The Supply Chain Behind Indoor Farms: An Upcoming Strategic U-Turn?

Operations & Supply Chain in Indoor Ag is critical both in terms of the crop growth process and the construction of new facilities/solutions.

Since the pandemic, transportation costs have increased both nationally and internationally driving the cost of consumables as well as the costs of goods sold up as companies started to acquire inventory for up to a year of operations.

For many years, companies have increased their vertical integration, acquiring suppliers in order to secure their operations, improve their innovation, centralize decisions, and leverage their market share. Nonetheless, this comes at a cost at a time when the industry is hit by exponential costs.

Increasing Transportation Cost

Both from a national and international perspective, transportation costs have increased leading to increasing prices in supplies as well as increasing costs of goods sold. Even if the rates have eased since reaching their peak in July 2022, the U.S. freight rates have increased by more than 20% Year-over-Year and Truck prices doubled since 2019 due to a lack of truck drivers, a steady important demand as well as, rising fuel prices have maintained these higher prices.

From an international perspective, the Freightos Baltic Index (FBX) global container index reflects the surge in container prices experienced throughout the economy with prices easing since March 2022 and reaching USD 3,450 on October 14th.

Companies across the sector have been affected by these price surges as the looming fear of a lack of inventory and delays in upcoming projects forced them to build up 3 to 6 months’ worth of inventory in case.

“Though we haven’t experienced important delays in the projects we had, we did experience an unprecedented surge in various consumable prices and decided to pill-up our inventory ensuring we had 3 to 6 months of inventory” Commented Donald Taylor, CEO of AmplifiedAg

Other companies such as publicly-traded indoor ag companies had to revise their financial outlook and full-year guidance for the year. Indeed, AppHarvest announced in its second quarter ending results that they expected to be “closer to the lower end of its guidance range” with a net sales outlook of USD 20 to USD 25M, their three new farms expected to be operational by the end of 2022 may be subject to “potential supply chain or delays affecting the timing of commercial shipments”. This had for effect to increase their full-year estimated loss to a range of USD 80 to USD 85M driven by supply chain disruptions.

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