Despite the recent negative press about facility farming, opportunities for investors remain. Facility farming's investable assets fall into two categories: first, businesses with cash flow and a management team with facility farming experience, and then some valuable startups that are expected to grow into a new batch of established businesses.
Today's assets** are well below their heyday in 2021, when interest rates were still very low and the industry's appetite to invest in agricultural assets was at its peak. However, today's market environment is more realistic, so investments in the sector have a better chance of long-term sustained success than in 2021.
Valuation analysis of new investments should focus on the following three areas:
Conservative income**:Investors should base their sales on the basis of 1) the number of quality products produced, and 2) the reasonable likelihood that the sales volume will match the actual results.
Management team with facility farming experience:Most successful operators have management teams that are experienced in facility farming.
Valuations in Interest Rates**:From 2021 to date, interest rates have been ** 300 to 400 basis points; This increase should be reflected in the required rate of return.
Overall, the investment climate has changed dramatically from 2021 to the present. First, in 2021, the average five-year Treasury interest rate was below 1%, while today's interest rate is around 45%。
Today, private credit investors are also investing on a large scale, with several major investors publicly stating that they are currently required to return 14% to 15%. And the merger and listing of SPAC, a very popular startup in 2021, experienced large or even total investment losses, and the same is true for private equity investors.
Moreover, facility agriculture technology itself has been relatively backward. While some methods have improved the efficiency of indoor growing environments, they have not been enough to seriously disrupt the market. Similarly, traditional products grown in facility agriculture have not achieved pricing growth commensurate with inflation levels.
Despite the current wave of negative news in the facility agriculture market, facility agriculture is not "useless".
Many of the large greenhouse operators that have been in business for decades are expanding, becoming more efficient, and potentially delivering financial results.
The product mix of facility agriculture is also expanding. For example,Strawberries grown in greenhouses are now widely available at retail. Some major retailers, including Costco, have always offered greenhouse-grown strawberries, albeit much higher than traditionally outdoor-grown strawberries.
Also, lettuce and leafy greens producers seem to have found ways to compete with cropland growers. For example, Little Leaf Farms in the U.S. was the first facility agriculture leafy greens brand to go beyond field-grown vegetables and its packaged lettuce became the best-selling lettuce brand in New England, USA.
In addition, fast-food chain wendy's buys tomatoes from greenhouse operators and seeks additional lettuce** from facility farmers.
Meanwhile, North American vegetable merchants, Mastronardi Produce and Bosch Growers, both of which have extensive experience in facility farming, now operate four large greenhouse farms that were formerly part of Appharvest.
In the field of vertical farming, operators Kalera and Aerofarms have undergone a recapitalization and are in the process of restarting.
These are undoubtedly positive developments for facility farming, as are other well-run and profitable companies that continue to expand. The number of early-stage startups looking for new capital** also gives the industry optimism, which is a clear indication of the long-term viability of the sector.
Products*** may help the industry further. Agricultural products are one of the few sectors in the retail industry, and now cautious investors will definitely want to consider this factor when determining valuations. As the industry moves further and further away from the peak of 2021, when seller expectations were very high, valuations for buyers and sellers are likely to be closer and more reasonable today.