Vonnie Estes, PMA:
Welcome to PMA Takes On Tech. The podcast that explores the problems, solutions, people, and ideas that are shaping the future of the produce industry. I'm your host, Vonnie Estes, Vice President of Technology for the Produce Marketing Association. And I've spent years in the AgTech sector. So I can attest, it's hard to navigate this ever changing world in developing and adopting new solutions to industry problems.
Vonnie Estes, PMA:
Thanks for joining us and for allowing us to serve as your guide to the new world of produce and technology. My goal of the podcast, is to outline a problem in the produce industry and then discuss several possible solutions, that can be deployed today. This season of PMA Takes On Tech ,is brought to you by Plenty.
Vonnie Estes, PMA:
Plenty is an indoor vertical farm that sustainably grows produce using less water and land, than traditional farming and no pesticides or GMOs. The farm is able to grow peak season, flavorful food year round and deliver fresh produce to its retail partners daily. Plenty's proprietary towers and intelligent platform, make it the only vertical farm that can grow multiple crops, with consistently superior flavors and yield.
Vonnie Estes, PMA:
On today's podcast, we have two professionals from Wells Fargo to discuss this season's topic CEA. Why Wells Fargo, you ask? According to top 100 farm lenders, Wells Fargo has been the nation's leading agricultural lender among commercial banks, for 25 consecutive years. They bring farm to fork expertise to clients in the agribusiness, food and beverage industries.
Vonnie Estes, PMA:
They provide strategic products designed to mitigate industry specific risk and provide a full suite of services for businesses of all sizes. I talked to Matt Servatius, Market Executive for the Central region and Karol Flynn, Sector Analyst within food and agribusiness. They give their perspectives as a bank on financing, technology and where the industry is headed.
Vonnie Estes, PMA:
As we've heard in other episodes, indoor Ag is a new industry with an underdeveloped ecosystem. Institutions like Wells Fargo, will play a role in the build out and scale up of a successful industry. Let's listen to Matt and Karol. Karol and Matt, welcome to the podcast. Please introduce yourself a little of your background and your role at Wells Fargo. Karol, why don't we start with you.
Karol Aure-Flynn, Wells Fargo:
Great. Thank you so much, Vonnie for having us. I'm a member of the food and agribusiness industry advisors at Wells Fargo. We're sort of this special sauce behind Wells Fargo's commitment to the Food and Ag space. Our role is to provide industry insights about leadership and also really evaluate risk at both the market level and at customer and prospect level, for all the different sectors of agriculture.
Karol Aure-Flynn, Wells Fargo:
We're part of the agribusiness food and hospitality division, but we really serve the entire bank. And I'm very proud to be part of that group. We cover from dairy, to food products, protein, sugar, all of the different sectors, produce of course. So thank you for having us.
Vonnie Estes, PMA:
Sure. And Matt?
Matt Servatius, Wells Fargo:
Yes. Hey Vonnie. Thanks for having us. Matt Servatius. So gosh, I've been with Wells Fargo for almost 18 years now. I'm based in Denver, Colorado. and I sit in our tech banking group. So I have responsibilities for our tech lending effort for the 20 states in the middle of the country. And then I have national responsibilities for our sustainable tech effort, which has me covering a lot of the Food and AgTech companies.
Matt Servatius, Wells Fargo:
So we work with venture backed companies, up through kind of a large mid corporate profile business. So really span the whole life cycle of these businesses that are going through big growth curves. And so Karol and I partner very closely with respect to where tech and food and Ag are coming together. So great to be with you today.
Vonnie Estes, PMA:
Yeah, I think it was really interesting to me to learn. I mean, I bank with Wells Fargo. And so when I think of Wells Fargo, I think of my checking account. So it's really interesting to hear how much you guys are involved in this industry. And you both have really strong backgrounds, to understand the industry and really help your customers in this space. So I'm excited to shine some light on some of your thoughts on the Controlled Environment Ag.
Vonnie Estes, PMA:
So let's start out with, since you are a financial institution, let's talk about some of the financial aspects of CEA. So how do these companies make money, if they are making money? And knowing that there're a number of different types of companies that are kind of under the CEA umbrella.
Matt Servatius, Wells Fargo:
I will jump in. What I would say is, most of them are not making money. At least those that we've come across. And I think the biggest driver of that is, so many of them have not scaled up yet. They're really still in that build out stage. I mean, you have some of these longstanding greenhouse players, that have been around for a decade or plus and some of those folks are profitable. Leveraging existing technology that's been developed over in Europe and utilized for years.
Matt Servatius, Wells Fargo:
But the ones you read about, really in the Controlled Environmental Ag space, they're really not making money yet. And it really does come down to scale. So it'll be interesting to see with time, how these companies navigate growth and the capital requirements to get the scale necessary and how they go about financing those. But most that we come across right now, are still burning significant amounts of cash.
Karol Aure-Flynn, Wells Fargo:
And Matt, I really want to echo that. I think it's a super exciting time as we look at this space and as far as their maturity. But at this point, we're observing a maturing industry. It's very capital intensive at this time. And when we see the revenue streams, it's really exciting to see the victories, but they're not at the traditionally bankable level as of yet.
Vonnie Estes, PMA:
So what are some of the issues that are keeping them from making money? You say scale is one, so they're just not getting big enough. But what are some of the other things that are going on, that's kind of keeping these ... I think focusing mostly here the conversation, we're talking about more the vertical farms and the kind of highly finance farms I think. What you said before, the indoor tomato greenhouse space is a more mature market and they're doing pretty well. But if we kind of focus here for a minute, just on the indoor vertical farms, what's keeping them from making money?
Matt Servatius, Wells Fargo:
I think part of it is, I think a big part is the financing, at the local indoor farm level. And I think part of that is, because traditional banks like Wells Fargo are looking for cash flow, these companies are in a startup phase. And so we have to risk rate based off of a cash burning business. And I think a linchpin to getting these things to be more fanciable, would be true off-take contractual relationships. Right? With the Kroger, with a Walmart. Right? Where they're going to take or pay what is delivered to them, under kind of a produce purchase agreement, something that is contractual.
Matt Servatius, Wells Fargo:
If the industry can start moving in that direction and companies can get away with those contractual relationships, all of a sudden you're going to open up debt financing at the farm level, which is an inhibitor to these businesses to scale up. Right? There's only so much equity capital that can go into these businesses before they need debt. Right, to really bring down that weighted average cost of capital. So BrightFarms is one that pioneered that early on. And I think more proliferation of that, will help these businesses become profitable faster.
Karol Aure-Flynn, Wells Fargo:
And that's an interesting point, because before you have scale, it's difficult to meet those contracts and to win at those contracts. This is a very competitive industry. As we all know, the traditional players have already hit a level of maturity and concentration, where they have very strong contracts that might be difficult to penetrate. So I fully expect we'll have some conversation as this goes on, about partnerships.
Karol Aure-Flynn, Wells Fargo:
But fascinating business model to try to disrupt a very mature and well run, sophisticated, fresh produce complex, even you can think of it globally, but if you want to look just even at the US on its own and very nimble. So the Controlled Environment folks, even just looking at the vertical and indoor, they have a lot of competition that they have to address from the traditional side. So I think that's an important thing to think about.
Vonnie Estes, PMA:
Yeah. I think years ago, many years ago, like 10 years ago, I was working on a project of doing some indoor strawberries in a traditional greenhouse. And we talked to a couple of the retailers in the area, this was New Mexico and Texas. And they said, "We're not going to commit to buy anything from you, because if we do that, we have to tell our other suppliers that we're not going to buy from them." And we were only going to supply for just the winter months. And so they said, "We can't do that."
Vonnie Estes, PMA:
So I think you've got a lot of these traditional relationships that you're trying to break into. But I think going forward with some of these crops, starting with leafy greens and then moving into other crops, these in indoor Ag companies, should be able to do good take or pays because they can guarantee supply throughout the year, that's going to be very consistent. They're not going to get hit by a hail storm. They're not going to have a lot of the issues that outdoor has.
Vonnie Estes, PMA:
So it'll be interesting to see as the market matures, if those take or pay contracts end up being the norm. So you mentioned a little bit about debt financing and in some of the financing models. And so what financing models do you think are working in the industry? You mentioned BrightFarms and which ones are not? Is the VC investment with high valuations the right way to go? Or are there other models that even some of these big guys should start looking at?
Matt Servatius, Wells Fargo:
I think the equity financing, right, is the right model for now to start. But I think the type of investor is really important. I think the traditional Venture Capitalist here is, not going to be as active as the investors you see that are active. Right? It's the larger sovereign funds, it's family offices, it's corporate venture arms, that are looking at it beyond just the financial return of that investment. But for other reasons that the patient investor, I think, is going to be really critical.
Matt Servatius, Wells Fargo:
And you see those players being in my view, the most active. One, because they can write big checks. Because they don't have that same investment horizon that traditional VCs do. You do see some of the pure play VCs around this, but I come from the Clean Tech background and a lot of that venture community, got blown out because they underappreciated the capital requirements required in the solar system back in 2010 through 2014. So equity financing is the right play. It's making sure you have the right investor lineup, that understands the long game here versus the short-term return.
Vonnie Estes, PMA:
Yeah. I think I was with you in the whole Clean Tech roller coaster ride. And one of the things that we saw there, was the need for really capital intense businesses and the need to really ... A lot of the projects I work on, they really needed project financing and it wasn't available because it was too early, but it was too late for VC. And so how do you see project financing might play a role in this, once things are a little more proven out?
Matt Servatius, Wells Fargo:
Right. Yeah, exactly. And part of the financing that was available, was government financing. Right? DOE loan guarantees that took, to say a long time would be an understatement. A long time to get that capital. And we don't do a lot of USDA loan guarantees to my knowledge. But if those mechanisms were more readily available, I think that could really help things out here.
Matt Servatius, Wells Fargo:
I think it's a net positive, that these companies are not reliant upon subsidies as we found in solar and wind. Right? You don't get that whipsaw effect. Is that investment tax credit going to be renewed, or extended? Things of that sort. So government financing programs, if they could be more readily available and more rapidly deployable, I think that could be a real net positive here.
Vonnie Estes, PMA:
One of the things I've seen in other industries as well is, sometimes the first generation of these companies, aren't the ones that then go on and be successful. It's kind of the generation that comes after them. And not that you have a crystal ball anymore than anyone else does, but just what's your sense on, do you think these first large, first of a kind companies, are going to be the ones that are going to take this technology into the future? Or do you think it's going to be the second generation that comes behind them with new technologies?
Karol Aure-Flynn, Wells Fargo:
I probably can start with that. I'm not sure that these are first generations. Some of the first generations might be the big greenhouse and efforts of previous traditional corporate players, that started something and closed it, because of either some operational situation they found was more challenging.
Karol Aure-Flynn, Wells Fargo:
Proven out is what I heard you say in the previous commentary. And I think that we're learning as we're going, I don't know what the timeframe is, but I think it's going to be quicker than we think. That they're going to learn about how to set controls in these buildings, how to work with lighting, how to manage labor. I think this is a different type of labor force.
Karol Aure-Flynn, Wells Fargo:
There's oftentimes the same heading, that a traditional player might work with, with their operational risks, but they're discovering in high, fast forward motion. And I think that the current players learn from those past experiences and again, partners matter.
Matt Servatius, Wells Fargo:
Yeah. I agree with that. And I think you're going to ... It's somewhat fragmented right now and regionalized, but I think you're going to see more consolidators too, right, to help drive that scale. It's like I'm doing PR for BrightFarms. I'm not intending to, but Cox just acquired them outright, right? They led in equity financing for them. And there's others where I think you're going to see more consolidation with some of these bigger players, that will help drive scale, will help drive access to financing as well. And so I do think some of these early drivers of these technologies and platforms, are going to get consolidated, maybe at a state level, Western region level, et cetera.
Vonnie Estes, PMA:
So moving on, just thinking about the effect that this will have. How do you think, or how are you hearing that outdoor growers are responding to indoor Ag? Do they see it as a threat, or do they see it as part of the whole industry? Or what are you hearing from some of your customers that grow outside?
Karol Aure-Flynn, Wells Fargo:
We're hearing ... I mean, customers are always going to look at what's supposed to be disruptive, as almost competitive in nature and that always drives innovation. I'm seeing more and more partnership. I think there's a lot of discussion going on in the back of maybe what we see. And there's going to be, the winners are going to find new ways to win. Certainly, the current industry, the CEA industry, is driving innovation faster than we would've done without it. So I really believe it's going to be positive all around for the industry.
Matt Servatius, Wells Fargo:
Yeah. It seems very complimentary to me. Right? I mean, CEA is not going to replace outdoor growing with the amount of mouths we have to feed. Right?
Vonnie Estes, PMA:
Definitely.
Matt Servatius, Wells Fargo:
And it does seem like a part of this solution. And you're seeing these players Driscoll's and others, coming in to equity rounds with the Plenty or others, right, to get under the foot a little bit. And those ... Driscoll's, name the big specialty produce company, could ultimately be natural acquirers of these business. I just think it's a part of the equation, I don't think it's the only equation.
Vonnie Estes, PMA:
Yeah. I think they run the entire supply chain and they know how this all works. And so I think they're looking at the industry and thinking about how should I be involved? I was at the Western Growers' Annual Meeting recently and Bruce Taylor was talking about vertical farms and kind of people are asking him, "What do you think?" And they made an acquisition.
Vonnie Estes, PMA:
And the story that he tells since he told this publicly, I think I can tell it publicly, but was he said that he went to visit ARO Farms very early on. And he said, "I walked in there and there were nine Cornell PhDs working at ARO Farms." And I thought to myself, "Do I have nine PhDs working for me?" And so he thought, "I can't build this myself, but I see that this is an important industry to be in." And so they made an acquisition into it.
Vonnie Estes, PMA:
And so I think a number of companies are thinking about that. Sticking their toe in and thinking, "We've got, especially here in California, we're going to have problems with water. It's going to have an effect on production here. And so, how do you just de-risk by growing someplace else, or not using as much water in a situation of growing inside." So, I think there's a lot of... It'll be interesting to see how that all plays out with the outdoor growers.
Karol Aure-Flynn, Wells Fargo:
I have another additional thing to add there. I really believe the traditional Ag has some nimbleness, that perhaps the indoor and capital intensive structure doesn't have. So I don't believe one is going to replace the other. So when we see a very expensive field of leafy greens being cultivated, plowed under because the market changed, that's a nimbleness, even though it looks very profound. It's a nimbleness that may not be available if you've contracted under lights and in a structure. So I think there's going to be room for both. And nimbleness doesn't just mean the newer model.
Vonnie Estes, PMA:
That's a really good point. I hadn't thought of that. Because there're things that you have the ability to do when you're growing outside, that you don't when you have structure that you're paying all these costs, whether you're growing something or not.
Karol Aure-Flynn, Wells Fargo:
Right. And market risk is one of the things we really look at. And so we'll see how this plays out.
Vonnie Estes, PMA:
Yeah. So everybody's favorite topic these days, is supply chain. It's the fault of everything. So what are you hearing about supply chain issues and how is this impacting indoor Ag positive or negative? They have a leg up on that, or is it more of an issue for them?
Karol Aure-Flynn, Wells Fargo:
I'm not sure we're at the scale where we can really see it. Of course, we can expect that transportation, when you're closer to the end user, transportation might be slightly improved. Some pricing might be slightly improved. But some of the supply chain is about, like you mentioned earlier, or you mentioned on your questions, which was about packaging. Both sides are going to be impacted by that. By the cost of resin, or the availability of pre-made packaging. I'm not sure we see a clear winner on that one either. And the scale isn't there for us to really know. Maybe three years from now, we'll have a better feel for that.
Matt Servatius, Wells Fargo:
Right. And anecdotally, I think that's right. Anecdotally, one would think that they'd be insulated perhaps a little bit more, because the inputs are far less, right, to grow and yield at some amount of crop. But certainly they're falling victim to the shortage of skilled labor as well. Right? I think every sector has been impacted that dramatically through this pandemic.
Vonnie Estes, PMA:
Yeah, yeah. I think the one advantage is going to be if you're closer to your market. So that's the one advantage of indoor, I think. But like you said, all the other shortages are going to hit them as well.
Matt Servatius, Wells Fargo:
Right. But perhaps, then thinking about what else do they need? Well, they need warehousing space to grow. Right? And they want to be in the metros close to the urban areas. So presumably, I don't have anything empirical to point to, but presumably, there's going to be space in those metros available, right, as we're all working from home and in more hybrid environments. That there could be a net positive, in terms of securing space at least rates that are more attractive, than they would've been three or four years ago.
Vonnie Estes, PMA:
Very cool. So Karol, you touched on this a little bit, but do you think that technology that we've learned from indoor Ag, will translate to the field? Do you see different technology, just learnings and understanding how to grow and that sort of thing. Do you think that will translate to the field?
Karol Aure-Flynn, Wells Fargo:
I absolutely do. I think actually the learnings are happening both ways, especially as these partnerships that we mentioned earlier, between the traditional and the new start to share. Bruce Taylor may tip his hat to eight Cornell PhDs, but those eight Cornell PhDs were probably telling the same story back at their dinner table, that they met Bruce Taylor.
Karol Aure-Flynn, Wells Fargo:
So because of his experience and because of access to the experience on his staff and he's been hiring very smart people for a very long time, that have a different skillset. But I think about automation and breeding, water usage, the fertility issues around these really highly specialized crops and lighting of course. But yeah, I think it's going to go both ways. Absolutely.
Karol Aure-Flynn, Wells Fargo:
And they're starting to share some of the same innovators that have been key players in the traditional space, are consulting with the new innovators, both ways. It's been fascinating from an industry perspective.
Matt Servatius, Wells Fargo:
And taking the contrarian view, it would almost seem because of the variables that are out of the outdoor growers control, that you have to be more innovative in the outdoor field, than you do in the indoor to a certain degree. Right?
Karol Aure-Flynn, Wells Fargo:
Well, when there is some kind of past outbreak in an indoor facility, I think some really smart entomologists that have seen it all before, might be the right one to bring into the picture. So I mean, I'm always thinking of it from the field perspective and from historical perspective. As a farmer, I want the best people at the table, no matter what.
Matt Servatius, Wells Fargo:
No doubt.
Vonnie Estes, PMA:
Yeah. So why are big AgTech companies paying attention to this space? What are their interests?
Matt Servatius, Wells Fargo:
I think their interests follows the money need. Right? And I think consumers more and more, are demanding better tasting produce. I think they're looking for produce that can be delivered nearly same day. Right? I think we're not far away from that. And I think the grocers are looking at this because it's generally, I think, higher margin for them, which leads to more ancillary sale. When you're buying that special herbs that some indoor grower grow and you're going to have a nice meal with a nice bottle of wine that you buy in that same grocer. So I think the bigger AgTech companies see the dollar signs around it and the consumer is driving that, is at least what I'm seeing and hearing.
Karol Aure-Flynn, Wells Fargo:
I think the big AgTech companies, are paying attention just as you say, Matt, to the consumers. Consumers are really fickle. They say one thing and they do something else with their behavior. And so if an AgTech company's end user is in a traditional player, or an innovator, they still are driven by the consumer. So the more those AgTech companies can see what's happening with that end product, it's going to elevate their opportunity to grow their own, develop their own AgTech strategy, or to develop their marketing strategy.
Vonnie Estes, PMA:
What's the impact of food inflation?
Karol Aure-Flynn, Wells Fargo:
Food inflation is the $60 million question. Maybe it's billions of dollars probably, adds some zeros to that. I think the important thing here, is to recognize that you have to segment it. Overall food inflation might be four to eight percent and it might be pushing even higher than eight percent. But you look at the segments that are growing, dairy prices have not increased at all. In fact, they're falling.
Karol Aure-Flynn, Wells Fargo:
The fats, the meats, have been going up around the 10% mark. If you look at what part of food inflation does the fresh produce, or the products that are grown in these special indoor environments take, what will the market bear? A two to five increase in produce sales? It certainly looks like it from the retail numbers that we see from Nielsen.
Karol Aure-Flynn, Wells Fargo:
I don't have a view on the food service as much. I suspect the market will bear more there. Will food inflation allow and give an opportunity to innovators to charge more? Perhaps. Is it shifting the sort of an American tolerance for higher prices? Maybe. I think we have to ... Details matter.
Karol Aure-Flynn, Wells Fargo:
And food inflation, there's an element of being driven by port congestion and supply chain, but we might be just in the middle of a greater shift for higher prices. That's probably positive for the indoor Ag folks.
Vonnie Estes, PMA:
Yeah. Matt, anything to add that? Nope.
Matt Servatius, Wells Fargo:
She captured it.
Vonnie Estes, PMA:
Yep. So why does packaging matter?
Karol Aure-Flynn, Wells Fargo:
I'm also going to try on that one. I think packaging matters because consumers are being purposeful with what they ... For a number of reasons on packaging. It's they want packaging that's environmentally sustainable. They want packaging that helps them have a sense of comfort with food safety. But packaging matters because it costs money. And it costs money, not just in creating and just not the price per package, but how does it transport? How does it work? What's its function?
Karol Aure-Flynn, Wells Fargo:
So we're looking at all of those things. And I think both tradition, I mean, it's been a incredible evolution of the retail space and food service space, in packaging of these types of products that are grown. But we're going to really have to watch cost and watch how consumers see the environmental impact of packaging.
Matt Servatius, Wells Fargo:
Well, and I know this has been talked over the years. Is there a new standard around produce that's in the Controlled Environmental Ag environment, with no pesticides and 90% less water? And is there a standard, complimentary, or above organic, right, the consumers start looking for? I know early days folks in the CEA industry, were exploring that. I don't know how much traction that's gotten, if any at all. But yeah, it matters. Right? And we all know the ESG tailwinds are more important than ever right now to a lot of consumers. And so packaging and the brand that people are sourcing from, becomes that much more important.
Vonnie Estes, PMA:
To finish up, thank you guys so much for being on. And I have one last question for you. And Karol, let's start with you. How do you think the CEA industry's going to look in five to 10 years from now? Where do you see the growth? What's it going to look like?
Karol Aure-Flynn, Wells Fargo:
I think as I've talked about throughout this discussion, I think we're going to see some really interesting partnerships, much more mature industry. I think the consumer is going to perhaps recognize the difference between indoor and traditionally grown products, but branding is going to mean more than ever.
Karol Aure-Flynn, Wells Fargo:
Consumers really want to know who stands behind these products, will continue to serve nutritious and beautiful produce across the U.S. and around the world. So very excited about the next steps.
Vonnie Estes, PMA:
Great. Matt, how about you? What's the industry going to look like?
Matt Servatius, Wells Fargo:
Yeah, I think you're going to see a lot more consolidation. I think the partnerships will be key. I think you're going to see Real Estate Investment Trusts, REITs, looking to make investments here in a much bigger way. When they can lock down a sticky tenant, whose got a 10 year lease, to where they'll actually invest, right, in some of those tenant improvements to lock in that tenant occupying a million square feet to grow produce. So partnerships are going to be big, but I think you're going to start to see a lot of these CEA players become divisions of the biggest food and Ag companies globally.
Vonnie Estes, PMA:
That's it for this episode of PMA Takes on Tech. Thanks for allowing us to serve as your guide to the new world of produce and technology. Be sure to check out all our episodes at pma.com and wherever you get your podcasts. Please subscribe. And I would love to get any comments, or suggestions of what you might want me to take on. For now, stay safe, eat your fruits and vegetables and we will see you next time.
