Learn the six steps to determine the profitability and feasibility of a vertical farming operation, including revenue, cost, risk, and opportunity analysis.

When putting together your pro-forma for a VF, the most important inputs are revenue, labor, energy and packaging. Your revenue will never be what you think it is as you scale. Even if you are growing a niche product. So be very realistic. Labor cost is always one of the highest input costs. If you don’t have a path to automation in 6 months, don’t put it in your model. Energy is much higher in a vertical farm. And often it is forgotten to take into account the plant matter you will grow that you can’t sell. VF works best in extremely low energy environments. Packaging is always a high cost for VFs that are retail facing. Make sure you talk to suppliers to get accurate assumptions and don’t over-estimate savings as you scale.

What is the most effective way to determine the profitability of a vertical farming operation?

Vertical farming is a method of growing crops indoors, using controlled environments and artificial lighting. It can offer several benefits, such as reducing land and water use, increasing yield and quality, and avoiding weather and pest risks. However, it also involves high capital and operational costs, complex technical and managerial challenges, and uncertain market demand. Therefore, before starting or expanding a vertical farming operation, you need to determine its profitability and feasibility.

1 Define your goals and scope

The first step to determine the profitability of a vertical farming operation is to define your goals and scope. What are you trying to achieve with your project? What crops do you want to grow, and for what markets? How large and sophisticated is your facility, and what technologies and systems do you need? How do you measure your performance and impact? These questions will help you clarify your vision, mission, and objectives, as well as the scope and scale of your operation.

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Gabriel De Franco

AgTech Specialist
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Make sure you have an assured route to market with a clear defined product with the right client specification. The intended product/crop to be grown should always be defined first then the facility should designed and built around foreseen capacity. Conservative approaches with room for expansion are always better than under utilised empty space. Lots of farms can grow great products but most of them don't sell them well.

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Amanda Nathália D.

Agricultural Engineer | Postgraduate in Phytopathology | MBA in Business Management | MBA in Digital Communication and Marketing | Landscape Designer
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In vertical agriculture, profitability is best determined by the integration of quantitative and qualitative methods. In addition to calculating production costs, it is crucial to consider resource efficiency, such as water and energy, and maximizing productivity per square meter. Analyzing local market demand and identifying specific niches can boost profits. Environmental sustainability and technological innovation also play important roles. The most effective approach combines agronomic, economic and commercial data for a holistic assessment of profitability and long-term success in vertical farming.

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YAPI Patrice N'CHO

Consultant, Agro-economiste, Expert en environnement des affaires, Coaching des Entreprises, Entrepreneur Social
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La présente orientation est constructive. A cela, on pourrait envisager l'utilisation du plan stratégique s'il est disponible et actualisé. Cela permet de suivre l'évolution de l'environnement de son entreprise. Ce qui va nous conduire à la réalisation des forces, faiblesses opportunités et menacesmenaces de notre exploitation agricole

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2 Estimate your revenues and costs

The next step is to estimate your revenues and costs, based on your goals and scope. Your revenues depend on the quantity and quality of your produce, the prices and demand of your target markets, and your distribution and marketing channels. Your costs include the initial investment for land, building, equipment, and installation, as well as the ongoing expenses for labor, energy, water, nutrients, seeds, maintenance, and other inputs. You need to collect and analyze data from various sources, such as market research, industry benchmarks, supplier quotes, and pilot tests, to make realistic and accurate projections.

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B. David Vosburg

Transformational Leader | CFO - CXO | Capital Raising + M&A + Scaling Growth | ROI Generator | Advisor | Speaker | Board Member
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When putting together your pro-forma for a VF, the most important inputs are revenue, labor, energy and packaging. Your revenue will never be what you think it is as you scale. Even if you are growing a niche product. So be very realistic. Labor cost is always one of the highest input costs. If you don’t have a path to automation in 6 months, don’t put it in your model. Energy is much higher in a vertical farm. And often it is forgotten to take into account the plant matter you will grow that you can’t sell. VF works best in extremely low energy environments. Packaging is always a high cost for VFs that are retail facing. Make sure you talk to suppliers to get accurate assumptions and don’t over-estimate savings as you scale.

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3 Calculate your profitability indicators

The third step is to calculate your profitability indicators, using your revenue and cost estimates. These indicators are financial ratios or metrics that show how well your operation generates income, covers expenses, and creates value. Some common profitability indicators are gross margin, net margin, return on investment, payback period, and break-even point. You can use formulas, spreadsheets, or software tools to calculate these indicators, and compare them with your goals, expectations, and industry standards.

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4 Assess your risks and opportunities

The fourth step is to assess your risks and opportunities, based on your profitability indicators and other factors. Your risks are the potential threats or uncertainties that could negatively affect your profitability, such as market fluctuations, technical failures, regulatory changes, or natural disasters. Your opportunities are the potential benefits or advantages that could positively affect your profitability, such as new technologies, customer segments, partnerships, or subsidies. You need to identify, evaluate, and prioritize your risks and opportunities, and develop strategies to mitigate or exploit them.

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5 Review and refine your plan

The fifth step is to review and refine your plan, based on your risk and opportunity assessment and feedback from stakeholders. Your plan is a document that summarizes your goals, scope, revenue, cost, profitability, risk, and opportunity analysis, and outlines your action steps, timelines, and budgets. You need to review your plan periodically, and update it as necessary, to reflect the changes in your internal and external environment. You also need to communicate your plan clearly and effectively to your team, partners, investors, customers, and regulators.

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6 Monitor and improve your performance

The final step is to monitor and improve your performance, based on your plan and profitability indicators. You need to measure and track your key performance indicators, such as yield, quality, revenue, cost, and profit, and compare them with your targets and benchmarks. You also need to collect and analyze feedback from your customers, suppliers, employees, and other stakeholders, and identify the strengths and weaknesses of your operation. You need to use this information to make adjustments, improvements, and innovations, and to optimize your profitability and sustainability.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Zan Mongus

Agricultural Engineer @ Kmetijski inštitut Slovenije | Robotics, Irrigation
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It's essential to consider energy, water, and space usage. VFs are notable for their high energy use, up to 1 kWh per square meter for lighting and HVACD, presenting a significant challenge for scalability and economic success. They can cut energy usage through sustainable practices like solar energy and geothermal cooling, albeit which can require more water and larger land areas. VFs excel in water conservation and space efficiency, making them appealing for urban agriculture if given the the right and economicaly viable resources. So consider, which problem you are tackling and what resources you have available in the region.

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Rayan Haidar

CISCM, CISCC Founder & Managing Director @Terre Verte, driving sustainable supply chain growth.
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It the a combination of all the identified steps in addition to perseverance and close analysis of your operating cost in addition to the focus on what you can do best. Identify your strategic fit and your competitive edge to ensure that you make a difference in your service and products.

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What is the most effective way to determine the profitability of a vertical farming operation?

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1 Define your goals and scope

2 Estimate your revenues and costs

3 Calculate your profitability indicators

4 Assess your risks and opportunities

5 Review and refine your plan

6 Monitor and improve your performance

7 Here’s what else to consider

Agribusiness

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