Indoor agriculture is rapidly expanding. The cannabis industry continues to grow in the United States, with 77% of Americans living in a state with legal cannabis in some form and sales reaching $31 billion this year according to New Frontier Data’s 2022 report. We are also beginning to see more food producers make use of controlled environment agriculture (CEA), taking advantage of the increased productivity that a controlled climate provides and locating closer to consumers. Resource Innovation Institute reports that the indoor vertical farming market is expected to be worth $3 billion by 2024 (2021).
And yet despite this growth, only 53% of vertical farms reported having reached profitability (Global CEA Census Report, 2020) and 42% of cannabis operators reported turning a profit (U.S. Cannabis Business Conditions Survey Report, 2021). How is it possible that operators are falling behind in these burgeoning industries?
The answer is of course complex and varies from location to location and from farm to farm, but the data points to a few common denominators among operators. Overall, the farms that fail have typically succumbed to the consequences of a combination of:
- Poor Business Planning
- Underfunding
- Mismanagement
Arguably, we can learn more from shuttered operations than from those that are reporting profits. By analyzing these pillar areas of failure, we can extrapolate where they went wrong and how to avoid repeating the same mistakes.
Market Research and Business Planning for Indoor Farms
It can be easy to become hyper fixated on getting your farm off the ground, but it is important to take the time to ensure your business is going to be a good fit for the market you plan to serve. When it comes to launching an indoor farm, the most important question you must answer is not “can I grow it,” but rather “can I sell it – and make a profit?”
From the outside looking in, this may seem like a no-brainer. Anyone who has taken an economics class or watched an episode of Shark Tank will tell you that market research is one of the first steps to starting a business. And yet this step is often underappreciated, especially for a unique vertical like indoor ag.
For food producers, where there are people, there will be demand for food. And for cannabis producers, where there are cultivation licenses available, there will be opportunity to stake a claim in a presumably untapped market. However, the complexities of these markets may surprise you if you are new to the space.
Location and Customer Base
Your location will have a huge impact on the viability of your indoor farm. Things to take into careful consideration include:
- Local demand. Does it make sense to compete against traditional agriculture in your area? Is there a demand for farm-to-table produce at local restaurants? What larger customers might be available (i.e.: retailers, schools, hospitals)? What is your target price point? Do consumers in your market have a need for any particular crops (like cannabis, lettuce, microgreens, mushrooms)? If you are growing cannabis, what differentiator would work best in your area (organic, sustainable, high quality/luxury, craft, etc.)?
- Cost of utilities. Electricity and water costs vary greatly between locations. High utilities will eat into your profits over time. Not only this, but some areas may not have the infrastructure available for the demands of indoor cultivation, meaning you will be facing a large capital investment just to get enough water and power.
- Cost of real estate. While building vertically can cut the costs of horizontal square footage in areas where land comes at a premium, it is still important to weigh your options and keep your bottom line in mind when selecting a location. For example, will it make more sense to be closer to the point of consumption, or will it be more cost effective to locate closer to the point of distribution?
- Consider the current players in the game. What has made them successful? What have they failed at? Are there gaps in the market you can fill? What is the pricing outlook for the crops you plan to cultivate, and how will you brand them?
Further Challenges in Cannabis
This is especially important for cannabis growers who, while they may be able to procure a cultivation license, could be faced with an oversaturated market at one point or another. Also, such as in California, some state taxes have continued to balloon over the years since legalization. And limitations on square footage and quantities of licenses vary between states. With many states becoming more established, this squeeze is a growing concern.
As more operators try to take their piece of the pie, especially in states with unlimited licenses, prices drop – but operating costs stay the same or even increase over time (property taxes go up, wages increase, and the cost of utilities can fluctuate). Many of the operators closing their doors in recent times are those who aimed for as low an initial capital investment as possible, which resulted in higher operating costs, system retrofits, or crop failures. Usually, this decision is either due to the grower’s inability to access sufficient funding or their unfamiliarity with the systems necessary to control an agricultural environment. And while a cheap facility may work fine while prices are upwards of $2,000 per pound, increasing competition and subsequent price drops ensure that only the most efficient and well-managed grows stay in operation over the long term.
Read More: 12 Practical Ways to Reduce Your Indoor Farm’s Operating Costs
Investing in Your Farm’s Future
You will very rarely see a grower reflecting on their success in terms of the money they saved in the beginning. In fact, the stories shared repeatedly among CEA’s most acclaimed producers tend to focus on their continuous efforts to understand their plants’ biology and their investment in the appropriate technologies that allow them to operate effectively. For example, Aeriz, a multi-state cannabis operator, chose cheaper growing systems for their initial build, and have since drastically upgraded the technologies used in their subsequent facilities, seeing just how crucial investing in their farm’s equipment can be for the longevity of their business in terms of producing high quality product and reducing operating costs.
In fact, according to the Global CEA Census report (2020), “73% of founders said that they would choose their equipment, technology, or crops differently if they could go back in time.” That’s a hefty dose of buyer’s remorse for an industry in which the costs of a start-up can range between hundreds of thousands to millions of dollars.
We’ve said this before, and we will say it again. It is always better to design and outfit your cultivation facility the right way the first time than to have to retrofit and bandage problems that are a result of a poorly designed facility. There are a number of ways that cutting corners in your architectural design, climate control system, and grow room equipment can ultimately lead to the downfall of your business, which is why it is so important to do your research when exploring your options. Keep in mind that facilities built specifically for agriculture present requirements that are wholly unique from any other commercial building. To avoid the most common indoor farm design mistakes, compare quotes between vendors, ask for references, and select a reliable company with a track record of success in CEA.
Management, Automation, and Optimization
You can’t know what you don’t know. This is true when it comes to running a business, managing cultivation operations, and improving your processes. The most competitive indoor ag businesses approach their facilities like a manufacturing line. The design should consider workflow to optimize productivity, and every step should be taken to allow you to optimize as you go.
Hiring and Labor Management
We have served clients who came from a wide range of backgrounds before building their farm; hobby growing, horticultural studies, tech, construction, marketing, law enforcement – you name it. And while each operator brings their own strengths to the table, everyone needs a team or access to resources to help fill the other needs of the operation. That is why it is so important that you build a team that is capable of managing not just the aspect of cultivation, but also marketing and sales, human resources, accounting, compliance, and all the other components of operating a company.
Your team should use each individuals’ strengths to pursue a common mission – a mission that should be clearly fleshed out from the beginning. You might seek out opportunities to benefit your local community; you may highlight yourself as an organic brand; you might be mostly motivated to drive down costs. Whatever your mission, your team should all be on board.
It is also worth noting that your labor costs will make up the majority of your operational expenses. Automation can offset operating costs by replacing humans in tasks they are better suited for (like packaging, for example), but you will still need to account for human labor. By nature, we are imperfect, and some growers have struggled with challenges like slow workers, insufficient labor supply, lack of training resources, theft, and so on. While these are challenges that almost every business faces, it is important to anticipate them and take steps to mitigate such risks and to properly support your team.
Automation in Indoor Farming
There is surprisingly little art in commercial scale cultivation. In cannabis, craft grows tend to be more artful and experimental (similar to the difference between macro and micro-breweries), but even these smaller grows rely on data to understand their recipes.
End users depend on cultivators to provide consistent and safe products. Chefs and grocers expect the same quality produce with every delivery. Cannabis consumers will be upset if they receive varying flavors and effects for the same product. The first step to delivering a dependable level of consistency is to closely monitor every aspect of your grow. This includes temperature and humidity levels throughout the canopy, nutrient recipes, water quality, irrigation rates, airflow, CO2 levels, lighting schedules, and more. The bigger the operation, the harder this can be to manage.
That is why most growers invest in some level of automation. Automation is an umbrella term that can encompass any or all of the following:
- Climate sensors that automatically record climate readings throughout the day
- Smart controls that adjust your HVAC equipment to maintain specified setpoints
- Light timers and adjustable switches
- Automated fertigation and irrigation systems
- Packaging machines
- Inventory management
- And so much more!
Incorporating controls and automation can give you access to priceless data so that you can locate potential areas for improvement. A more advanced system will even allow you to tell the system what setpoint you need to change, and it will simply make it happen. Understanding your data will help you better understand your process. Once you understand your process, you can optimize it.
Research and Development
R&D is another often overlooked aspect of a cultivation business. For as long as humans have been studying agriculture, there is still so much that we have yet to learn. This is especially true for plants grown in a totally artificial environment at scale, which is a modern concept. While it would be nice if there were a formula in which you could enter all of your inputs to determine what results you will see in your plants, nothing can compare to real-life testing.
For some growers, a pilot farm may be a viable first step before committing to a larger scale operation. A pilot farm will be smaller, easier to manage, and will have the added benefit of providing you with proof of concept for when the time comes to procure funding for scaling up. You can also put some of your theories to the test and land on the methodology that works best.
Building in phases can be a good option for some – but make sure you work with a designer and climate system provider who understands your intentions. They can help you build in phases, keeping scalability in mind and making your design much easier – and more cost effective – to add onto during future expansions.
Also consider R&D test rooms. While R&D requires time and investment, it can be well worth the effort. Testing variables like strains, lighting strategies, nutrient recipes, irrigation techniques, etc., in a dedicated test space will allow you to optimize your grow without the risk of affecting an entire harvest. For example, Ashley Hubbard, Director of Cultivation for Rair Cannabis Co. is a huge advocate of tracking data and running experiments to improve her company’s product.
How Can You Avoid These Failures?
Starting an indoor grow is challenging, but with the proper planning, you can set yourself up for success over the long-term.
Whether you are planning to build a new operation or expanding your current facility, our white paper, How to Set Up a Commercial Grow Operation, provides insights into the steps that are essential to launching your CEA business.
Download your free copy today or reach out to us to begin exploring your cultivation facility design options.
