On a recent episode of Business of Agriculture podcast, Damian Mason, Adam Bergman and I discussed Controlled Environment Agriculture (CEA). I remain bearish on CEA and Adam remains bullish. As always, a bit of disagreement makes for great podcast fodder. We covered a lot of ground.

Here are the highlights:

1) CEA was one of the hyped sectors of AgTech (along with alternative proteins), and the $7B that went into CEA over five years (2/3 vertical farming; 1/3 green house) is turning into a terrible investment in real time. Primary factors that caused the bad investments─media missed the fact that all CEA products have to compete with existing growers and supply chains (it was never a green field opportunity), investors did a poor job of due diligence and a lot of folks thought this was a tech play (it’s not, it’s a distribution play that needs to focus on taste and price).

2) The most interesting battle may not be between CEA and conventional soil growing. I predict it will be between green house and vertical farming. I believe that green house is in a huge advantage position in this battle with patient capital, years of optimizing product and economics, and a much lower operating cost structure (they use sun, vertical farming has to pay for electricity, and that cost is only getting higher).

3) The most interesting owner of the vertical farming assets may not be the original owner. It may be the third owner (after a second owner that gets the asset for a deal but doesn’t have a business model, the third owner gets it for an even better deal and has a business model).

4) Future vertical farming startups need to focus on two sets of unit economics─unit economics of the facility (how much it costs to build and operate) and the unit economics of the resulting SKU at the retail level to the customer (it needs to be at or below similar product with existing shelf space.  Incumbency has its advantages).

5) There are use cases for vertical farming like growing strawberries in the Middle East locally where it’s hard to grow outdoor product and shipping comparable product via long-range air travel. But it’s unclear how big the go-forward opportunity will be given the current and likely future bad outcomes for a lot of the $7B already invested. How many more checks will investors write in this space?

Listen to the full podcast episode here.