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Vertical Farming – Controlled Environment Ag Market Brief – Future Bright

Vertical Farming – Controlled Environment Ag Market Brief – Future Bright

Market Brief – Vertical Farming – Future Bright LLC

Vertical Farming is a technique in Controlled Environment Agriculture utilizing LED lighting and control systems to grow plants with consistent quality, year-round. Interest and investment in Vertical Farming is still in its early stages, and, combined with other CEA techniques, offers a differentiated growth area for investors that is ripe for innovation.

Investment in agricultural technology is growing and reached $4.5B in 2015. Still, Upstream Production Infrastructure, like Vertical Farming, Control Systems and Greenhouse Growing, remains a small part of overall investment for US markets. Indoor agriculture attracted $77M of the reported total in in 2015 (AgFunder). This total grew to ~$250M in 2016, 222% growth and we estimate will exceed $450M in 2017. Globally, this number is likely to be around 5-10X through 2018, with higher end estimates including medicinal crops. The focus of this brief is food.

Vertical Farming is increasingly being seen as part of the puzzle in creating a sustainable global agricultural system, as seen in the needs and opportunity graphic below.

Building a Sustainable Agriculture System (Opportunity / Needs Assessment)

Early Growth: There are a number of secular drivers fueling growth in Vertical Farming. These factors include improved economics, rising demand for local foods, and an increased focus on water and weather-efficient growing in order to improve food security in the face of climate change.

Vertical Farming is reaching economic parity in many markets due to falling costs of technology, the rising cost of water, improved growing expertise and demand for clean, local foods that are non-GMO and produced without pesticides. It is estimated there are 20+ commercial developments underway in the US with dozens more in planning. 2014 represented an acceleration of investor interest with the notable investment of ~$30M by Goldman Sachs and Prudential into Aerofarms, a company that has garnered over $107M in investment as of 2017. Aerofarms is working to develop a 70,000-ft2 facility in New Jersey. Aerofarms, like many of its US counterparts, claims they are building the largest and most productive vertical farm in the world. In our view, the largest and most productive vertical farms operate in Japan, a country with a long history of addressing its resource scarce position through technology. Japan has over 150+ commercial scale vertical farms, many of which have proven profitability while employing leading water, energy and labor efficiency (New Bean Capital, Future Bright). Still, Aerofarms signaled a number of initial and follow-on investments in Vertical Farming projects and companies, including more US investment in Greenhouse growing as well.

Market Signals – San Francisco-based Plenty announced a $200M funding, the largest ever for indoor Ag, led by Softbank’s Vision Fund and venture arms supported by Jeff Bezos and Google. We expect this deal to catalyze further interest and bet placing by investors around the world. 2018 could be US Vertical Farming’s first billion dollar year. 

The Science & Tech: Vertical Farming technology is evolving rapidly to meet the needs of a number of market models. While Plant Science relatively well known for standard, quick harvest cycle, leafy greens, the key for vertical farmers is to tune their system to deliver the proper things (PAR or light from LED’s, Nutrients and ambient conditions: Temp, Rel. Humidity) at the proper time. Any investible model should have this process down pat for its’ core varietals. The controlled environment is allowing growers to experiment with things like simulated sunrise/set, strobe lighting, water stress, utilizing ultraviolet and green PAR spectrum and much more. Databases of plant science variables and growing techniques are growing across the industry. Eventually, the industry needs to evolve to grow more robust, value-added varietals from a whole-diet nutritional or nutraceutical angle. Additionally we see systems integration and vertical integration (from energy to seeds to feeds) as all part of the opportunity arc as Vertical Farming evolves.

BREAKOUT BOX – Where Does It Go? Future Bright LLC is focused on a future with healthy food systems. We share the vision of a Berlin think tank that articulates a viable economic global demand for 3000 ‘Whole Diet’ Integrated Agriculture Facilities that have 37 stories, including 5 sub-levels for aquaculture. These farms would each produce 3,500 tons of fruits and vegetables and 1400 tons of tilapia fillets, and cost $200M to construct pointing to an industry need for $600B+ in infrastructure investment. Add services and value-added product and the market for CEA tops $1T, assuming no serious environmental disruption.

Apples to Oranges? What makes one Vertical Farm different from another, or from an investors perspective, a better investment? There are really three aspects to compare: Technology, Strategy and Experience. On the technology front, models should be examined for how efficient they are in terms of water, energy, space and carbon per pound of food produced. There are small efficiencies to be gained from optimizing building envelope, chassis design, HVAC and LED’s and these must be examined fully. The second aspect of the technology is the quality of product that it produces – are the plants nutrient dense and how to they compare to conventional and organic product alike. The dialogue is evolving in this space and is at the heart of the debate between soil-based organic growers and vertical farmers.

Second is strategy and we’ve seen a number of market models from direct distribution to long-term contracts (volume and/or price) with distributors or retailers. The distribution model has a big impact on profitability with higher profit strategies presenting investors with taking the risk of merchant pricing.

If the Climate Change Thesis is correct, taking merchant risk with highly predictable, weather-agnostic food production isn’t a misplaced long-term bet. If the Vertical Farm is relying on premium pricing (up to organic levels) then we’d like to see a plan geared around bringing that price down over the course of three years to de-risk the model. If the Vertical Farm is focused on a few products, is there a plan to expand into higher value varietals or partner with a value-added producer? We also include data and control systems under the strategy umbrella although it overlaps with technology. Are control systems being built in-house, developed in partnership or simply outsourced? Co-development in partnership may be the most ideal given the specialization effect and the ability to raise investment into each entity separately. There’s also the question of database design. How robust are the data sets, do they extend beyond baseline varietals and into the opaque world of distributor and market pricing. Do they integrate with weather; soil and climate data to predict which varietals will be most valuable for the next cycle.

Finally, there is experience. We’ll note a number of the notable raises into the Vertical Farming space involve companies which have not yet gone to market. They’ve raised millions but haven’t sold a vegetable or proven they can manage the perishable product supply chain. This presents a challenge, as the food business is ultimately a problem solving exercise built around sales and marketing. By contrast, there are many Vertical Farming companies with years of growing and selling experience, or those developing production assets alongside a retailer, taking the sales challenge out of the equation. From an investment perspective, we prefer putting our money with the later. While no two vertical farms are exactly alike from an investment perspective, they all share a similarity in that they address certain environmental and social challenges.

Environmental Challenge: Vertical Farming is arriving not to soon to address some critical environmental challenges. Numerous causes of disruption to the food supply, like drought conditions, excessive heat, hot wind and dwindling fresh water reserves point to challenges for conventional agriculture. Excessive heat is already leading to significant crop failure, as reported in 2016 by one of the largest South American agriculture companies, AdecoAgro. Soil Health is rapidly deteriorating, with the UN FAO recently stating that the world, on average, has only 60 years of farming left (UN, Scientific American). There is a critical need to implement a hedge against the risks posed to the food system by scarcity and climate volatility. That hedge is Controlled Environment Agriculture, including Vertical Farming, Integrated Aquaculture and other CEA techniques.

A Solution to Urban Decay: While many Vertical Farming models are re-utilizing urban brownfields, and the public money that comes with this strategy, others are building from the foundation up. Regardless of the strategy around the structure, Vertical Farming can bring much needed employment to urban areas that have seen an exodus of jobs for decades or more. The counterpoint to watch is whether automation threatens the bulk of these new roles in VF2.0 or whether these jobs can offer meaningful opportunities for both economic and skills advancement. What the Vertical Farms can solve for is food access into heretofore deserts for fresh food. The lack of quality nutrients is a contributor to many of society’s downstream costs like crime, low education rates and health costs, and many Vertical Farming companies have a stated goal of improved access. But supply, access and affordability is only one aspect of the challenge. Fixing the food deserts, and the long-tailed problems that come with them, is equally a challenge of education and convenience. Vertical Farms, and other CEA techniques, are uniquely positioned to solve this problem because they can be located within the food desert communities, source employment from them, and double as centers of education and community gathering.

A Solution for the Developing World: While the high energy footprint doesn’t make Vertical Farming an obvious choice for bringing sustainable food and purpose to the developing world, we feel that view could change over time given the abundance of renewable energy sources found in many parts of the developing world. Pairing Vertical Farming with a large geothermal or solar plus storage arrays does two things. First, it completes the technology leapfrog for developing communities from both a food and a energy perspective. It also creates the investment scale that could attract development organizations like OPIC and IFC that require large investment sizes to justify participation. Still, Future Bright LLC sees a better fit for another Controlled Environment Technique, Integrated Aquaculture and Hydroponics or IAH. This technology delivers whole-diet, and much needed protein, in the most efficient manner possible. Compared to Vertical Farming, IAH uses 1/3 of the energy to grow ~2 times the food. As we describe in the ‘breakout box’, we see the two technologies combining and are actively encouraging that within our stakeholder groups.

Economics: We propose that Vertical Farming model can achieve mid-to-upper single digit unlevered returns in certain markets through using traditional distribution channels. Returns can be enhanced in a number of ways by solving for direct distribution, accessing strategic channels, like restaurants or D-T-C portals, and through varietal diversification and value-added partnerships. Also, a number of innovative financial structures and project leverage can push returns into low-to-mid double digits, or higher. Certain niche models, in niche markets, can boost returns further but questions arise over scale and sustainability of pricing as the industry matures. Vertical Farming is in the early stages of a secular growth story because it is reaching economic parity in markets around the world, but also because it is a solution-based investment in terms of climate and social restoration.

 

Solutions-Based: Controlled Environment Agriculture solutions, like Vertical Farming, are economically viable today and will be more so in the future. CEA is a solution for delivering reliable, consistent quality, and food security, in the face of a predictable increase in Climate Volatility. Vertical Farms do not use soil and utilize between 90-99% less water than conventional systems. They can grow year-round in any weather. They shorten food transportation miles, reduce pollution and food waste, and can deliver food that is of superior nutrient quality compared to conventional food. They don’t require the use of pesticides or herbicides for growing and when paired with renewable energy, CEA presents the most powerful economic opportunity for society’s global pivot towards sustainability.

On The Follow: For a deeper dive of the technology, practitioner or investment landscape in Vertical Farming, Aquaculture, Renewables, Energy Efficiency, ESG/SRI platform development and more, please contact Future Bright LLC.

About Future Bright

Future Bright is a think tank and consulting company in the fields of sustainability and sustainable investing. Future Bright focuses on a diverse cross-section of themes including renewable energy, energy efficiency as an asset class, sustainable agriculture, equity strategies and green consumer trends. Future Bright has worked with project developers, fund managers and asset managers in developing frameworks, definitions, structures and investment products.

Future Bright offers executive management, project management, team construction, product development, modeling, sourcing, communication and investing services.

Disclaimer: This brief is for informational purposes only and was prepared by Future Bright for publishing and distribution attributable to Future Bright LLC. This is not an offer of investment of any kind. The information on sustainable investment opportunities can serve the basis of discussion with potential sponsors or project work that Future Bright can assist with.

Intellectual Property: Models and Concepts not explicitly otherwise stated are the intellectual property of Future Bright LLC and are not to be used or reproduced without attribution without written permission and/or compensation for services at market rates.

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Goldman: Solar = Yes / Coal = No

Goldman: Solar = Yes / Coal = No

If you saw Future Bright’s post earlier today on Goldman’s Coal divestment, you understand the second part of the title.

As for the first, Goldman and Sunedison (SUNE) today announced a joint $1B investment vehicle warehouse to construct and purchase operating renewable energy assets. Goldman’s investment vehicle West Street Infrastructure Partners III (WSIP) will invest $300M of equity while Bank of America, Deutsche Bank and Morgan Stanley will offer up $700M in debt commitments.

The investment warehouse is expandable up to $2B if certain conditions are met. It is the second such investment warehouse established between Sunedison and various partners to develop the company’s sizable project pipeline.

Sunedison’s equity has been under pressure lately, falling roughly 40% since announcing earnings earlier this month, amidst concerns of the impact of falling oil and gas prices on solar and wind development and the company’s ambitious growth strategy, including the acquisition of Vivant Solar (VSLR).

With the Goldman warehouse, the company should be able to meet its growth plans through 2016.

In terms of positive catalysts for solar and wind development, there are a number to point to:

  • The Clean Power Plan calls for a drastic reduction in the carbon footprint of the United States energy infrastructure. Solar and Wind will benefit from state plans to meet this goal. See Future Bright’s blog post – ‘Clean Power Plan in 5 Pictures’
  • A $140B pledge by blue chip corporations including Goldman, Apple, Berkshire Hathaway and others points to continued private investment in renewables.
  • The cost to install Solar and Wind energy assets continues to fall while the efficiency of the technology continues to rise. For more on the Solar Power Growth Story, click HERE.

Equity markets, built on perception and the valuation yardstick a la jour will most likely continue to remain volatile. Still, given the catalysts and momentum for real asset growth in renewables, beaten down equities of solar and wind developers might warrant closer inspection.

Given growth prospects and misunderstanding of what might possibly the most elegant of asset classes from a long-term revenue stability, secular momentum and security standpoint, Future Bright prefers real asset ownership. Connect to learn more.

Roadside Array

Disclaimer: Future Bright is a think tank and advisory in sustainability and investment themes. Future Bright has worked with renewable energy developers, energy efficiency funds, assets managers and vertical farms on progressing solutions towards sustainability. This note is not an offer of services or investment of any kind. This is a blog post for informational purposes only. Those interested in consulting services, design work or industry analysis should contact Future Bright directly. (www.futurebrightblog.com)

Goldman sells $600M Coal investment for <$10M

Goldman sells $600M Coal investment for <$10M

For many, the etchings on the mine wall are clear; coal is in terminal secular decline. The message is clear – one option remains to divest from coal assets and that is to walk away.

Effectively, that’s what Goldman has signaled in August when the firm ended its 5-year investment into Colombian coal mines. The company announced it would sell assets, originally purchased for roughly $600M, for less than $10M to private US coal company Murray Energy. After four years of operation, Goldman estimates it lost $200M on the deal.

Murray, for its part, is attempting to diversify assets outside of the US to ‘ensure survival’ as coal has come ‘under attack’ in the US. It won’t be so easy.

The global economy is pivoting away from coal given the availability of cleaner, cheaper alternatives and potential future waste liabilities. Coal assets have largely become unsalable (see Future Bright’s thesis on Future Waste Liabilities for corporate valuation). The market has revealed this to be true as over the past few years, coal equity valuation has plummeted. Unable to sell equity or assets, the bankruptcies have begun.

Coal_Stocks

– In earlier August, Alpha Natural Resources filed for the industries biggest bankruptcy yet.

– Many other coal companies have filed for bankruptcy over the past two years including, Walter Energy, James River Coal and Patriot Coal. Two others, Arch Coal (ACI) and Peabody Energy (BTU) could potentially be next.

Why Coal won’t be coming back

1.) Future Waste Liabilities: A cornerstone of the Future Bright investment thesis is the looming recognition of Future Waste Liabilities (FWL’s). FWL’s will be tied to global greenhouse gas (GHG) emissions, fabricated and synthesized products with toxic qualities, water, air and other forms of pollution that affect real estate value, human health and bio diverse ecosystems.

  • In 2014, the state of North Carolina sued Duke Energy over and accident that spilled 39,000 tons of coal ash into the Dan River. It is estimate that clean up could cost the company over $10B. Duke’s market cap at the time of this writing was $52B
  • Estimates of the economic value add of coal are 1/2 that of the externalized costs of environmental destruction and health costs.
  • It is estimated that 500k to 1.6M people lose their lives annually to air pollution in coal-heavy China.

2.) Cheaper: The Coal industry first had to battle off the natural gas boom, an industry that will prove to carry its own sizable future waste liabilities. Now, Coal is losing an outright battle of economic parity to renewable energy sources, which have installation/technology costs which have mirrored the steep decline in the price of coal itself (~80% over 4 years). Contrary to coal how, renewables have no fuel costs or near zero marginal cost of production.

Lcoe

Graph displays sample LCOE (Levelized Cost of Energy) for 2014 utility scale projects (NREL).

3.) Cleaner: Renewables and Natural gas are winning in price and, in the case of renewables in particular, cleanliness. Renewable often have zero operational supply chain and little to no GHG (Global Greenhouse Gas) emissions. As the global economy races to de-carbonize to improve air and water quality and combat climate change, Coal’s kissing cousins of oil and gas will be forced into transformation or face a similar fate.

2012Emission_bySector

THINK TANK: Will Oil and Gas companies see the ghost of Christmas future in the mirror and pivot before their own equity implosion begins. Key inflection points like battery pricing could signal the tipping point when joined to conditions like rising vehicle efficiency, millennial trends and liability from spills and earthquakes.

Stay tuned to Future Bright for more on this subject and others related to the trillion dollar sustainability option.

Sources: EIA, Bloomberg, Future Bright, NREL

Disclaimer: Future Bright is a think tank and advisory in sustainability and investment themes. Future Bright has worked with renewable energy developers, energy efficiency funds, assets managers and vertical farms on progressing solutions towards sustainability. This note is not an offer of services or investment of any kind. This is a blog post for informational purposes only. Those interested in consulting services, design work or industry analysis should contact Future Bright directly. (www.futurebrightblog.com)

Solar in 5 Pictures

Solar in 5 Pictures

1.) Solar Penetration is low making large market share gains possible. That’s been exactly what’s happening in terms of new capacity. Solar and Wind accounted for 74% of new capacity in the 1st half of 2015 (Cleantechnica)

PowerMix

2.) Solar has steadily exhibited rising efficiency with falling costs (CAPEX efficiency) while end consumer power prices have risen. A sampling of project shows total installed costs fell by more than half from 2011-2014.

Avg_Cost

3.) Overall Demand for electricity is expected to rise dramatically. Much of this demand will come from non-OECD countries where renewables are the cheapest form of new capacity.

Elec_Demand

4.) Countries are responding to multiple signals. Cheapest to deliver, low security costs, public demand, pollution mitigation and climate change are all factors driving an influx of solar PV to the grid around the world.

1H_GW

The top countries investing in renewables have announced between $30-60B in utility scale Solar PV projects through the first half of 2015 (Cowen). But public sector investment dollars aren’t the only ones betting on renewables,

5.) Corporate Demand is Increasing too

Corp_adoption

Given the relative balance sheet conditions between governments, consumers and businesses, the corporate pivot towards renewables is significant and necessary.

Many of these company’s are adding to their renewable portfolio and making that pledge publicly and in partnership with the White House.

A $140B pledge to invest in climate change mitigation between 13 blue chip companies and the White House was announced at the end of July. Those companies included: Bank of America, Goldman Sachs, Microsoft, Google, Apple and Berkshire Hathaway among others.