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Kalera wilts like its lettuce: Is vertical farm investing a manure idea?

By Tim Worstall

09:43, 31 October 2022

Vertical farming
Investment fads: don't trust them, writes Tim Worstall - Image: Shutterstock

Kalera has been forced into an emergency rights issue at 13 cents just four months after its SPAC-driven arrival on Nasdaq.

This is wilting worse than the lettuce the company grows. That SPAC combination had a proforma valuation of $375m when announced by Kalera. The company was previously on Euronext Growth, before that on Merkur.

When it arrived there, it raised some $100m. Given that the current market capitalisation is around the $5m mark – despite having swallowed all that capital already – we might go on to say that it's a pretty manure idea.

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We might even be right too. Sales are of the order of $1.3m a quarter, cost of goods sold well over $6m and general and admin costs $24m. All per quarter. Forget manure: this company is pissing away capital at an astonishing rate.

OK, well, excrement happens in investing. But what we'd like to know is why? The answer, to my mind at least, is that everyone's believing the wrong bullshit.

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What the company does – or perhaps soon will have to stop doing – is vertical farming. This is the idea that we're running out of resources, the farmland's all about to disappear and we should, instead, farm food in the middle of cities – in buildings. This makes sense, perhaps, if you believe all the doom and gloom from the environmentalists.

To anyone else this is near insane. Now, clearly that means there's a difference of opinion here and one thing markets are excellent at is clearing up such differences. We measure by money. Does it work, does it not, the measure being whether the output is worth more than the input. Does it, in fact, make a profit?

Our answer here is no. So why does it still (occasionally) attract investors?

As I say, the answer lies in people believing the wrong things. It's not difficult to find people who will tell us the world is running out of resources. They are, of course, wrong. I wrote an entire book on why they're wrong about minerals. But they're wrong about farmland too. And about water. Worse, they get their economics completely muddled.

The basic rule here is that you always optimise for the scarce resource. Whatever it is that you've not got very much of is the thing you design the process to use not very much of. Seems obvious really. The computer you're reading this on contains gold but only a bit, because gold is expensive. Where gold could also be used we use copper, or tin, instead because they're cheaper.

Gold spot price chart

So, what are the big expenses in farming? Land and labour. Which makes one of the claims made by Kalera very odd indeed – for they tell us that: “using 97% less water and a fraction of the land traditional farming uses“.

This is insane. Irrigation water can cost $100 per acre foot in the US. An acre foot being enough to supply two households for a year – 325,000 gallons. That's not a scarce resource. Meanwhile, farmland in the US costs perhaps $5,000 an acre. We might think that's getting scarcer but in fact it isn't. Humanity is now using less farmland each year.

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And Kalera is optimising for these (not so) scarce resources by building farms in downtown Denver, Orlando, Houston and Atlanta. They're replacing rainwater, which falls free from the sky, with buildings and municipal water; and agricultural land that costs $5,000 an acre with land folk will pay to build skyscrapers on. This just isn't optimising for the scarce resources, is it?

Swallowing political Kool-Aid?

So, why? Well, Kalera and its investors have swallowed the political Kool-Aid. It's not just the Swedish high school drop out, there are entire political parties driven by this idea that we're just about to run out of everything. A contention that doesn't stand up to the analysis of spending actual money on it.

So, what's the lesson we should take from this? Well, one obvious one is not to send Kalera any money. We might look askance at any other vertical farming companies too.

The main lesson here, however, is that we shouldn't allow politics to determine investment.

Political enthusiasms come and go, and they're not always based on a rational appreciation of this universe. So, we should always check any ideas being presented for correlation with reality, rather than blindly accepting what's politically fashionable.

That means not using environmental, social and governance (ESG) principles as an investing guide for example. For that is a collection of whatever is politically fashionable and the most notable recent effect is that everyone who followed the ESG investment thesis entirely missed out on the fossil fuels boom. Well done there investment advisors.

SPDR S&P 500 ESG ETF share price chart

We can and should go further though. Politics believes that minerals are going to run out therefore we must recycle everything. It's also true that the current lithium price is nice and high.

But that doesn't mean that all lithium mines are going to succeed – on the very simple grounds that if they all come into production then lithium will be in oversupply and worth spit.

This did, after all, happen in the 2013 lithium boom and mines were going bust by 2017. So too with rare earths – they're not all going to succeed.  As happened after the 2010 boom, when Lynas needed to be recapitalised and what is now MP Materials (the Mountain Pass mine) went bust.

Precisely because investing has to meet that test of reality – does it work in a financial sense or not? We have to ignore politics when making decisions. Simply because politics just doesn't work to the same standard of proof, not even the same method.

Don't invest in something just because it's fashionable, even politically so, for neither fashion nor politics are driven by reality.

Markets in this article

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