“We are currently in a transitioning phase in the CEA industry. You can say that from CEA 1.0, we are getting to CEA 2.0. In a way, we can see the current situation as CEA 1.5.” This is the assessment by Curt Meltzer, CEA consultant and former managing partner and CEO of Kentucky Fresh Harvest.
Curt is one of the minds involved in the construction and operation of one of the first large hydroponic tomato greenhouses in Kentucky, and he has more than one funny anecdote about building a veggie greenhouse when it wasn’t a common thing. “People thought that it was a cover-up,” he chuckles. “Some locals didn’t believe we were growing fresh produce in there. They thought we were growing cannabis.”
Curt is one of those seasoned veterans who has seen countless ups and downs in CEA. “When we finished closing on our 10-acre facility in September 2015, I believe there were less than 20 significant greenhouse operations in the US. At this point, there are so many more.” The industry is witnessing consolidation, with big companies expanding and eating up some of the small fish out there. “That anyway is also compensated for by the big number of small companies constantly coming into existence.”
Tomatoes vs lettuce
Most of those recent companies, according to Curt, are active in the leafy greens space, even though tomatoes used to be the crop of choice when thinking about greenhouses. “Tomatoes, for the most part, are a saturated market,” he says.
“We have seen players acquiring small, innovative growers all around – but not only that. Think of some of the largest horticulture companies in North America, for instance. Their strategy wasn’t based solely on expansion by acquisition. They usually also signed distribution agreements with greenhouse growers.” Thus, it goes without saying that getting into such a market as a small, independent company may be quite challenging. “Of course, such a thing is not only happening in tomatoes but also leafy greens, yet to a different capacity as of now.”
What happened to AppHarvest?
Given this context in CEA, Curt says that the AppHarvest debacle was like watching a driverless bus. “In the past, I had weekly conversations with other CEA experts about the AppHarvest situation. It was obvious to all of us where they were going.” Drawing from his experience at Kentucky Fresh, Curt takes care to explain what went wrong at AppHarvest.
“Three are the main components of every business: capex, opex, and revenue. If your capex and opex are so much higher than your revenue, then you are going to lose money until it’s all gone. Now, let’s take the AppHarvest example. Building their first facilities was very expensive, for one. For two, they were paying their workers much more than other companies in Kentucky – and I know that because they were our competitors in the labor market. That’s admittedly a nice thing in itself, but then if you look at their revenue numbers, you would see that their total expenses and their revenue were never close to balanced.”
Photo 44667180 | Agriculture © Maksudkr | Dreamstime.com
Who will survive?
So, which company is going to survive and will not end up like AppHarvest? “There are some large companies that are doing well, but in my view, the future will be with small greenhouse companies that are active in wonderful niches,” Curt says.
“For instance, AgBotic. They are a high-tech, small greenhouse company – it’s less than 5 acres. They grow in soil in greenhouses and use a combination of patented labor-saving technology. On top of that, they also have patented AI technology, which increases production. They continue to increase their growing efficiency and have a very low cost of goods compared to the rest of the CEA space. These kinds of companies will survive this transitioning period. As they expand their product selection, they are going to be much bigger, and that’s going to be CEA 2.0.”
There’s another CEA space that has been struggling since its inception, and that’s vertical farming. “Energy is the true Achille’s heel of this space,” Curt points out. He also believes that energy, as with so many of the other current issues in CEA, will be successfully tackled down the road. At the same time, focusing on a niche market is going to be especially crucial for vertical farms. “The successful ones find a solid business model, which almost always involves a unique approach to lowering expenses and a special customer base willing to pay above market prices for special produce. And for sure, in 5 years from now, there are going to be energy solutions that will lower vertical farmers’ energy costs.”
Photo credits: VerticalFarmDaily
There are plenty of examples of vertical farms that got crushed by their opex, and Curt believes that had mainly to do with the sheer size of those operations. “For the future, I’d rather have ten small greenhouse operations or vertical farms in different locations than one large mega facility in the middle of a rural county, where transportation costs skyrocket. I like those greenhouses and vertical farms that are small, that can be replicated in multiple areas, as many as needed.”
The conclusion is that size doesn’t matter here, says Curt. “What matters is a successful model. Once greenhouses and vertical farms hit the point where all the improvements can show profitability, it’s much easier to expand, scale up, and just go bigger, generally speaking.” In other words, nail down a first model that is profitable and then multiply that. It’s much cheaper to build a smaller company, keying into specific distribution centers or a specific market that wants your produce. “Not only is it cheaper and more financially savvy, but you can build such a company 2-3 times faster.”
Considering all the challenges and the possible ways forward for the different CEA spaces, opportunities abound, and new crops may become trending, opening up new profitable ventures for growers. “While the tomato market is saturated, and the leafy greens market too is heading that way, berries are coming in strong. You can see advancements in genetics, which historically have been holding back the industry’s profit. A lot of companies are working to optimize that. Once that gets over the hump, you’ll see many more berries in supermarkets.”