Sky-High Harvests

Agtech investment, like many other areas of technology, has been through a difficult period in the last few years. Both the number of deals and the value of new investment in the sector declined significantly in 2022 and 2023.

The challenges for this sector during this period were not uncommon and were shared with other areas of technology. Higher interest rates were clearly a factor following the rapid and significant increase in inflation across the world. Still, perhaps the most difficult problems were posed by the significant increase in energy prices experienced by the agricultural industry following the war in Ukraine. This was especially challenging for the relatively capital-intensive vertical farming sector, which, in Europe, has proven to be highly vulnerable to increases in electricity prices. One consultancy in the industry has estimated that the energy price inflation across Europe has taken electricity costs from around 25% to over 40% of total operational costs for a typical vertical farm.

These more cyclical problems compound the existing structural challenges confronting the agricultural sector, with climate change being the biggest. Globally, food systems account for about a third of global greenhouse gases, and so the industry is at the forefront of humanity’s battle to limit emissions. Whilst doing this, agriculture must also meet the needs of a growing population, do more to protect scarce natural resources, improve soil health, and reverse its historically damaging impacts on biodiversity, as well as meet the increasing aspirational demands of consumers for more of a choice of fresher, better quality nutritious produce that also tastes good.

This is a daunting task list that can only be met if agriculture and the food industry, more broadly, embrace new, disruptive technology to help farmers find better ways to grow food and become more productive as well as less environmentally damaging.

In the wake of COP28 in Dubai, these issues have assumed even greater importance, given the limited window in which the world must limit its GHG emissions to avoid irreversible and globally damaging climate change. It is in this environment that this significant decline in support for young Agtech businesses must be seen.

Fortunately, the immediate future for technology-focused businesses in this massive sector is significantly more supportive. The global macro-economic environment appears to be gradually improving as energy prices have fallen back and this will be followed, with a lag, by lower inflation and interest rates. We think this will engender a recovery in investor confidence in agricultural technology more broadly, and we expect, therefore, to see a recovery in deal activity in the Agtech sector.

Within Agtech, vertical farming has had an especially difficult two years in which a number of high-profile early-stage businesses across Europe either went bust or significantly scaled back their ambitions. The rapid and significant increases in electricity prices across the continent were an important causal factor, but other characteristics of the European food market, fragile investor confidence, and consumer belt-tightening were also cited as reasons for this setback in what is a capital-intensive alternative to established farming practises.

Against this challenging backdrop, a vertical farming business based in the US, called 80 Acres, has made significant technological and commercial progress over the last two years. With a supportive shareholder base, this business has bucked the trend seen in vertical farming businesses in Europe and scaled up its operations, having recently completed the construction of its first 150,000 sq. ft vertical farm in Florence, Kentucky. This new farm will be able to deliver better yields, optimise energy use and capture scale advantages in packaging and transport costs, alongside growing higher-value crops, to deliver EBITDA margins of over 40%.

Having both survived and prospered during this difficult two-year period, we think 80 Acres, along with the rest of the Agtech sector, is poised to enjoy a significantly more benign commercial and investment environment in the years ahead. Vertical farming is a nascent industry, and, like many before, it has seen some early failures. But the future is bright for those businesses with the right technology, access to capital, top-quality management, and appropriately scaled business models.

Vertical farming is also especially well-suited to locations where energy is relatively cheap and less volatile and where growing crops outside is difficult. One obvious location that fits these criteria is the Middle East, where GCC countries import around 85% of all their food and 56% of their vegetables. These countries are naturally looking to increase domestic food production and food security, and unsurprisingly, one of the world’s largest vertical farms opened in Dubai in 2022, supplying leafy greens for the Emirates Airline and local markets. We expect to see many more farms like this come on stream in this region in the years ahead.

We think vertical farming and the Agtech sector, more broadly, will continue to have a crucial role to play in helping to transform the global farming industry in the years ahead, enabling it to meet the many challenges of the future whilst reducing its CO2 emissions and its harmful effects on the natural environment. Given the size of the industry’s emissions and the short timescales over which significant reductions must be achieved, we expect the scale of new investment in technology in this industry to scale rapidly, led by consumer pressure and legislation.