizeandreturnpotential

offeredbyindoorfarmsmeansthatthisisunlikelytochangeintheshortrun.Thoughsomeindoorfarmers

expecttoreturn40%+toinvestors,mostarelookingtoraisefundingatan8-12%returnrate,wellbelow

thosepresentlyseeninlessriskyinvestmentcategories,suchasrealestate.

TechnologyInvestment

Aswasoutlinedabove,thereremainanumberofhigh-potentialavenuesfortechnologydevelopment

withinindooragriculture,whetherinbiologic,bigdataorenvironmentalsensingarenas.Itislogicalthat

thesewouldaccrueventure-capitallikereturns,andgeneralventurecapitalists–whoseusualstomping

groundsaresoftwareandhealthcare–havebeguntotakeaninterestinthesectorasaconsequence.

FinancingorLeasing

Indoorfarmshavecomparativelyhighstartupcosts,andraisingsuf�icientcapitaltocovertheseorto

retro�itnewtechnologyintoanexistingfarm,isoneofthegreaterchallengesfacedbyindoorfarmers.

Consequently,anobvious‘nextstep’fortheindustryisthedevelopmentofadditionalleasingand�inancing

structuresthatallowfarmerstofundcapitalcoststhroughthefarm’srevenuestreams.

Aswasthecaseforthesolarindustry,thereareplentifulopportunitiesforinnovativeentrepreneursto

createtechnologysolutionsfortheindooragricultureindustry,foreverythingfromtrackingplantbehavior

tocreatingorganicnutrientmixestoplanningnewfarms.Whatwe’veseensofarisjustthetipofthe

iceberg.



Expediting IndustryGrowth

F

F. EXPEDITING INDUSTRY GROWTH

Increasingthesizeoftheindooragricultureindustryultimatelyrequiresamultitudeofsolutionsinvolving

advancesintechnology,changesinsupplychainoperations,andincreasingindustryawarenessamongst

producebuyersandend-consumers.Ashasalreadybeenseenfromthesuccessoftherenewableenergy

industry,severaltacticsfrombothpublicandprivatesectorsarecriticaltoexpeditingindustrygrowth.

1. HOW LOCAL GOVERNMENTS CAN SUPPORT INDOOR CROP PRODUCTION

ClarifyRegulationandZoningonIndoorAgriculture.Removingambiguityinregulationspertainingtourban

farmingandverticalfarmingatcountyandmunicipallevelscaneliminatelargebarrierstoentryfor

entrepreneursseekingtostartindoorcropproductioninurbanorsuburbanareas.CitiessuchasChicago,

IL,Cleveland,OHandSeattle,WAhaveprovidedblueprintsfortheintroductionofurbanagriculture

ordinances.

ExtendTaxAbatementsorRebatestoIndoorCropProduction.Asisalreadythecasefortraditionalfarming,

incentivesshouldbeputinplacetoattractindoorcropproduction.Manycitieshavevacantlots,abandoned

buildings,orotherunderutilizedspacethatcouldbeofferedatdiscountedratestoindoorfarmers.New

York,forinstance,has10,000acresofusablelandandrooftopspace.24Indoorcropproducerscouldhire

localworkersanddevelopinnovativewaystosupplyfreshproduceintofooddeserts.

FacilitateFarmRelationshipswithPotentialCustomersandLocalUtilityProviders.Governmentof�icials

couldconnectfarmerswithpotentialcustomersotherresourcesnecessarytomitigatecustomeracquisition

riskpriortofarmdeployment.Incaseswheremunicipalleadershavedirectin�luenceonutilityproviders,

stepscouldbetakentonegotiatelong-termelectricratesandalloweasiermarketentryfornewindoor

cropproviders.

2. HOW FEDERAL GOVERNMENT CAN SUPPORT INDOOR CROP PRODUCTION

Trackdataonindoorcrops.USDAdataisa‘goto’sourceforanyindustryobserverlookingtounderstand

agriculturetrendsorforbeginningfarmerslookingforabenchmarkonproductprices.WeusedtheUDSA’s

wholesalemarketpricestocalculatenationallettucepricevarianceinchartnine,forinstance.Usable

strongdatasetsfortheindustry–includingproduction,pricingandvolumedata-wouldallbewelcome.

Extendfederalfundingprogramstoindoorfarming.Asisshowninthetableoverpage,weestimatethat

indoorfarmersareeligibleforthreeUSDAfundingprogramswhosefunding$192mn.25Somegovernment-

backedlenders,suchas1stFarmCreditServices,workwithindoorfarmers.Yet,thesectoriscurrently

24“ThePotentialforUrbanAgricultureinNewYorkCity”,ColumbiaUniversity’sUrbanDesignLab,201225For2014-15,REAPtotalallocationis$101.35mnperEnvironmentalPolicy&LawCenter,$66mnforspecialtycropblockgrantfor2014perUSDA,$25mninvalueaddedproducergrantsin2014perUSDA



excludedfromotherfederalfundingprograms,suchasthe$3.5bn26newmarkettaxcreditprogram,which

providesforgivabledebtmostlytoinfrastructureprojects.Theprogramspeci�icallyexcludesfarming

activitiesatpresent,thoughweunderstandthatsomeequipmentpurchasesmayqualifyfortheprogram.

Asmanyindoorfarmsareinurban,industrialorsuburbanareas,theydonotqualifyforrural-focused

USDAgrants.Moreover,theindooragricultureindustrylacksthespeci�icprogramsthathavefueledother

newagriculturalindustrysectors.Forexample,inJanuary2013,theUSDA’sFarmServiceAgency

introducedapopularmicroloanprogramtoaidbeginningfarmers.Afundingprogramwhichextendedlow

costloansorotherformsofcapitaltoindoorfarmerswouldbehelpful.

Createclearstandards.Onebarriertoentryforindoorfarmersisthelackofclarityaroundfoodsafetyand

organicstandards.Giventhis,weencouragesafetyauditorstoincorporateindooragricultureguidelinesfor

GAP,HACCP,GFSI,andotherfoodsafetystandards,andtoformallydelineatestandardsforthesector’s

producetoqualifyfororganiccerti�ication.

3. HOW UNIVERSITIES CAN SUPPORT INDOOR CROP PRODUCTION

Continuegroundbreakingresearch.Academiahasundoubtedlybeenthedrivingforcebehindmanytechnical

advancesintheindooragriculture�ield.OfparticularnoteintheUSisthepioneeringworkofDrs.Gene

Giacomelli,MerleJensenandCheiriKubotaattheUniversityofArizona’sControlledEnvironment

AgricultureCenter.Examplesincludethedevelopmentofalunargreenhouse.Elsewhere,ProfessorToyoki

KozaiatChibaUniversityhasdonemuchtochampionthedevelopmentofplantfactories.Forexample,one

ofhisrecentpaperscomparedtheresourceutilizationofgreenhouseandplantfactories,andconcluded

thatthelatterwasamoreef�icientuseofresourcessuchaswater,carbondioxideandenergy.More

recently,theinitiativesofDr.CalebHarperatMIT’sCityFARMprojectonopendataandDr.JanJanseofthe

DutchWageningenUniversityonthenutritionalbene�itsofindoorcropshaveextendeddiscussionsof

indooragriculturetonewaudiences.

Expandcollaborationwithindustry.Whilepreparingthispaper,anumberofindustrystakeholders

commentedtousthattheyfelttheindustrywouldbene�itfromacenterofexcellenceestablishedalongthe

linesoftheFraunhoferInstitute,aGermanorganizationthatoffers“demanddriven,appliedresearch

combinedwithscienti�icexcellence”27intheserviceofindustryandinclosecollaborationwithacademics.

Itderivesabout70%ofitsrevenuesfromspeci�icindustrycontracts.Themodelhasbeensuccessfully

replicatedacross67disciplines,wouldallowforgreatercollaborationbetweenacademiaandindustry,and

wouldbeespeciallyhelpfultosmallerindustryplayersthatlacktheirownresearchanddevelopment

capabilities.

262014allocationperCommunityDevelopmentFinancialInstitutionsFund27FraunhoferInstitutequote



Source:FarmedHere

AN OVERVIEW OF GRANT FUNDING FOR INDOOR FARMS

For-pro�itindoorfarmersareeligibleforgrantfundingandincentivesunderanumberof

differentgovernmentandutilityprograms.Chicago-areaverticalgrowerFarmedHerehasput

togetherthefollowinglistofprogramsthatmaybeavailabletoindoorfarmers.Pleasecheck

withtheindividualfundingagencytodeterminewhetheryourprojectiseligible.

Ÿ UnderUSDA’sRuralEnergyforAmericaProgram(REAP),indoorfarmsmaybeeligiblefor

fundingtopurchase,install,andconstructrenewableenergysystemsandenergyef�iciency

improvements.Renewableenergyprojectsmayincludeanaerobicdigesters,solarpanels,

andgeothermalsystems.Energyef�iciencyprojectsmayincludeimprovementstoHVAC

systems,switchingfrom�luorescenttoLEDlights,andreplacementofenergy-inef�icient

equipment.

Ÿ UnderUSDA’sSpecialtyCropGrantProgram,indoorfarmsinparticipatingstatesmaybe

eligibleforfundingrelatedtospecialtycropresearch,solongasthefarmpartnerswitha

researchorganizationorcooperativeextensiontopublicizetheresultsoftheresearch.

Ÿ USDAValue-AddedProducerGrantProgram.Indoorfarmersareeligibleforthistopromote,

market,anddistributevalue-addedproducts,suchasFarmedHere’sbasilsaladdressing.The

fundsmustbeusedformarketingandpromotioncosts,whichincludepackaging,labels,

delivery,etc.

Ÿ Manylocalutilitiesprovideincentivesformakingenergyef�iciencyimprovements.

FarmedHere,forexamplehasreceivedincentivesthattiedirectlytotheamountofenergy

savedbychoosingLEDsinsteadof�luorescentlights,undertheComEdSmartIdeasforYour

Business®program.Inaddition,FarmedHerehasbeenacceptedintotheComEdandNicor

GasNewConstructionServiceprogram,pursuanttowhichitmayreceiveincentivesfor

increasingtheenergyef�iciencyofitsfarm.

Ÿ Certainstatesmakegrantfundingavailablefortechnologicaladvancesinfarmingthatcreate

jobs.Forexample,in2014,FarmedHerereceivedasubstantialgrantfromtheIllinois

DepartmentofCommerceandEconomicOpportunity,EmergingTechnologicalEnterprises

Program,foruseinpurchasingLEDlights.FarmedHerebecameeligibleforthegrantby

demonstratingthattheinstallationofLEDlightswouldincreaseitsplantyields,and

increasedplantyieldswouldcreatenewjobsrelatedtoharvestingandpacking.



CASE STUDY: HOW AN URBAN ORDINANCE FUELED CHICAGO’S INDOOR AGRICULTURE INDUSTRY

TheChicagoareaishometothelargestclusterofindoorfarmsinthecountry,withthreeexistingfarms

(FarmedHere,Gar�ieldProduceCo,ThePlant)shortlytobejoinedbyafourthfromNewYorkrooftop

farmerGothamGreensinconjunctionwithconsumergoodscompanyMethod.Fouryears’ago,therewere

none.

OneoftheenablingfactorsforthisdevelopmentisanUrbanFarmOrdinanceintroducedinSeptember

2011,throughwhichtheCityofChicagoprovidesclearguidelines–forrooftop,indoorandoutdoorfarms–

tourbanfarmers.AccordingtotheCityofChicago,it“clearlyde�inescommunitygardenandurbanfarm

uses,identi�ieswhereeachuseispermittedandestablishesregulationsdesignedtominimizepotential

impactsonsurroundingpropertyandhelpmaintainthecharacterofChicago’sneighborhoods.”Previously,

Chicago’surbanfarmershadoperatedinagrayarea,wherethelegalityoftheirfarmswasunknowable.

Theordinancewasdevelopedandenactedoverasummer,ledbytwoChicagonon-pro�its–theChicago

FoodPolicyAdvisoryCouncilandAdvocatesforUrbanAgriculture–alongwiththeCityofChicago.

MeganKlein,alawyerwhoworkedontheinitiativewiththeChicagoFoodPolicyAdvisoryCouncil,makes

threerecommendationswhenitcomestoenactingsuchordinances:

1.Findanin�luential�iguretospearheadtheinitiative.“OncewehadMayorEmmanuelonboard,and

heallocatedapolicydirectortotheproject,thingsreallystartedtomove”commentsKlein.

2.Involvestakeholdersinthedraftingprocess.Sharingearlydraftsoftheordinancewithfarmersand

otherstakeholdersmeantthatunworkablesuggestions,suchaslongsetbacksfromresidencesin

denselypopulatedurbanareas,werenixedearly.InChicago,acoupleofpublicmeetingsallowed

stakeholderstolearnabouttheordinanceandaddtheiropinionsandsuggestions.

3.Developanimplementationplan.Oncetheordinanceisinplace,citydepartments(especially

buildingandlicensingdepartments)andfarmersneedinformationonhowtheinitiativeworksin

practice.Forinstance,theCityofChicagodevotedasectionofitswebsitetooutliningitsordinance.

Klein–nowChiefLegalCounselatChicago-areaverticalfarmerFarmedHere–seestwobene�itsfromsuch

ordinances;betterpublicawarenessofurbanfarmingandmoreurbanfarmsinthelocalarea.Forinstance,

localnon-pro�itAdvocatesforUrbanAgriculturelists49farmsandcommunitygardensinthearea.



4. HOW THE PRIVATE SECTOR CAN SUPPORT INDOOR CROP PRODUCTION

Incorporatingindoorcropsintomenus.Chefshaveledthechargewhenitcomestoorganic,sustainablelocal

food,andpartneringwithindoorfarmerstoincludenew�lavorpro�ilesinmenuswouldbeafurther

enhancementtothismovement.ExamplesincludeChefDarrenBrown,whoincorporatedVillageFarm’s

greenhousegrownproduceintoFairmontHotelmenusduringhistenurewiththecompany.

Collaboratingonproductdevelopment.Asarelativelysmallindustry,indooragriculturedoesnotalwaysget

the‘shareofvoice’thatlargeronescommandwithindustrysuppliersandthiscandeterthedevelopmentof

productsbene�icialtoallindustryplayers.Asolutionisforcompaniestobandtogethertorequest,for

example,thedevelopmentofseedswithspeci�ictraits.

Gatheringdataonnutritionalcontentofproduce.Currentlythereisnoconclusiveevidencethatindoor

produceis,onaverage,healthierordenserinnutrientsthantraditionallygrownproduce,thoughtheDutch

WageningenUniversityhasreleasedtwostudiesthatshowimprovedVitaminCcontentinstrawberries28

andtomatoes29grownincontrolledenvironmentsystems.Growerscouldregularlyconducttissuesample

analyses,aggregatethedata,andworktogethertocommunicate�indingsifthereissigni�icantevidenceto

suggestindoorproduceishealthier.

Improvingaccesstocapital.Aswasoutlinedabove,thereareplentifulopportunitiesfordeploymentof

capitalintotheindustry.Weencouragebanksandotherfunderstoestablish�inancingmodelsthatsupport

indoorfarmsandtechnologiesthatenablethem.

5. HOW NON-PROFITS CAN SUPPORT INDOOR CROP PRODUCTION

Advocatingfortheindustry.Itisimportantthatindoorgrowersthemselvesworktogetherasanindustry,

potentiallythroughearlyformationofacentralizedbodyadvocatingforbene�icialpoliciesatstateand

federallevels.Suchabodywouldadvocateonbehalfofindustryforregulationandzoningchangesthat

enableurbanfarmsatthegubernatoriallevel,andforashareofexistingfundingprogramsandclearer

organicstandardsatanationallevel.

Gatheringdata.Anyyoungindustryishamperedbyalackofdata,andindooragriculturewouldbene�it

fromdataoneverythingfromitsimpactonlocalfoodsystems,tocomparativegrowingandcapitalcosts.

OnemodelthatcouldbeusedforsuchaninitiativeistheKauffmanInstitute,whichfocusesonproviding

dataandthoughtleadershiparoundentrepreneurship.

Educatingconsumersonthebene�itsofindoorfarming.Non-pro�itshavealengthyhistoryofeducatingand

in�luencingconsumerswhenitcomestofoodandagriculturematters.Examplesincluderaisingawareness

ofgeneticallymodi�iedfoods,ofchildhoodobesity,andofanimalwelfareissues.Nutrition-focusednon-

28“TastystrawberrieswithLEDs”,WageningenURGreenhouseHorticulture,December201429“TomatoeswithextravitaminCviaLEDlamps”,WageningenURGreenhouseHorticulture,May2013



pro�itshadrevenuesinexcessof$300mnlastyear,morethan

doublethatofoneoftheindustry’slargerfarmers,Village

Farms.30Non-pro�itshaveauniqueopportunitytoleverage

indoorcropproductiontofurthermissionspertainingtofood

access,nutrition,orpromotionoflocaleconomies.We

proposethattheyincorporateindooragricultureintotheir

advocacywhererelevant.Generalnutritioncampaignsdon’t

educatetheuninitiatedaboutthebene�itsofindoorcrops,so

onesfocusedonthebene�itsofindooragriculturetothe

environment,tofarmlaborersandtolocalfoodsystemswork

best.

Providingphilanthropy.Indooragriculturehasthe

disadvantageofrequiringarelativelyhighupfrontinvestment

inequipment,andthiscanbetoughforbeginningfarmers.

Consequently,philanthropic�inancing,whetherintheformof

grantsorlowinterestloans,wouldbebene�icial.Thereare

templatesforthisintheformofprogramssuchastheMaine

OrganicFarmersandGardenersAssociation'sOrganicFarmer

LoanFundwhichmakesloansofupto$20,000tolocalorganic

farmersworkingtobuildacredithistoryfortheirfarms.

6. HOW CONSUMERS CAN SUPPORT INDOOR CROP PRODUCTION

Supportlocalindoorfarms.Byseekingouthydroponically-

grownproduceratfarmers’marketsandgrocerystores,and

purchasingdirectlyfromlocalindoorfarms,manyofwhich

offereitheronlinesalesorcommunitysupportedagriculture

(CSA)subscriptions,consumerscanbolsteryear-roundlocal

foodsupplies.

Requestlocalfoodatrestaurantsandgrocerystores.Asinmost

industries,theconsumervoiceisextremelyimportanttothe

foodandbeverageindustry,soweencourageconsumerstoask

questionsattherestaurantandgrocerystore;“wheredoes

yourproducecomefrom?”,“howdoyousourcefreshproduce

inthewinter?”,“doyouworkwithlocalfarms?”.

30AnnualrevenueforK40Nutrition501c3NTEEcategoryof$304mnperNationalCenterforCharitableStatisticsasatDecember2014.AnnualrevenueforyeartoSeptember2014forVillageFarmsof$134mnperYahoo!Finance.



INDOOR FARMING TECHNIQUES GREATLY REDUCEPRODUCTION VARIABILITY AT THE FARM LEVEL AND

ENABLE UNPRECEDENTED ACCURACY IN COSTFORECASTING.



The Future of IndoorCrop Production

G

G. THE FUTURE OF INDOOR CROP PRODUCTION

Inordertosecurebroadmarketpenetrationandscalebeyondanicheindustry,indoorcropproduction

mustbecomecostcompetitivewithoutdoorcrops.Priceparityhasalreadybeenreachedforsomehigh-

valuecropsandincertainmarketsduringwinter,suggestingthatthetruetippingpointforrapidindustry

expansionhasalreadytranspired.Astechnologiescontinuetoadvance,theprimarycostdriversofthe

industry–capitalequipment,andlabor,electricity,andnutrientsperharvestedplant–willcontinueto

decrease.Simplyput,economicmomentumisonthesideofindoorgrowers,andweenvisagetheindustry

playingagreaterpartinthenation’sfoodsupplychainasexistingfarmerssupplementproduction,and

grocers,restauranteursandstateentitiesbegintogrowtheirownproduce.

Beyondthis,weexpecttheindooragricultureindustrytoplayapartintheongoingreintegrationoffarms

intourbanandsuburbanlife.Weenvisionafuturewhereof�iceatriumsprovidefoodforin-building

cafeteriasandlocalrestaurants.GreenbuildingssuchasUrbanarbolismo’sverticalgardencomplexinSpain

continuetogrowinpopularity,completewithgreenwalls,balconygardensandrooftopfarm.In-home

appliancesautomaticallygrowingvegetableandherbgardenswillprovidefamiliessupplementalfresh

producegrownrightintheirkitchens.Andcountlessotherapplicationswecan’tnowforeseewillcontinue

toinspireentrepreneursforgenerationstocome.

Indoorfarmingwillneverreplaceconventionaloutdoorfarmingmethods.Itwillinsteadaugmentthefood

chaintocreateadiverse,distributedsystemmoreresilienttosupplyshocksandbetterpreparedtomeet

thedemandsofagrowingglobalpopulation.



APPENDIX: CALCULATING THE ADDRESSABLE MARKET FOR INDOOR CROPS

TocalculateanaddressablemarketsizefortheUSindoorcropindustry,webeginbytakingalistofcrops

thatcanbecommerciallygrowninsuchsystemsfromaUniversityofFloridapaper.31 Next,wematchthese

cropstoUSDA’sNationalAgriculturalStatisticsService(NASS)productionstatisticsfor2013,themost

recentlyavailablesetofdata,toreachthefollowingpotentialmarketvalue:

TheNASSstatisticsaccountforstrawberries($2.4bn)andmushrooms($1.1bn)separatelyinthefruits,tree

nuts,andhorticulturalspecialtiessection,soweaddtheseestimatestoourvegetabletotalof$5.8bn.

Combinedthisyieldsatotaladdressablemarketof$9.3bn,ornearly17timesthecurrent$555mn2revenue

estimate.

Wenotethatthis�igureexcludesthefollowingcropsforwhichdatawasnotavailable:Arugula,Basil,

Chervil,Dill,EdibleFlowers,Eggplant,ItalianParsley,Kale,Microgreens,MiniCucumbers,MuskMelon,

Mustard,OtherHerbs,SwissChard.Further,theydonotaccountformarketgrowthbetween2013and

2015.

Crop

BabySquash

BellPeppers

Cantaloupe

ChilePeppers

EuropeanCucumbers

HeadLettuce

LeafLettuce

RomaineLettuce

Spinach

Tomatoes

TOTALCOMMERICALVEGETABLES

Value($1,000)

248,725

627,540

325,337

175,145

420,807

805,658

444,082

621,771

240,677

1,874,527

12,067,897

Notes

Allsquash,notjustbaby

Fresh&forProcessing

Fresh&forProcessing

Fresh&forProcessing

Source:"2013AgriculturalStatisticsAnnual",USDA'sNationalAgriculturalStatisticsService

TABLE TWELVE: PRODUCTION VALUE BY CROP ($1,000)

3¹“AlternativeGreenhouseCrops-FloridaGreenhouseVegetableProductionHandbook,Vol3”,R.HochmuthandD.Cantliffe,UniversityofFloridaIFASExtension



www.newbeancapital.com

www.localrootsfarms.com www.proteusenv.com

For more information and to download a .pdf of this white paper,please visit indoor.ag/whitepaper

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INDOOR CROP PRODUCTION FEEDING THE FUTURE · About the White Paper The purpose of this paper is to consolidate knowledge on the current state of the indoor agriculture industry, demonstrate