Peter Tasgal he’s an agri-food marketing consultant and CEA and co-founder of Farmbook Venture, primarily based in Boston, USA. The views expressed on this article are these of the authors and don’t essentially characterize these of AFN.
A lot of the managed surroundings agriculture (CEA) business at the moment focuses on bettering the associated fee and effectivity of cultivation (provide). Articles and discussions spotlight issues just like the implementation of robotics and synthetic intelligence, using various power sources and higher seed choice, to call only a few areas. All this is essential to carry CEA merchandise nearer to value parity with merchandise grown outdoor.
Nevertheless, the business should additionally work to extend client demand for CEA-grown specialty merchandise, which is important to the business’s general progress.
Definitely there’s demand for produce grown by CEA, however just for these offered at a value on par with these grown outdoor. For instance, as we speak a big proportion of the tomatoes, cucumbers and peppers offered to US grocery retailers are grown in greenhouses.
Then again, CEA-grown merchandise that don’t meet the costs of conventionally grown merchandise (specialty merchandise) have thus far proven restricted demand. Based mostly on my analysis, retail gross sales of lettuce and leafy greens grown at CEA had been lower than $500 million in 2022; strawberry gross sales had been below $100.
Key elements influencing client buying selections embody:
- Retail costs: What value vary will considerably decide volumes
- Produce inflation: What’s taking place to the general costs of lettuce, leafy greens and strawberries
- Availability of natural: A restricted quantity of produce grown by CEA is licensed natural
- Client schooling: Improve client understanding of CEA
- Competitors:What are the alternate options
Worth will probably all the time be crucial issue driving customers’ buying selections. Nevertheless, if the business can slender the value hole between outdoor-grown and CEA produce, different elements may have an growing affect on buying selections.
Strawberries grown in a CEA surroundings nonetheless value considerably greater than strawberries grown outdoor. For instance, take into account Costco Northeast’s retail costs:
- Outside grown, typical: $2.85/lb
- Outside grown, natural: $3.70/lb
- Greenhouse grown, typical: $6.28/lb
Greenhouse grown (non-organic) berries are priced 121% larger than typical berries and 70% larger than organically grown berries.
Equally, most lettuce and leafy greens grown in a CEA surroundings promote at a big premium over outdoor-grown lettuce offered complete heads or in a bag format. Most of CEA’s grown lettuce and leafy greens are offered in 4 oz. shells with a retail value of $2.99 to $3.99. That equates to $12 to $16 per pound.
Meals value inflation:
CEA services have excessive ranges of mounted prices in comparison with outside growers, together with capital expenditures for high-tech services and inner methods, in addition to the gear and administration wanted to supervise the advanced services.
The good thing about vital upfront capital expenditures must be the discount of variable prices (eg, direct labor, water, and many others.). Conversely, outside rising ought to have the next share of variable prices than mounted prices.
In a time of excessive inflation, each meals costs and variable prices are anticipated to rise. This state of affairs must be a optimistic improvement for the competitiveness of mounted value constructions reminiscent of these of the CEA.
In line with the California Strawberry Fee, freight on board (FOB) costs for conventionally grown strawberries elevated at a CAGR of two.6% between 2012 and 2022. Throughout the identical interval, natural strawberry costs elevated at a CAGR of 0.8%. The excessive ranges of meals value inflation, not less than by way of produce that may be grown within the CEA, have but to materialize.
The narrowing of the value hole between CEA grown and conventionally grown merchandise might be elevated if there’s vital meals value inflation for the related merchandise.
Most produce grown in a CEA surroundings as we speak will not be licensed natural. There was a longstanding controversy over whether or not produce grown off the land (hydroponics, aeroponics, aquaponics) may even be labeled licensed natural. Regardless of latest California court docket rulings, most CEA services usually are not at the moment thought-about natural. Causes for this embody:
- Uncertainty about future selections
- Downtime required to change to natural farming strategies
- Decreased yield/elevated cultivation prices
- Willingness of customers to pay a premium over conventionally grown CEA produce
In my work, practically all newly constructed CEA services are not less than finishing a cost-benefit evaluation of natural produce manufacturing. There’s vital crossbreeding between premium consumers of CEA grown produce and premium consumers of natural produce. To the extent that the product will not be licensed natural, the marketplace for premium consumers is additional subdivided.
In some ways, produce grown at CEA is the cleanest, most ESG-friendly and tastiest produce available on the market. Some causes for this embody:
- It’s typically grown nearer to the ultimate client, leading to much less mileage and a more energizing product.
- Amenities might develop selection for style and texture moderately than portability.
- There isn’t a pesticide use and far much less water use within the rising course of.
- All entrances are managed indoors.
Given the early stage of the CEA business for merchandise reminiscent of lettuce, leafy greens and strawberries, there was little give attention to educating the patron concerning the above advantages. Many of the investments thus far have been geared toward effectivity and enchancment of the supply. If the value hole narrows and the business turns into extra worthwhile, I anticipate way more sources to be dedicated to customers.
Those who compete with CEA for share of client wallets embody outside growers, various produce and different CEA growers.
Based mostly on my analysis, customers pays a premium for conventionally grown product as much as the value of organically grown product. The prize quantity relies on the significance of the acquisition resolution. If the patron considers the buying resolution necessary (for instance, recent strawberries for the youngsters in midwinter), they’re extra more likely to pay the next premium. There’s a restrict, nonetheless. Based mostly on my analysis, that ceiling is at or close to the value of a comparable natural product.
Within the case of the strawberries talked about earlier, the greenhouse-grown product sells for a 70% premium over the natural product. This greenhouse grown product in all probability won’t attain scale till the product might be offered at or close to parity with natural produce.
CEA grown leafy greens and lettuce offered in 4 ozpackages. clamshell format offered price-matched with natural, free-range product offered in 4 oz. shell format. If this a part of the market grows, I anticipate massive packaged salad producers (Dole, Contemporary Specific, Taylor Farms) to enter the CEA market.
In the direction of the mass market:
The CEA business as an entire has completed a fantastic job of bettering effectivity and in the end lowering the price of produce grown on this format. That is important to maneuver to a completely mass market.
As value parity approaches for conventionally grown produce, consideration to demand attributes might be more and more necessary to all the business competing within the mass market. Will probably be very obvious that the business has reached scale when the quantity of shelf area allotted to all produce grown by CEA is elevated considerably.