Indoor Farms: is there a potential of growth?

Indoor Farms: is there a potential of growth?

In 1854, agriculture was 40% of the US GDP. Nowadays, agriculture is around 1,5% of the GDP (1,45% of the US GDP in 2013). The importance of agriculture, the most strategic economic sector as well, has collapsed due to progresses in productivity. Recently, indoor cultures appeared like a potential innovation of process. Nevertheless, major limits remain strong while the global agricultural productivity tends to stagnate slowly. 

Actual problem is different

In 1850 in the US, 55% (12,755 million of people) of workers were in agriculture, it is 1,40% (4,48 million people) in 2015. The agricultural sector is the most strategic sector in economy but also the less important. Economic growth is allowed by a reduction of agriculture in the national wealth of a country. This reduction is the consequence of a higher productivity for farms. 

As we treated in our previous article on commodities (N’oublions pas la rétroaction d’une crise sociale d’ampleur – Thomas.A. | Roche Grup), the agricultural sector faces major difficulties. On one part, debts are disturbing. In the US, agricultural debts rose by 40% between 2012 and 2019 while working capital went from 165Bn$ to 56Bn$. On the other part, prices of commodities stay low, and banks can be reticent to deal with the agricultural sector. It can become a strategic threat in the case of a major crisis in agricultural investment.

In Europe, between 2005 and 2015, European commissioner has deplored the bankruptcy of more than 4 million farms. Indeed, the number of European farms went from 15 million in 2005 to 11 million in 2015. It means the bankruptcy of more than 1000 farms each day. Instead of the decentralization of production, we have a process of centralization due to the growing weakness of the sector.

Costs and productivity of indoor farms

According to Statista, studies established in 2015 show that indoor farms could increase the agricultural productivity by a factor of 4 or 6 (even 10 for tomatoes or lettuce for example). Indeed, it allows farmers to exploit artificial lands during all-seasons with a higher concentration in surface. As a result, it seems that indoor farms are particularly efficient on secondary agricultural products (vegetables, fruits, etc…). 

Nevertheless, there are central problems coming from indoor farms:

1/ Real estate cost. Rising public debt and growing demography are pushing real estate prices higher and higher. While land prices are relatively low, establish an urban activity implies costs in real estate.

2/ Worker’s remuneration and entertainment costs (electricity, ventilation, artificial equipment, etc.). Agricultural workers are generally paid with low wages. Find agricultural workers at the same price in cities would be less easy while indoor farms add a cost of artificial equipment.  

3/Consumers practices and types of cultures. Cultures of cereals for example need significant surfaces to be efficient. It is hard today to imagine a production of cereals indoor. A wide part of needs in consumption are precisely cereals. In addition, consumers can be skeptics to indoor products (vegetables, fruits, etc.).  

Furthermore, the COVID19 has even show a new trend of leaving cities. Even if urbanization continues, a wide part of developed economies will have a stagnating demography.

Low costs and higher productivity for 40 years again?

The graphic below clearly shows the correlation between agricultural production and the wealth of countries. A higher GDP tends to signify a lower part of agriculture, as proportion of economy. Indeed, a higher GDP tends to traduce a better productivity (facilities in capital concentration, industrial machines, etc.) and as a result a declining importance of agriculture in economy.



To end on this point, we have a coming problem. Agricultural productivity, even in developed countries, tends to come in stagnation. There are no more disruptive innovations leading to major changes in the production methods. It implies a problem of sustainability because of the growing world population that isn’t followed sufficiently by a growing agricultural productivity.  

To conclude, indoor farms could appear like a great innovation of process for some types of cultures. It is not a general response to the problem of feeding the world, but it can be interesting to boost local urban markets. Such an innovation can really take sense in the case of a major inflation on commodities or a problem of overpopulation and shortages of lands. Before it, a peak in world population should be achieved in only 40 years.