Vonnie Estes, Vice President of AgFood Technology, International Fresh Produce Association
The International Fresh Produce Association is an international association serving the entire fresh produce and floral supply chain.
Produce Grower: What is your assessment of the market in 2024 compared to 2023?
Vonnie Estes: The CEA market has continued to grow in 2024 compared to 2023, driven by technological advancements in production and increased demand for sustainable and locally grown, fresh produce. Growth continues to be in areas farthest away from the top outdoor growing areas (Salinas, California, and Yuma, Arizona), like areas in the northeast. Maine has one of the highest percentages of indoor grown leafy greens and is the farthest away from California. However, the pace of growth has been slowed by economic challenges, particularly in achieving profitability. Many companies are struggling to generate positive cash flow. The sector has seen slower expansion due to decreasing and nervous investors, as well as the economic pressures of maintaining high-cost operations and struggles to become profitable.
When you consider how new markets develop, it’s not always a straight line. There are peaks and valleys even when the trajectory points up. We’re at one of those points in CEA’s journey where we’re seeing some shrink, but the general direction is still moving toward growth of the industry.
On the positive side, consumers and retail are becoming better informed about the sector and what the products have to offer. From a very small base, the amount of space in the produce department continues to increase quickly.
Another advantage in 2024 is the market has seen a notable increase in innovation, particularly in the hardware segment. Innovations like high-efficiency LED lighting systems, automated climate control units and smart sensors are enhancing productivity and sustainability in CEA operations. In many cases, these innovations are being done by third-party companies and then offered to grower operations. This decreases the amount of money a grower operation has to spend on innovations to cut costs.
PG: What are some of the challenges CEA growers are currently facing?
VE: [Regarding] financial performance and profitability: We have to be careful that we don’t speak too broadly when speaking about CEA, because it covers everything from 40-year-old greenhouse operations (mostly tomatoes and mostly located in Canada and Mexico) to vertical and new high-tech greenhouses. So, when we talk about the challenges, the old guard greenhouses are mostly doing fine. Most new CEA companies are facing significant challenges to get positive unit economics. Despite raising a lot of capital, very few have managed to achieve profitability. The pressure to meet aggressive financial projections without validating the underlying technology has led to the construction of uneconomic facilities, which continue to strain company resources. To date, too much corporate equity has been raised by CEA companies, a strategy that is not viable in the future, as hard assets, including indoor farms, should not be funded with corporate equity, which is much more costly than other forms of capital like bank debt, mezzanine and project finance.
Rising energy costs have hit places like the EU very hard but is also a factor in the U.S. The high cost of energy, particularly fossil fuels, has increased production costs in an already energy-intensive industry. This is problematic not only for profitability, but some consumers are noticing, and high energy use can give them a reason not to purchase.
Labor challenges impact all of ag but take on a different form in CEA. High labor costs and employee turnover are exacerbating the operational challenges faced by CEA companies. This adds to the overall production costs. CEA operations often require specialized knowledge in areas such as hydroponics, aquaponics and advanced horticulture technologies. The industry is facing a shortage of skilled labor, making it difficult for growers to find and retain qualified staff. Additionally, the complexity of operating and maintaining high-tech systems requires continuous training and expertise, which adds to operational challenges.
PG: Describe how M&As and changes in funding availability have impacted the market.
VE: The CEA market has seen consolidation through mergers and acquisitions. This has helped some companies expand their technological capabilities and market reach. However, this has not fully alleviated the financial pressures many companies face. While this has helped some, it’s too early to see the long-term impact.
The availability of funding has shifted toward a more cautious approach. Investors are now more selective, focusing on companies that show clear paths to profitability. The earlier exuberance, particularly during the period from 2020 to 2022, led to overvaluation and unrealistic growth expectations, which many companies have struggled to meet. This shift has slowed down expansion and forced companies to prioritize operational efficiency over rapid growth.
We are seeing the lines blurring between indoor and outdoor grown, and that will likely continue. Our industry is in the business of supplying high-quality, fresh produce at an affordable price. With the impacts of changing climate and increased extreme weather events creating more unpredictability around where, how and when we grow, we will need to find more creative ways to supply our customers.
Photo courtesy of the International Fresh Produce Association
Read the rest of the 2024 State of the Industry Report:
Pacing for profitability: Tom Stenzel and Tracy Nazzaro
Where are the robots?: Vineland Research and Innovation Centre
States court CEA business, education for economic development: University of Wyoming
Explore the September 2024 Issue
Check out more from this issue and find your next story to read.
