Vertical Farming

Climate change and Russia’s invasion of Ukraine have exasperated issues within the food supply chain. Food security has greater importance at a time of rising food price inflation. At the same time, more consumers are aware of the impact of their shopping habits on the planet, while the businesses that supply them look to offer them more environmentally friendly solutions. Companies are also accelerating Environmental, Social and Governance or ‘ESG’ policies – considering a business’s impact on the environment and society.

One fledging sector looking to expand rapidly upon these trends is vertical farming. The Jones Food Company (JFC) has just opened a new specialist innovation research centre in Bristol to discover more foods suitable for vertical farming. Initial crops have tended to be herbs and lettuce with a view to expanding into fruit such as strawberries and raspberries.

Vertical farming involves growing fresh produce indoors in hydroponic farms – plants are grown without soil, no chemicals, with 90% less water and potentially using renewable power to mitigate higher energy costs. Vegetables in a field would take up to nine months to grow, whilst the JFC facility can produce 12 crops a year.

JFC opened its first hydroponic farm in Scunthorpe, North Lincolnshire, which supplies retailers with fresh basil. It has a new vertical food factory under construction in Lydney, Forest of Dean, Gloucestershire which is due to open in October, with the first produce expected to be ready in December. The new facility, at 148,000 sq. ft. of growing space is three-times the size of the existing site and covers the equivalent of 70 tennis courts worth of growing space.

The UK currently grows less than 50% of its vegetables and 20% of its fruit. Increasing food security while reducing air or road miles transporting produce to help the planet sounds a ‘no brainer.’ The government is trying to support game-changing innovative technology such as multi-acre glasshouses and vertical farms and last year launched a £270m dedicated fund to help farmers innovate and invest in sustainable farming practices. During the Conservative leadership race, Rishi Sunak has also vowed to prevent agricultural land from being covered with solar panels to ensure more land is available for crop production.

Our farmers face a wide range of challenges from climate change causing drought to Brexit. To compound matters, last week the UK’s last remaining fertiliser plant and carbon dioxide producer announced it will halt ammonia production. Citing rising energy costs making it uneconomic.

Due to the drought and shortage of labour, it sounds as if we are going to have to get used to buying smaller, wonky vegetables!

What have been watching?

Concerns about the risk of global recession continued to overshadow markets following the publication of the latest ‘flash’ regional business activity indicators. Another new high in benchmark gas prices added to the concerns for Europe. Fed Chair, Jerome Powell’s latest speech has added to these concerns as he said that “restoring price stability will likely require maintaining a restrictive policy stance for some time” and “is likely to require a sustained period of below trend growth”.  This is also expected to “bring some pain to households and businesses”.  This Hawkish speech saw bond yields rise and equity markets fall.

‘Flash’ global manufacturing and service activity indicators for August showed all economies signalling contraction with a reading below 50. Japan’s composite (manufacturing and services) index was 48.9. the EU composite index was 49.2 and even the US composite index was 45 after a very weak reading from the service sector.  The UK’s composite index remained marginally in expansion territory but suggested the weakest growth in 18-months.

Last week, marked the 6-month anniversary of Russia’s invasion of Ukraine. The arrival of long-range artillery and HIMARS rocket systems from Western partners has allowed Ukraine to blunt further Russian advances in the Donbas region and these have also been used to great effect to hit Russian bases, ammunition depots and bridges around Kherson. Having reached something of a bloody stalemate, reports are now emerging that Ukraine has started its long-awaited counter offensive to re-take Kherson. However, given spiralling energy costs and the economic pain, will support for Ukraine weaken in parts of Europe this winter?  In the meantime, one positive development is that Ukraine is on course to ship nearly as much grain this month as it did before the Russian invasion.

Gas prices have continued to rise due to the proxy economic war being run by Putin. National Grid has warned the energy crisis could last three years. Many small businesses are now starting to be squeezed hard between falling consumer confidence and higher energy costs. There are some interesting proposals around the UK energy price cap. Some UK energy providers have suggested a cap on any further increases through buying 2-years gas now for £100bn with the UK government guaranteeing the power companies borrowing and these companies then getting the money back through bills over 15-20 years. A possible solution for the incoming Conservative leader?

Government bond yields continued to creep higher with the yield on German 10-year bunds at an 8-week high. The movement was even more noticeable in UK gilts, as investors re-priced the path of Bank of England monetary policy in response to higher inflation. UK interest rates are now projected to hit 4.3% by mid-2023 compared to 1.75% currently. There may also be some concern about the UK’s financial health due to the funding costs of index-linked gilts and the costs of benefits as inflation rises even higher. Credit ratings agency S&P has warned that UK government debt as a percentage of GDP could soon exceed that of Italy! This further emphasises the imperative of getting inflation under control.

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In the UK, one leading US investment bank is forecasting that inflation could touch a 50-year high of over 18.5% in January given rising energy bills. This is well above the Bank of England’s forecast of 13% although the central bank has been well behind the curve so far in the cost-of-living crisis. The ASDA Income Tracker reflected the cost-of-living crisis with household discretionary income estimated to have contracted by over 16% in July.

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China’s autumn harvest is under severe threat from high temperatures and drought, authorities have warned, urging action to protect crops in the face of the country’s hottest summer on record. The drought has also reduced hydropower generation causing power shortages.

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Brent oil recovered to $100 after Saudi Arabia hinted at possibly cutting production as the oil price was behaving irrationally. It was only a few weeks ago that they met President Joe Biden and confirmed their intention to increase supply! Given the weaker global economic outlook the oil price would be expected to retreat. Perhaps the Saudis are surprised by oil weakness given gas prices are rocketing upwards?

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Finally, the UK imported no fuel from Russia in June, for the first time on record. However, while most of Europe is trying to wean itself off Russian gas, it appears China is importing an increasing amount of energy from its neighbour. Russia is now China’s third largest supplier of oil while coal imports are at the highest level for five years. China has been taking advantage of discounted commodity prices from Russia to increase energy imports. As western manufacturers face spiralling gas costs, it looks as if China has a major competitive edge when it comes to energy supply.

 

Read Last Week’s Alpha Bites – The Battery of Europe

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.