How can you calculate the return on investment for vertical farming?

A detailed cost-benefit analysis is vital to understand the financial feasibility of a vertical farming project. This involves assessing all costs (infrastructure, operational, labor) against the benefits (crop yields, market demand, etc.). Calculating the Return on Investment (ROI) is essential to determine if the vertical farming venture will be profitable. Long-term financial viability also depends on managing risks and ensuring sustainability in operations It's important to focus on crops that have high market demand and can be grown efficiently in a vertical farm setting, like microgreens or baby greens. Organic crops might offer higher profitability due to increasing consumer awareness and willingness to pay more for such products

To determine the ROI, one must subtract the total operating costs, encompassing elements like energy, labor, materials, and overhead, from the overall revenue generated by the vertical farm. Simultaneously, the total investment cost, which includes expenses associated with construction, equipment, technology, and infrastructure, must be considered. A positive ROI signifies profitability, while a negative ROI indicates a loss. It is crucial to factor in the payback period, representing the time required to recoup the initial investment. Additionally, the success of vertical farming is influenced by variables such as crop selection, market demand, operational efficiency,

Energy and labor are the primary operating expenses in vertical farming. Energy costs are significant due to the need for constant lighting (usually LED), climate control, and humidity regulation. These can account for a substantial portion of the total expenses. Labor costs vary depending on the degree of automation and the region of operation. For example, a large vertical farm in Saudi Arabia with mostly manual operations can incur labor costs of about $13,000 monthly. Automation can reduce these costs by up to 30%

Tracking KPIs like crop quality, profit margin, and customer satisfaction is crucial. These metrics help in maintaining high standards, understanding financial health, and ensuring customer loyalty. For instance, a profit margin of 10-20% is generally advisable for vertical farming operations

The cost of land would have the most profound effect on the Return on Investment (ROI), since it would be one of the biggest initial expenses. Second, after land cost would be an investment into produce processing (washing station, drying, packaging, etc). Smaller-scale vertical farming projects, may not afford the cost of initial investment, and if they go for processing, chances are they may not see ROI.

There is a common misconception that vertical farms are not profitable. In 2014 in Japan, only 25% made a profit, 50% broke even, and 25% lost money. In 2018, the number of farms increased by 23%, with 50% of vertical farms making a profit. Since 2018 the number of profitable vertical farms, including large-scale farms in Japan has been increasing further.