Less noticed than the widespread bankruptcies and turbulence of the crypto industry, 2023 has decimated the vertical farming industry. The bankruptcy of AeroFarms, the biggest and most famous American vertical farming start-ups is only emblematic of broader issues in an industry that heavily relied on venture capital investment (which has declined more than 90% year-on-year in the past year). Another vertical farm start up, InFarm recently announced the layoff of around 500 workers. Fifth Season, famous for its “robot farming” has shut down. Perhaps biggest of all, in February, Kalera, one of the biggest vertical farming operations in the world, one that had amassed a huge capital investment, declared bankruptcy and most of its facilities are currently non-operational.

Kalera had total sales of 1.7 million dollars in the third quarter of 2022, and a staggering gross operating loss of 20.7 million dollars. To put it bluntly, most of these vertical farming companies have proven to be huge wastes of capital, and many were run by start-up wonks who had no background in agriculture. As such the projects have been hampered from the start by unrealistic yield and price expectations and underestimations of costs, with companies time and time again pouring far too many resources into expensive R&D projects and economically unnecessary technology. The industry operates under Silicon Valley maxims of Go Fast and Break Things (fail, in other words, like the vast majority of non-tech Silicon Valley investments, from the 500-million-dollar juicer start up, to the longevity pill sellers), rather than the sort of careful cost analysis and multi-year planning that established agricultural industries operate under.

Vertical farming is an example of an over-invested market fad that fundamentally didn’t understand its own market and made a lot of false claims. Vertical farms, were, in fact, not so environmentally friendly, with a larger carbon footprint per kg/yield than traditional field-based farms. The touted “97%” savings on water and land amount to little when irrigation water is very cheap while municipal water of big urban areas is not, and farmland is cheap while urban land is an expensive and limited resource. Even focusing on high value products like microgreens and herbs, these farms have been losing money from the start. They are emblematic with a broader problem in the economy, which is how so many companies and products are now designed to be “profitable later” with no timeline for when that later is and an action plan that is more an exercise in wishful thinking than a pragmatic assessment. 

The fact that vertical farms’ prices were much higher than traditional farms just emphasizes the point of how expensive to run and maintain these complex systems are, and ultimately consumers didn’t care enough about the special urban farming “local produce” label to pay high premiums for it. The high price should also enforce the obvious point: these systems touted for their efficiency were using up more resources than traditional farming. Vertical farms are swapping the sun for artificial lighting, and the flip side of year-round production is high climate control costs.

Mushrooms ARE vertical farming
However, mushrooms are the true vertical farm. Starting with Japan in the 1970s, East Asia has developed an immense array of sophisticated automating systems and large indoor cultivation. These systems don’t look as nice as the Mars-exploration designs and ambitions of big vertical farms like Kalera, but they are far more efficient and practical. More importantly, they are profitable. They are profitable even when prices fall below those of standard leafy greens on the American market, and in Japan even managed to survive a double whammy of soaring energy costs and a weak yen driving up imported substrate costs in 2022.

There are a few key points where mushrooms have the advantage over leafy greens and herbs. The biggest and most undeniable is that large, climate-controlled mushroom farms produce a product without any competition. Naturally foraged mushrooms or mushrooms grown with actual logs have lower yields, higher labor costs, and fewer growing periods during the year. They make for good gourmet and specialty mushrooms, but in cost and volume cannot compete with modern mushroom farms_emdash_the exact opposite of the issue faced by vertical farms.

There are other key advantages. Mushrooms don’t need continual lighting throughout the process, as they are most often incubated in darkness and then most farms manage the fruiting cycle with a light-dark cycle. The total water consumption is less for mushrooms than leafy greens, and neither use pesticides. A key advantage for mushrooms is the labor efficiency of bottle cultivation farms, which have automated the harvesting process and require minimum labor to run. These systems on the whole are considerably less complex and expensive to maintain than the high-density hydroponic growing systems utilized by most vertical farms.

Lastly, in terms of total yield, the systems are not even close. AeroFarms has a project in Danville, Virginia (the vertical farms companies are gradually disentangling themselves from pricy, high-value real estate in major urban areas) that is 138,000 square feet, and the company has an ongoing project to get yields of 6 million pounds a year, which is 2721 metric tons of production. AeroFarms hasn’t managed this, mind you, but this is considered such a lofty and impressive goal that if the facility did succeed at this level of production, it might be able to eke out a profitable operating margin if other costs, including energy costs, were kept down.

The difference between vertical farming and mushroom farming in a nutshell is that vertical farming is selling these concept designs built around potential yields they'd get if everything went exactly right (which it never does) and which are oriented around increasingly high-tech and expensive, ultra-specialized systems that all have to be maintained in-house. Mushroom farming already has the proof of concept, already works, the current generation of plant layouts and equipment are already very nearly maximally efficient, and there are virtually no waste products.

What goes into mushroom farming is either sawdust/wood chips, or agricultural waste products (straw and manure for traditional button mushrooms, and primarily corncob and wheat/rice bran for some exotic varieties). What comes out is high quality non-animal protein, and vitamin and potassium rich, low-fat food. The spent mushroom compost from exotic mushrooms has numerous uses in regional agriculture as well. Corncob-based compost can be baked dry and powdered and used as a feedstock, and all spent mushroom compost is useful as a soil conditioner, improving water retention of soil, increasing organic content, boosting microbial activity in soil, and potentially improving the efficiency of chemical fertilizers.

What the future holds for both the mushroom and vertical farming industries
None of this is to say that vertical farming will never have a viable system_emdash_in ten to fifteen years we could be looking at a future where most work is remote and cities have vast sections of unused parking garages and office space to either refurbish into housing or rebuild as vertical farms. Each farm may have a tiny, one-room molten salt nuclear reactor that is extremely efficient and produces all the energy the farm needs at a negligible cost. Simplified, streamlined vertical farms running on fourth-generation small-scale nuclear energy in urban spaces rendered obsolete by technological changes_emdash_that is something I can envision in 2038.

 
My impression of vertical farming, particularly in North America, is of techies without a farmer, while Japan is the opposite, farmers without a techie in sight. I can’t think of any farms in Japan with less than 15 million USD in sales that invest any money in research and development. I also can’t say that the Japanese model is perfect in that regard; many farmers are very dependent on the detailed cultivation instructions the spawn companies provide for their specific strains. Farmers are well-attuned to the strains they are familiar with, but have limited knowledge about mushrooms more generally and often can’t even tell me why they do what they do. I’ve had Japanese farmers shrug and tell me sometimes they have to supplement with calcium carbonate and sometimes they don’t, and they’ve never really kept notes about it or determined a pattern.

In a word, Japanese farmers are often masters of the process of growing their own particular mushrooms (usually just one, singular variety, i.e., nameko farms only grow nameko, and shiitake farms only grow shiitake), but don’t know much about the system and know even less about technology. I think if you were to transfer maybe 20% of the North American vertical farming sector’s technology and science-oriented nature to Japanese farmers, you would have about the perfect mix.

The short answer is: no. But behind every short answer there is a long-list of caveats waiting, knife in hand, for those that tread carelessly. Very simply, the exotic mushroom sector is booming in the Western market, and growth for most of the past 20 years has approached 30% annually and shows little signs of slowing down according to most metrics. More consumers than ever before are familiar with exotic mushroom varieties (and not just shiitake) and a diverse range of ethnic cuisines are using mushrooms. However, booming or not, it’s still possible to make the same kinds of mistakes the vertical farm start-ups did, which is to over-invest and over-produce, which leaves a company in a situation with low prices and unnecessarily high operating costs.

A company that jumps into the exotic mushroom market with a thirty-million-USD facility that grows 10,000 tons of enoki a year and invests ten million USD  developing a custom, high-tech growing system in-house, will-not, I suspect, meet a much kinder fate than many of the vertical farming start-ups. With agriculture, I think a producer can basically not assume high margins. At the very least, margins will decrease as supply does, and supply will increase if it can (and with exotic mushrooms it can and is).

In addition, when setting up any new system, with a new product and production method, things are going to wrong. Problems will happen. Rather than a planning failure this is just something that has to be baked into the business plan itself. Companies have a situation where workers are new to processes, the machinery is new, and, in this case, the mushroom varieties are also new. Mushrooms themselves are finnicky little creatures, sensitive to tiny differences in substrate composition, which might mean that even with the same climate controls recommended by a Japanese spawn maker, it could take time to formulate a substrate and growing system maximally suited for a facility half-way around the world.

It is best to fail early rather than late. Between investing to set up a 6000-ton annual production facility and then having six months of pinning failures and low yields, and setting up a single initial line that aims for about 800 tons of annual production and suffers the same issues, the former is obviously catastrophically worse for the company in question than the latter. With any new venture, I cannot emphasize enough the importance of establishing proof of concept_emdash_that is working out the kinks and developing a system and protocols that show viability_emdash_then expand step by step from that point.

The biggest fault of the vertical farming start-ups is possibly that they failed to establish a road map to profitability, and instead just kept expanding and expanding and developing their in-house technology along the way, assuming that the theoretical value of their company brand and national market share in ten years would be enough to make them profitable one day. Just like Tesla operated at a loss for nearly a decade, but has managed to capture a large part of a challenging new market by making those long-term investments. But Tesla worked because cars are high-margin goods and Tesla doesn’t have a whole lot of competition in the EV market. If Ford was already cranking out nearly identical electric cars as Tesla at 30% lower prices, Tesla would have never lasted more than a few years, and that’s the kind of market the vertical farm start-ups growing leafy greens and herbs faced.

Exotic mushrooms have that advantage; there are some pressures on shiitake from China and China can produce cheap dried mushrooms (with, and there is no other way to put this, very low quality), but in terms of the domestic fresh market in North America, Europe and elsewhere, the market is still young and the supply has not yet outpaced demand. Unlike with leafy greens, where overall demand is fairly stable, moving into the exotic mushroom industry offers room to grow in conjunction with demand over the next 20 years, by the end of which, I expect nearly half of the mushroom market will be from exotic varieties. This makes exotic mushrooms a good, stable sector for long-term investment, one which is also a sustainable product that recycles other agricultural waste flows and has a low environmental impact.