Vertical farms are poised to capitalize on a $50 billion market opportunity with the ability to grow more flavorful, fresher, pesticide-free produce - using less land, water and labor than conventional farms. Barclays Research analysts highlight how vertical farming can reduce water pollution and greenhouse gas emissions, hedge against climate change and ensure a fresh food supply at a local level.
Agriculture accounts for nearly a quarter of global greenhouse gas emissions, nearly two-thirds of fresh water use, and is the biggest water polluter in many countries. Produce often travels 1,500 miles before it reaches the end consumer and roughly half of all global crops perish before they arrive at grocery stores, according to insights from Barclays Research. Inefficiencies of this magnitude set the stage for vertical farming, one of the few tangible sustainability initiatives in agriculture and a method that could benefit the planet, consumers and investors.
Digging into the weeds of vertical farms
Source: Barclays Research
A hedge against climate change
Seen through the lens of climate change, many of today’s agricultural practices could be considered unsustainable. Vertical farms, which grow produce in stacked layers or rows inside warehouses, shipping containers and other structures, offer a potential sustainable solution.
The “vertical" model allows hundreds of acres of crops to grow on a single acre of land, eliminating the need for further deforestation. And, to the extent that vertical farming can replace conventional farms and allow natural habitats to return, it can enable carbon sequestration. Shielded from the elements, vertical farms operate irrespective of weather events, such as drought or other natural disasters, and use 70% less water than traditional growing methods.
Vertical farms do not use pesticides, fertilizers or herbicides and operate in sanitary closed environments, resulting in safer produce and creating close to zero water pollution – a key issue with conventional farms.
Key advantages of vertical farming
Source: Barclays Research
Importantly, vertical farming requires a significant amount of energy to power artificial lighting, heating and cooling, automation and robotics. In this way, it still relies upon fossil fuels. However, LED lights are expected to be 70% more energy efficient by 2030, and to the extent that vertical farms can tap into renewable energy sources they could be carbon negative.
Following the COVID-19 pandemic, we would not be surprised to see vertical farms explored as a hedge against fresh food supply shortages.
- Barclays Research
The new fresh produce
Technology is deeply rooted in the vertical farming industry, with many farms using proprietary software and hardware to increase yields, grow differentiated products, and slim their cost structures. Vertical farms can use lighting, data analytics and artificial intelligence to control the growth cycles, taste, size and nutrition of crops in order to tailor produce to consumer preferences.
Food retailers, restaurants and foodservice distributors could all benefit from safer local produce from nearby vertical farms. Vertical farms can supply more flavorful and fresher produce closer to the point of consumption that has a relatively lower risk of causing foodborne illness.
A vertical farm's success depends on many factors – from revenue model and cost structure to technological advantages, relative yield capabilities and investor risk appetite.
- Barclays Research
What it will take for vertical farms to thrive
Source: Barclays Research
Sizing up the investment opportunity
Our Research analysts estimate that the size of the global fruit and vegetable market is roughly $1.2 trillion, and calculate that the addressable produce market for vertical farms is closer to $700 billion, leading to an approximately $50 billion market opportunity for vertical farms.
Ultimately, the fact that vertical farms can potentially mitigate climate change with superior products will drive demand, according to Barclays Research. The success of vertical farming could be a boon for the environment and participants throughout the supply chain, as food retailers, restaurants, distributors and consumers reap the benefits of fresher and safer produce.
Read the full report
Authorized clients of Barclays Investment Bank can log in to Barclays Live to read the full report from Barclays Research:
What trends will be of most interest to investors over the coming decade? Our Research analysts identify trends that have the potential to disrupt society and business by 2030.
About the analysts
Galya Laskar joined Barclays’ Equity Research department in 2014 and is a thematic Research analyst covering the Consumer sector. From 2014 to 2019, she supported coverage of the Packaged Food sector. Prior to joining Barclays, Galya was a Senior Associate at a boutique TMT investment banking firm. Galya started her finance career at Nomura in 2011, where she worked in investment banking. Galya graduated with an M.B.A. from Columbia Business School in 2011. She received her B.A. from the University of California, San Diego, where she majored in Urban Studies & Planning and Political Science.
Karen Short joined Barclays in July 2016 as a Managing Director and Equity Research analyst following the Food and Staples Retailing industry. Prior to Barclays, she was with Deutsche Bank, covering the same sector. Karen started her equity research career in 1999 at Lehman Brothers and now has more than 15 years of equity research experience covering the sector.
Prior to her career in equity research, Karen spent 5 years in energy sales and trading in Seattle, WA and Vancouver, B.C. Karen received her M.B.A. from Columbia Business School in New York and her BA from Queen’s University in Ontario, Canada.
Andrew Lazar joined Barclays in September 2008 and is a Managing Director and Research analyst covering the packaged food sector. Prior to Barclays, he was at Lehman Brothers from 1995. Andrew was selected as the First Team analyst in Institutional Investor's All-America Research Team survey during 2003-2018, Second Team analyst in 2002, and Runner-up in 2001. Andrew was inducted into Institutional Investor's All-America Research Team Hall of Fame in 2012.
Prior to joining Lehman Brothers, Andrew spent three years in strategic planning at Unilever and two years in management consulting with Mars & Co. He earned a B.S. in Finance from The Wharton School of the University of Pennsylvania and M.B.A. from Columbia Business School.
Jeffrey Bernstein is a Director and Equity Research analyst covering the restaurant and foodservice distribution industries. Jeff joined Barclays from Lehman Brothers in 2008. He began working at Lehman in 2000, initially as an associate on the restaurant team, before launching primary coverage in 2005. Jeff currently covers the quickservice (QSR), casual dining, and specialty / fast casual segments of the restaurant industry, as well as the largest foodservice distribution companies.
For more than a decade, Jeff has been ranked in the annual Institutional Investor's All-America Research Team survey in the Restaurant category. Prior to joining Lehman Brothers, Jeff spent four years at Ernst & Young, where he earned his CPA designation. Jeff earned a B.S. in Accounting & Finance from the University of Albany.