Understanding the business of growing edible crops in a greenhouse or vertical farm

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Regardless of whether specialty crops are grown in hoop houses, greenhouses or indoor vertical farms, growers are incorporating technology to improve production and profitability.

When it comes to technology, most controlled environment growers are looking for ways to produce their crops as efficiently and as economically as possible. Purdue University horticulture and agricultural economics professor Ariana Torres is focused on the marketing and economics of specialty crops, especially those grown in controlled environments.

“Because of my educational background in controlled environment I focus more on that type of production,” Torres said. “I have three appointments at the university. I teach entrepreneurship. I do research on technology adoption for specialty crop operations, including vegetables, ornamentals, herbs and organic agriculture. I also investigate how consumers perceive grower technologies. My extension appointment allows me to bring the findings from my research to growers and other stakeholders.

“I collect information on farmers markets every week. I have an extension program called Horticulture Business with a website that is hosted by Purdue University. I am also working on developing financial tools like online enterprise budgets and financial calculators where growers can learn about risk and the break-even analysis of various crops.”

Purdue University horticulture and agricultural economics professor Ariana Torres tours Big Tex Urban Farms at the State Fair of Texas in Dallas.
Photos courtesy of Ariana Torres, Purdue Univ.

As a graduate student at Purdue, Torres studied controlled environment production learning that light requirements and nutrition not only vary by crop, but also by variety.
“I can transfer those learning skills to other crops,” she said. “Ninety percent of my current research is on edible crops and 10 percent is on ornamentals. This split also reflects what is happening in the industry. Greenhouse growers and ornamental growers are slowly transitioning to edible crops as well. Many hydroponic systems that were developed for greenhouses and poly houses were designed for ornamental production.

“Of the specialty crop growers I’m working with, 50 percent are controlled environment and 50 percent are outdoor field growers. I initially started working with field crop growers and have transitioned more into controlled environment systems.”

Focused on cost-efficient technology

Torres is focusing on how growers can adopt cost-efficient technologies. She is particularly interested in assisting growers in accessing information about the cost efficiency of technologies.

“I am also interested in finding out how these technologies are perceived by consumers,” she said. “I am starting to study consumers’ perceptions and their willingness to pay for specialty crops.

“One project I’m particularly interested in studying is related to value-added technologies. There are specialty crop growers who sell wholesale in bulk while other growers cut, wash, dry and label products. Value-added can be defined as any physical or labeled transformation of a product. I’m evaluating the transformation of the identity of a crop. Anything related to whether a crop is non-GMO, organic, pesticide-free, locally grown or domestically produced.”

Differences in operation size, customer base

Torres said that small and large specialty crop growing operations have very different market channels.

“The goal of most large operations is to produce large volumes,” she said. “That involves a lot of efficiency—producing the highest value crops that can provide the highest profits selling large volumes to one or two customers.

“Small hydroponic growers are not only looking for a higher profit, they are also looking to access different market channels than large operations. They tend to diversify their number of crops and their number of market channels. For example, small operations tend to sell to restaurants, farmers markets, independent grocery stores, community supported agriculture and they may also sell online.”

Torres said once small operations incorporate technology they tend to stick with it for as long as possible to recover their investment.

“At small hydroponic operations there tends to be less technology and lower investments,” she said. “They also tend to grow more edible crops, including tomatoes and other small fruit, and try to capitalize on higher prices for locally-grown hydroponic crops.

“Large operations are aiming to produce fewer crops and larger volumes with potentially smaller profit margins than small operations. These large operations grow fewer crops and their technologies tend to be more expensive. For example, large growers tend to use more expensive sensors, substrates, irrigation systems, lighting fixtures, and they are usually more willing to experiment with newer technologies. These operations also tend to be more efficient as a result of technological efficiencies.”

Automation limitations

Torres said Europe still leads the way in agricultural automation.

“More technology will be coming from Europe, but I’m not sure if it will come from European companies,” she said. “There are more U.S. researchers and companies doing research on automation and its impact on controlled environment agriculture.

“The Dutch have been very innovative on controlled environment technologies for automation. One of the successes for the Dutch growers is that they are very specialized. A grower has one crop, two crops at most. If a grower is producing one crop like tomatoes, then automation makes a lot of sense. In the U.S. it’s more difficult because growers are more likely to produce a larger number of different crops. The challenge is when growers produce multiple crops like baby kale, microgreens and tomatoes. These are crops that have different production requirements, different stages and different pest pressures. In regards to automation, what works in Europe may not necessarily work in the U.S.”

Factors affecting profitability

Torres said the type of structure and facility can also impact investment and profitability.
“With hoop houses there is usually less technology and fewer investments compared to greenhouses,” she said. “There also tends to be less technology and lower investments at small operations. If these small growers capitalize on higher prices for hydroponic crops, they can be profitable relatively quickly.”

Ariana Torres and a visiting scholar collect prices of specialty crops sold at Indiana farmers markets.

Torres said indoor vertical farms tend to take longer to be profitable because of the startup costs. There can be a large investment in technology.

“Even though greenhouse growers typically need more employees than vertical indoor farms because their operations are larger, most vertical farms are dealing with a higher level of technology requiring more qualified labor resulting in higher labor costs,” she said.

“Energy costs are also going to be higher for vertical indoor farms. The reason profitability is harder to reach for large indoor farms in the first and second year is a reflection of the investment and operational costs.

“Customer base also impacts profitability. A bag of lettuce may cost $4 at a farmers market and $5 at Whole Foods. The prices are not that different considering that selling at a farmers market allows a grower to capture a higher share of the consumers’ dollars. Also considering that operational costs for growers selling wholesale are very different, it is evident why profitability is harder to reach for large growers. If growers sell to wholesalers, the price they receive can be considerably lower than the price paid by consumers. In addition, labor costs per square foot tend to be higher for indoor farms and operational costs can be higher. However, these indoor farms can produce a lot of product so that they are able to supply large volumes.”

Vertical farms can be profitable

Torres said she has been able to collect limited information on indoor vertical farms.
“Small vertical farms tend to sell to independent grocery stores and local farmers markets,” she said. “The vertical farms I have seen in the Midwest tend to be small and their level of technology they usually have built themselves and/or recycled a lot of equipment. They can be very profitable because they are small and are able to capitalize on high prices for locally-grown crops like leafy greens and microgreens.

“Even though these vertical farms are producing on a small scale, they can be very profitable because they are rotating crops every four to six weeks. They can have as many as 12 crop cycles, which is a lot of production.”

Ariana Torres is visiting urban hydroponic operations like this one in Indianapolis.

Torres said where these indoor vertical farms start to run into trouble is when they look to scale up production.

“When small operations scale up, they are going to become a full time job and may need to start hiring employees,” she said. “Once they start to scale up because of increased demand for their product or just because they want to expand their business, that’s when they are likely to run into financial stress. They would need to invest in more technology and their customer base is going to change, moving from direct-to-consumer markets to wholesale or retail. When growers move into bigger market channels and start selling to larger retailers and wholesalers, their business model changes and with that their financial performance.

“With indoor vertical farms, scaling up may involve a lot of investment, especially going from a small to large operation. In field agriculture, it is much easier to scale up to increase profit and revenues. For large indoor vertical farms, for the first three to five years depending on how much money is invested, they are going to just break even or maybe generate negative numbers. Those indoor farms that are able to succeed during the first three years usually have investors with deeper pockets who are willing to see the operations through the long term.”

 


For more: Ariana Torres, Purdue University, Horticulture and Landscape Architecture, West Lafayette, IN 47907; (765) 494-8781; torres2@purdue.edu; https://www.purdue.ag/hortbusiness.

This article is property of Urban Ag News and was written by David Kuack, a freelance technical writer from Fort Worth, TX.

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