Vertical Farms vs Greenhouses: Financial Considerations Beyond the Energy Bill [Part 3 of 5]

In the first two articles of this series, we discussed the impact of location and energy usage on the CapEx and OpEx of vertical farms and greenhouses. Energy usage accounts for a significant proportion of indoor farm costs, but what else affects the expenditure (and profitability) of vertical farms and greenhouses? Here, we examine the factors that impact vertical farm and greenhouse financials and provide you with a range of real-life examples.
Logically, building an indoor farm in a dense city centre will mean less space availability, at a higher cost — factors that favour compact, but energy-intensive vertical farms over greenhouses. (And the source of the energy is, of course, a major factor in determining the carbon-intensity of any CEA operation, but especially so for a vertical farm.)

Remember the striking statistic from Agritecture, in Part 1 in our series, about vertical farms costing six to 10 times as much as greenhouses per square metre?

Operating in a brand-new, high-tech industry means urban farms often have high CapEx — and the products they sell are priced with slim margins. The options for both vertical farms and greenhouses are so wildly diverse that neither can be said to necessarily be quicker or cheaper to design or build.

“The ROI is very long-term,” says Ramin Ebrahimnejad, an expert on multiple types of urban farming and vice-chair of the Association for Vertical Farming.

“Most funding partners who are coming to this industry know that they can’t have their money back in just a couple of years. There are farms that are profitable within two years of operation, but that doesn’t mean they’re going to fulfill all of their investments.”

He adds that because this is a new and fast-changing industry — and because the product is priced so low — it’s hard to generalise about profitability and payback. The industry still lacks what he calls “clear and trustworthy market analyses,” with most statistics being anecdotal.

However, we can provide a few real-life examples to illustrate the current playing field.

A farm built with iFarm technologies growing 300+ square metres of greens can be constructed in about two months, with a payback period as quick as four years — a timeline iFarm’s R&D team is constantly working to improve.

Of course, the total cost of construction depends on the location and size of the farm. The cost of 1 square metre of growing space differs depending on the overall size of the farm, for example.

>1,000sq. m. iFarm vs Greenhouse in Estonia
Let’s imagine we are going to build a farm with iFarm technologies in Estonia. The farm will have more than 1,000 square metres of growing space and a basic level of automation. The average cost of 1 square metre of growing space will be approximately 700 EUR to 750 EUR.

The CapEx for iFarm vertical farms built in Estonia is approximately 901,000 EUR. (This includes equipment for the vertical farm and installation, but not structural building costs or any necessary renovations to the site.)
The OpEx, along with the cost of production, is approximately 899,500 EUR (including expenses for packaging, logistics, and other commercial expenditures.) Considering that the annual revenue for a farm is approximately 1,168,100 EUR, we can calculate that the payback period should be 6,2 years. Of course, these numbers are approximate and, as we mentioned, they will vary from case to case based on location, farm size, management, automation level, and many other factors.

When we compare this to the publicly available data for greenhouses, we’ll find that the payback period may vary significantly — from 2–3 to 12–13 years, depending on the business model and other factors. (Data sources: Agro-Industrial Symbiosis and Alternative Heating Systems for Decreasing the Global Warming Potential of
Greenhouse Production, Economic Efficiency of Investment in Greenhouse Vegetable Production Without Heating.)

So we can see that the profitability and payback periods for indoor farms hinge on many factors — including where the farm is built and the technologies used and the crops that are being grown. Due to the potential variables, it’s important to use custom calculations to determine CapEx, OpEx, ROI and payback periods. This ensures that all relevant factors are accounted for and provides you with an accurate estimate of costs and returns.

To find out how profitable your vertical farm could be, request a custom calculation from the iFarm team now!

For another example, let’s compare the possible yield from one square metre, looking at data from greenhouses and iFarm vertical farms in Finland.

According to the Finnish Statistics Database (LUKE), growing salad vegetables in a greenhouse in 2020 yielded an average of 0.3 kg per square metre of planting area per month. Meanwhile, vertical farms using iFarm technologies in Finland yielded up to 4.2 kg of Romaine lettuce per square metre per month.

The number of yields, or harvests, you can obtain from a specific growing area have a significant impact on profitability and payback periods. After all, the more you can grow, the more produce you can sell and profitability increases accordingly.

While overall profitability depends on numerous factors, including your ability to outperform competitors, the increased yields available on a vertical farm do provide the potential to boost revenue and profits.

When it comes to getting produce to customers, it’s all about location, location, location.
In this respect, vertical farms typically have a distinct advantage over greenhouses. In addition to delivering higher yields, vertical farms can be built in city centres and other urban environments, putting them closer to consumers and end-customers. This simplifies the distribution chain and reduces the associated costs.

In relation to logistics and distribution, the equipment used for processing and packaging on a vertical farm, and the type of produce grown, can also impact the cost of launching and running this type of indoor farm. For example, vertical farms often produce super-premium quality greens, which may require more advanced solutions than the typically bulk-cut produce grown in greenhouses.

While this can mean higher expenditure for processing and packaging equipment, incorporating all aspects of logistics into one farm building can significantly reduce costs. Furthermore, the increased revenue that can be generated via super-premium products can boost profitability and offset the additional expenditure.

Returning to the topic of strategies to increase profitability, it may be valuable to consider a tip mentioned in the Agritecture Designer course: Any kind of urban farming, whether vertical or greenhouse-based, is often considered a “social good,” and therefore may qualify for rent reductions. Urban farmers can also find local partners — schools, community projects, or others — that may be able to provide space for free or at a reduced cost.

Vertical farms generally require fewer employees than greenhouses, but the numbers can vary greatly depending on both the design and the farm operator’s vision and objectives. Most vertical farms built with iFarm technologies, for example, employ approximately one person per 125–150 square metres of growing space.
To learn more about the number of working hours it takes to run a vertical farm, take a look at our blog post here.

Reducing Labour Costs
Inevitably, the cost of labour is a significant expenditure for both farms and greenhouses, particularly in locations with relatively high wages. However, there are ways to minimise the cost of labour.

Community Involvement
Firstly, farms with a social mission can provide jobs and volunteer opportunities to members of the community who may otherwise be excluded from employment. Effectively accessing labour at a reduced cost, this benefits the farm while supporting the local community too.

Increased Automation
From a commercial perspective, increased automation may be a more reliable way to reduce the need for manual labour and cut costs. While virtually all farm processes can be automated on a vertical farm, investment is required to implement new technology, Ramin Ebrahimnejad says some vertical farming operations are already nearly 100% automated — but that is rare and very costly. He adds that greenhouses cannot be fully automated at this point because, unlike vertical farms, they don’t offer full control over all of the elements.

Simplifying Farm Roles
The majority of indoor farms will likely remain manually operated for the next couple of decades, and he says that, currently, the major hurdle for farm managers is finding qualified employees with a variety of specialties — plant scientists, robotics scientists, AI specialists, and more.

“We’re going to still have a lot of high-skilled jobs in this new industry, but we need to educate people for them,” Ebrahimnejad says.

Indoor farm operators often have trouble finding people with knowledge of indoor farming to work as farm monitors, for example — a technical position that involves assessing the numerous data points collected.

In the hopes of alleviating this labour shortage, the Association for Vertical Farming started the Indoor Farming University Network in 2020, which currently has dozens of universities and academics who are members, mostly in Europe.

Meanwhile, iFarm is working to make vertical farms simple enough to be operated by employees without any specialist experience.

iFarm Growtune software is just one way of simplifying farm management and reducing the number of specialist staff needed to operate your farm. The Growtune SaaS platform features numerous modules and includes knowledge sourced from hundreds of farming professionals — agronomists, plant health specialists, engineers, biologists, and other experts. It allows farm operators to manage a vertical farm in a couple of clicks — from planning, to optimisation, to analytics — and make the right decisions to achieve greater yields.

As you can see, there are numerous factors that must be taken into account to determine the true cost and potential profitability, payback periods and ROI of vertical farms and greenhouses. Regional variations further complicate the issue, which is why detailed, accurate forecasts are critical to long-term success.
However, the opportunity for increased automation, simplified farm processes, higher yield outputs and shorter distribution channels certainly give vertical farms some advantages over greenhouses!

01.02.2022