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Jul 30, 2020
Agriculture is faced with the critical challenge of reducing pesticide use, improving water efficiency, and building a food system that is resilient to climate change all while delivering nutritious affordable food for the masses. In this episode we sit down with Dave Chen to talk about the technology that his team at Equilibrium is betting their $1B+ fund on, a technology that is expected to deliver impact at scale, on all fronts– high-tech greenhouses.
High-tech greenhouses are extremely common across Europe. Meticulous optimization at the plant level has enabled 10 – 40x productivity increases with a laundry list of sustainability and resilience benefits. But these glass and steel mega-producers have yet to come to the U.S. en mass. Equilibrium Capital is fueling a movement that will enable a new era of precision agriculture with sights set on solving some of the industry’s most pressing issues.
Dave Chen is a pioneer in the sustainable investing space and founder and CEO of Equilibrium Capital.
Borna (ClimateAi) 0:03
This is agriculture adapts by ClimateAi. Every week we speak with industry leading executives, farmers, and academics to get a 360 view of how the agriculture sector is innovating to stay ahead of a changing climate. I’m your host Borna Poursheikhani. And I am your co host Himanshu Gupta. We’re a team of climate scientists and agriculture entrepreneurs trying to make farming more resilient, profitable and equitable as we transition to a new age of agriculture. This podcast is our journey as we explore the hurdles and opportunities that lie ahead for the industry that feed the world. With us today is David Chen, founder CEO and Chairman at Equilibrium capital and impact investing firm that manages over a billion dollars and is laser focused on sustainable agriculture, energy, water and waste. David is one of the leaders in the field of impact investing and has really done a lot over the years to show the world and more tangibly show institutional investors. That is folks with With no 10s to hundreds of billions of dollars that they’re looking to invest, showing them that, you know, hey, sustainable investing is actually just plain old good investing. So equilibrium capital, big plays in sustainable ag. And from what I hear you all, don’t take your research lightly. So very excited to dive into the trends and opportunities you see in the ag sector and, and what that means for our food system for farmers and for our health as eaters. David, thank you for joining us. Hey, thank you very much. Look forward to this. So David, can you tell us a little bit about your journey and what ultimately inspired you to create equilibrium capital?
David Chen 1:36
Yeah, I had spent about 25 years in high tech in almost every aspect of it, founder of companies and the venture capital world, just the whole thing and about 2006 I decided it was time for a change. And by then I got to know a tremendous number of entrepreneurs that were quote unquote, in the sustainability area and One of the things I noticed was that at the end of the day, these were just great business people thinking about solid businesses that they were building. Almost all of them were performing at the upper end of their categories. example would be, for example, new season’s grocery store, which was one of the 13 store chain that was, you know, at the uppermost end of per square foot sales, and they were doing it with sustainable practices. There were farms that we got to know that were of significant sizes, you know, 10 20,000 acres practicing sustainable agricultural practices. And again, at the upper end of productivity at the upper end of generating great returns, and doing it by doing the right thing for both society and for the environment. And I sort of stepped back and, and said, Hey, is there an opportunity here to reframe the issue and remember, this is the time of Al Gore and Inconvenient Truth? And is there a way to reframe this as an economic driver of value and that part of the value was a social and environmental value.
Borna (ClimateAi) 3:06
I mean, just to dig into that a little bit further, you know, what kind of an organization is equilibrium capital? So you guys are managing a ton of money, how does that money get invested? What kind of decisions are you making? And what types of trends are you ultimately betting on?
David Chen 3:20
So, at the heart of our company, the the easy way to explain what we do is number one, we’re an investment manager. We have three core things that we do we treat sustainability as a economic advantage. And so at the heart of it, our company is a value chain analyst. We’re always looking for where in the value chain, either driven by external forces or by internal forces to the industry. Is there a shift in power structure, consolidation, aggregation, etc. And when there’s a shift, there’s always economic value that that gets won or lost or redirected. The second thing that we do is we express that insight about the value chain. In real assets. Real Assets are exactly what they sell. They’re real, tangible things like building land force farms, a power plant is a real asset. And so that’s how we do it as we express that insight in the form of real assets, portfolios. And then the third thing is, we founded the company to serve institutional investors. And that would be typically pension plans, sovereign wealth funds, endowments, and foundations. And typically, these are institutions that as you pointed out earlier in your your introduction, are anywhere from 10 billion to $500 billion in size, and they have long term obligations, and they have widely diversified portfolios. And so we find it in some ways easier to serve that that client base.
Borna (ClimateAi) 4:56
Yeah, and I want to dive into sort of the agriculture side of things because you You guys are doing some pretty innovative and interesting stuff in the ag world. But just be curious to see, before we do that, what role did the institutional investors themselves have in your investments? Because if you think about sustainability or ethics in general, a lot of it can be subjective. So I wonder if Are you trying to fit these things to different modes? Or is it really just going by equilibrium or some larger standard?
David Chen 5:22
You’re asking a very important question. And that is that number one, what what is known as a discretionary fund manager? In other words, you invest and due diligence us for are we historically a good manager, then you do diligence us for the validity of the strategy that we’re proposing? What’s the investment thesis does it hold up? And you’re typically the way we manage money you’re signing up for anywhere between 10 years or upwards of 15 years or more of being part of our investment portfolios and part of our investor base The question you though asked is a little bit more subtle than that. That’s that’s how we manage money. Our investors, by and large, and the reason that we chose institutional investors early on in our fund life in our company life was that the money tends to be very focused on is the strategy. Does the strategy Make sense? And when we got started, I would say very few institutions serve an impact or a sustainability carve out very few of them. They were just plain vanilla investors. And the reason that we focus on sustainability is an economic advantage. And that is a shift in the value chain was that we were trying to appeal to institutional investors. This is just good investing. There’s no save the planet. You don’t have to be quote unquote, an advocate for climate change. You just have to see that sustainability is economics. And for us, that became a Very important argument to be made to our investors. And so that’s historically how the institutional investors look, is it just a good investment over the last two, three years, and it’s accelerating? Almost every one of the large institutions, though, has adopted an ESG, environmental, social governance overlay protocol and their investments across their entire portfolio, or a sustainability overlay or a climate change overlay. Now, one of the things that’s really important is because we’re dealing with institutions that have I mean, think about a pension plan, pension plans got a 3040 year obligation to a teacher or to a Department of Motor Vehicles worker or to a telephone utility repair person. That long term obligation means that the way they manage those portfolios is not just fiduciary. It’s got to be managed for the long term and for the long term risk, and so when we talk to our investors, they rarely talk about sustainability in words like responsibility, they talk about it in terms of risk, and the time length of the risk that they’re managing. And so that’s generally the way that that we make sure that we interact with our clients. And so the move towards climate, the move towards sustainability is almost always in the context of risk and opportunity.
Borna (ClimateAi) 8:26
Yeah, that makes sense. And that, I mean, that resonates really well with us as a company to like, we like to position sustainability, resilience and profitability all it’s really, you know, three sides of the same really tool that we’re we’re trying to push forward here. What are some of the big insights that you gained that caused your team equilibrium capital to go heavily into the domain of agriculture,
David Chen 8:47
and it’s a very basic idea, and that is that what we saw was an increased focus in agriculture on the availability of water, the use of water Fertility of the land, the sustainable practices, we also saw a discontinuity taking place and where value was created in the agricultural food chain. We saw climate having material impact on it. We saw technology in very specific ways changing the way we did things and agriculture, which then biased towards capital infrastructure being critically important. And we saw that the end products of that food safety, food security, resilience of the supply chain, the availability year round of high quality, fruits and vegetables. We saw all those trends across almost every part of the value chain. Since we got started, I would say that we have learned a lot and we’ve gotten much more clear of clear eyed about the kinds of things that are happening and so oftentimes these days I’ll, I’ll make the observation That, where we grow our food, how we grow our food, where we get our food, and what we are eating are all simultaneously in a state of flux at this point. So about four or five years ago, we made the observation that as climate, it’s funny, I mean, it’s so obvious that ag is depend upon climate. But I don’t think people spend enough time actually thinking about all the mutations of climate and the permutations of climate as an impact. It impacts labor. And I don’t think people really understand that. If it’s 45 degrees centigrade outside, it’s really hard to get someone to work outside, and they’re really not as productive. And it can be a health danger to the person. So the idea that your workforce is maybe going to migrate out of your area, or maybe not as productive for maybe in danger. becomes a real risk factor and business risk factor in the consideration. The second aspect of it is, climate is much, much more nuanced than you think. It’s not just Hey, it gets hotter. It includes things like when does the temperature or the humidity or the sunlight change during the time of year and the time of day, because you assume in a region, especially in agriculture, that you’ll get a general pattern of sunlight rain or cloud cover during the year and patterns during the year. Plants adapt to that. humidity is a huge issue, the percentage of cloud versus sunlight, the amount of rain and when it rains, does it rain when you need it most? Or does it just make it wet and run off to the ocean trade routes, I mean, if your trade routes get flooded, or snowed in or ocean routes, that that’s a dramatic impact on on agricultural global trade, productivity and yield plants. You can see the charts of corn, for example, how temperature variations and as it gets hotter, the plant itself shuts down. And and then the last is, as an investor, we’re always looking at things like tcfd in the two degree four degree scenario for risk analysis, and how much resilience is there in the asset that we’ve invested it. So whether there’s a huge aspect of this and so as we looked at the future of agriculture, we took all these observations and it became very obvious that greenhouses and the broader area of controlled environment agriculture, including vertical farms and indoor growing, were going to become an increasingly important factor globally in the ag picture. Europe was already about 50%. And we asked the question, how come North America has very little All right, and it’s not even really a huge factor. And aside from the Clintons of the world that got a lot of high tech attention. The reality is that the substance of our food system, we weren’t seeing that. And we had to ask question, why is it so predominant Europe, not a factor here. And we came to the conclusion that we were going to hit the knee of the curve, and that it was a great time developing an expertise, a network, in a great time to enter and literally be the first entry.
Borna (ClimateAi) 13:25
Hmm, interesting. So the thought was that we are at the inflection point, Europe has already seen it happen. They’re operating with a ton of these greenhouses, particularly Nate, Netherlands and Spain are doing a ton with greenhouses, and that it’s basically inevitable for North America to go down the same route. And yeah, I completely agree. Climate change is changing the paradigm of how we grow crops around the world. It’s changing where we can grow certain things, how we need to be breeding crops. And these greenhouses, I just want to point out, these are not typical greenhouses that someone might be thinking of. It’s not like you have like a tent in the backyard that you know that I had that I had to Growing up, these things are like, Yeah, can you just paint a picture of what these things actually are? Because they’re no joke.
David Chen 14:05
Our largest single structure greenhouse in the United States is in Cambria, California, it’s 125 acres. It’s a quarter mile long. For those of you with a real estate background, it’s 5 million square feet under glass and steel. They produces approximately 40 million kilos of food a year. It generates about 100 billion dollars of revenue a year. And 40 million kilos translates the 20 semi trucks leaving the farm the greenhouse every morning. So this is not farmed before. This is not a farmers market. This is 20 semi trucks headed to a Walmart or to a Costco distribution center. And it is filling stores with greenhouse grown peppers, cucumbers, tomatoes, and then we’re early on In the cycle but but you’re gonna start seeing greenhouse grown, leafy greens, including all the lettuces and all the way through to spinach. And this is going to have a profound impact as well on the on the basket. And then the third area is greenhouse and indoor grown berries. And we’re just seeing the beginning of that cycle as well. What makes something
Borna (ClimateAi) 15:23
good to be grown in a greenhouse like obviously, we’re tackling the things right now in the earlier stages of greenhouse development that are, you know, more suitable to be grown in greenhouses and then we’ll bring in more crops as time goes on what makes something more suitable to be growing in the greenhouse
David Chen 15:37
look, every time that a new technology enters the marketplace. And and the great thing about the high tech industry is that as a as a professional in the in the high tech industry, because the cycles are about 10 years long. The complete lifecycle for for new technologies In his short career, 20 year career, you get to see three or four life cycles and it’s very predictable what happens in technology that is that the first wave of new technologies, you do what you did yesterday and the last technology faster, better cheaper and and and about year three of the new technology somebody wakes up and says, Wait a minute, what can I do with this new environment this new tech that I couldn’t do before so for the first wave of electric cars are basically automobiles that ran out of battery but but you see with the evolution of it right, which is with GPS and with AI and expert systems, we move into self driving. Right? And and then we’ll buy self driving we’ll move into the new model, which is maybe not ownership but personalized travel one. And and that completely changes both the model and the paradigm and the usage and a lot of it is just the evolution of the technologies and the compounding of technology. Use that create new applications. The same thing happens in a greenhouse, first generation of greenhouses a very simple concept. Wow. Since I get to control the climate, I get to grow 365 days a year. So let’s take what I grew outside and grown inside. And that generally is what happened with the tomatoes. The second way that happens is now wait a minute, if I can control the environment, what is it that I can do differently about the varieties and the characteristics? Can I now grow vegetables and because these greenhouses can be located regionally, and oftentimes in regions that may not have been great climates or opportunities to grow outdoors? What can I do if I’m closer to the market? What can I do if I can control the climate? And so let’s just say for example, that I can grow strawberries indoors. Take for an example if the strawberries that we’re used to for the last 20 years, 25 years Yours were grown with a very simple idea. I can grow it in California and truck it to New York City. And you’ll actually have a good or decent experience. That was it. So it was built for the highway. Right and and and to do justice to that strawberry, it wasn’t that they wanted to sell you a crunchy strawberry it was that I wanted to get it to New York City. So that meant seven days, eight days. All right. Now what if I changed the whole paradigm so that the strawberries grown closer to usage? What kind of new varieties that explode in flavor in sugars and things like that can I grew up and if I can do that close to the point of usage. What if I grew a strawberry that was at peak ripeness harvested at at peak ripeness had a variety that had beautiful color, beautiful flavor, complexity, and high sugar content? What if I made a yogurt that was just strawberries and milk in it? Had no additives, no color, no flavor enhancement and no sugar. It was just a poped, strawberry and milk that changes the game and strawberry yogurt. And so this is the evolution that’s starting to take place in greenhouse growing.
Borna (ClimateAi) 19:17
Yeah, first and foremost, I would definitely buy that strawberry yogurt. That sounds delicious. But yeah, it’s interesting when you think about if you have the controlled climate, which you do in these greenhouses, you’re controlling the light, you’re controlling the temperature, the humidity, the amount of carbon dioxide in there, everything is controlled down to a tyranny of data running off all this stuff. But when you’re doing that, you don’t need to worry about the same problems you’re used to. So if you’re thinking about breeding breeders have to try to navigate a ton of different traits that they’re trying to optimize for. You know, yield is always a big one. You might want pest and disease tolerance. But if you think about a controlled environment, I would imagine that pests and disease is not as much of a problem Am I correct in assuming that
David Chen 19:55
so there’s a there’s a cleanliness that takes place, but there’s also a culture of clutter. leanness and so it’s not unusual that if I were to invite you on a tour of one of our 60 acres or 120 acre facilities, I first asked you to put on what effectively looks like a bunny suit. I’d asked you to put covers on your shoes, I would have asked you that your shoes go into a antiseptic bath. And I would ask you to wear a hairnet. And so the idea of pathogen management is hugely important. If you actually go into a greenhouse, one of the first things that you’ll notice are bee boxes. And there’s a bee service that we almost all contract with. And and and that’s basically bug warfare. And so we’re using good bugs and the bees to be part of the internal controlled environment. And so in our leafy greens greenhouse, in a very real way, we’re more organic than organic in the sense that that the Leafs are either no residual or low residual In other words, if you didn’t essay on the leaf itself and plucked one off of one of our ponds or one of our conveyors. There’s literally nothing on it, right. And so so these are environments where there’s no spraying. Everything is generally coming up through the irrigation system or the drip irrigation system. And we’re active users of biological systems as part of control mechanism. This has both impact on the food, but it also has a huge impact on workers. I think you probably know that in places like Fresno, in the heart of California’s agricultural community, asthma is rampant, and the air quality is rapidly an issue and a large part of that is the very active use of sprays and of chemicals, whether that’s good or bad or not. We do know that asthma is a problem and in a greenhouse, it’s a no spray environment. And then everything is usually conducted through the drip irrigation system.
Borna (ClimateAi) 22:00
Yes, which means huge water reductions, right? Like I was reading that a lot of these greenhouses are seeing like 90% reduction in water consumption and little to no pesticide applications, which is kind of a game changer when you think about people paying a premium for organic. But it also leads me to want to ask about the pricing of these crops that you’re producing in the greenhouses, so it’s more organic than organic. is the goal here to be collecting a premium for this the super clean, super tasty food? Or is it really to just create a crop that that everyone can consume for cheap? Because one of the other sides of greenhouses and the reason why greenhouses are so on the rise in North America, and so prominent in Europe is because they see insane increases in productivity, right? So is the goal to deliver a product that everyone can consume or to create a premium product?
David Chen 22:50
So you mentioned two great topics there. One breath, I’ll tell you where we are as a company, philosophically. We think sustainability is an every person opportunity and every person issue. And because we’re Our objective is to create portfolios of assets that are literally literally in the billions of dollars. Our objective in agriculture is the brain, wholesome, healthy, abundant food to the fat part of the bell curve of population. And so I’ll tell you what got us compelled. To get started on this portfolio. Look, we had done all the we have done all the quantitative analysis, all the charts of the growth, the opportunity, we had convinced ourselves that we could get the price and most importantly, cost parity. When we walked into and had a long conversation with one of the head procurement officers of produce at at Walmart, and it’s important to understand that’s not that funny. Walmart is 22% market share. groceries in the United States. And and Kroger’s is about 20%. So between those two, you’ve got 40 over 40% market share of every grocery dollar. Yeah today. So the Walmart person is very important. And she said to us look, Dave, you need to understand there are very few people that will including on this podcast that have ever been budget shoppers. In other words, my shopper she was saying his average income or below average income in the United States which means that every time she puts something in her shopping cart, she’s taking something out. She’s on a fixed weekly or monthly budget. And so when and she was telling us and and we are tracking that across the demographics, but at average income and below, they’re trying to eat healthier, and they’re making produce choices. And so when that individual is bringing on board a snacking tomato, onto their shopping car, they’re taking something out. And for us, when we heard that, remember, one of the secrets of high tech investing is to remember, Hey, no one has the power to change markets really. But the small little high tech startup generally spots the changes in the market sometimes ahead of the large guys. And for us, we took that to heart which is, geez, I don’t know why this demographic shift is taking place. But of Walmart is telling us that the fat part of the demographic curve is switching to a better quality vegetable, a better quality tomato, a better quality cucumber, a better quality snacking, baby bell pepper, then we need to pay attention to that. And that was the single most important piece of feedback that convinced us to get into this game. And so to answer your question, no, this is not a premium goods we are trying to drive to cost parity across the ranges of crops. That would relate to the field field crops.
Borna (ClimateAi) 26:02
So basically it’s, it’s how can we produce these crops more efficiently so that we can reduce the cost and get produce to be cheap. So that people who are, you know, maybe on the SNAP program, which one in nine Americans right now are struggling with, with some sort of food security, and a lot of them are signed up for the snap programs, which is basically the new version of food stamps in the US How can we get those people to affordably be buying healthy produce, instead of you know, ultra processed foods, two liters of coke for $1, whatever it might be, using these productivity gains from the greenhouses to drop down the cost and ultimately fuel a healthier society. And I understand that correctly.
David Chen 26:41
I think we can solve part of that problem, which is to make healthy foods available across the United States or North America and shorten the supply chain. I think the last mile is still critically important. We could get great food but we can’t solve necessarily The food desert issue, right. But even there, I think we have some optimism. We had a conversation with the CEO of 711 pi, three, four years ago, about what role could they play their fresh section and their chiller section of bringing and making available, you know, very, very high quality foods like these tomatoes or blueberries or organic fruits and vegetables made available and and they clearly are going in that direction.
Borna (ClimateAi) 27:31
That’s good to hear. I wasn’t aware of that. When we think about the types of impact we can make. So you mentioned a few crops you mentioned, peppers, cucumbers, tomatoes, some leafy greens, some types of berries. But if we look at the broader agriculture production in the US, it’s largely dominated by things like corn, soybean, and wheat. Do we see those things ever entering greenhouses? What needs to happen in order to enable these ones to be Putting greenhouses and should they even be putting greenhouses? Or is it just, you know, there’s no reason to they’re doing fine as is.
David Chen 28:06
I’ll answer that two ways, I think you’re going to see more and more crops, the fruits and vegetables area, go indoors. So you’re already seeing melon production, blueberry production, strawberry production going indoors. We’ve seen successful trials of Madagascar, vanilla beans in greenhouses. If you go into Holland, you’ll see the development of what we call Asian vegetables. So an American diet of leafy greens is about six things. an Asian diet is upwards of 30. And you’re starting to see the application of greenhouse technologies and greenhouse environments to a whole plethora of Asian leafy greens, bok choy indoors and things like that you’re seeing living basil indoors. So increasingly, you’re going to see more and more varieties of things go Going indoors, including for things like example, there are now successful citrus and apples that are going indoors as well. Now, I think you’re gonna continue to see that take place. And I think you’re also going to see a difference in the word food security versus food sovereignty. And I think food sovereignty is the concept that that food reflects culture, that people are entitled to eat the foods of their culture, not just the foods and what comes out of a Silicon Valley thought, on on on nuvo food. And so I think that you’ll see more and more work on trying to bring this availability 365 days a year, I kind of jokingly call the greenhouse movement, the the ultimate bio and DIY, you know, I don’t care about soil. I don’t care about climate, I don’t care about geography. I bring my own, I make my own climate and I bring it to where I am I think the issue though, that you mentioned about corn and soy, and most listeners don’t have a mental image of how big corn and soy is, yeah, corn and soy is, is roughly 85 million acres each, and basically fluctuate about 5 million acres up and down. Depending on the market signals that are given. That’s a lot of land. And if you want to put a fine point to it about and everybody forgets that, that that kind of agriculture, soy, corn, sugar beets, you know, that kind of agriculture is actually destined for three things, food, fuel, and fiber. All right, and a huge hunk of what is used in food is actually livestock. And so so if you think about the vegetable protein movement, which is not about necessarily greenhouses, that’s a very different megatrend that has the greatest ability to impact the way land is used and what what we grow and how it’s used. Most people don’t know that most of the soybean of that 85 million acres is used for animal feed. Most people don’t know that upwards of 30% of the corn that’s grown his his fuel. bioethanol and then about half Actually, I’m sorry, but almost all the remaining corn that’s used. Yeah, yeah, we talked about how you know, cords, fruit toasts and all that most of that is actually animal feed. Mm hmm. All right. So, so of all the fields that you drive by in the Midwest, whether it’s soy or corn, almost all of that is going to either fuel or animal feed. Right. And so this alternative protein area, has the opportunity to actually shift that acreage, the boats much more so than than greenhouses. greenhouses is gonna be fruits and vegetables.
Borna (ClimateAi) 31:57
Yeah, nuts. That’s a whole separate can of worms. That will have to say for an entirely other podcast, but I’m curious, what is the versatility of these? greenhouses? So let’s say you’re growing tomatoes in one, you know, for a span of a few months, and then you say, Oh, you know what, I actually want to switch to cucumbers, I want to switch to blueberries, how easy is it to make that shift?
David Chen 32:20
So at a very conceptual level, what you want to do is optimize the greenhouse automation systems and the greenhouse climate management systems around the plant, right, so everything should revolve around the health of the plant. And so there is some flexibility in these greenhouses. So for example, what is known as a high wire greenhouse, which is most of the vine crops and that goes everywhere from cucumbers, peppers, over jeans, even hops, even the bad gas car, you know, vanilla bean, these are going to be things and tomatoes. grill in a high wire configured greenhouse. And so those are fairly flexible. You don’t want to make a lot of haphazard decisions, but you can redeploy the greenhouse. There’s another set of greenhouse architectures which are suited towards leafy greens. And these are usually conveyors or pawn structures. And those aren’t readily redeployable into the high wire crops. The strawberries and berries and other crops are going to be much closer in architecture to a high wire greenhouse. So in general, you have flexibility, you’re going to have degrees of flexibility depending on the classes of things that you grow in.
Borna (ClimateAi) 33:47
Got it. That makes sense. I want to sort of switch gears here into the business model and some of the questions around the finances and profitability of these things. How are you guys actually in With these greenhouses, are you purchasing greenhouses that already exist? Are you purchasing new land in ideal locations and partnering with someone else to kind of build the greenhouse and operate it? Do you have your own operational expertise in house? What is was equilibriums role and all this? Yes. To all of them. Love it.
David Chen 34:21
Now I’ll answer those. We’re an investment manager that prides itself in being an investor operator. So our strategy has been to believe in the Walmart story, which is that we’re hitting inflection, the demographics have shifted, and that we’re in a race to implement technology on a constant basis to increase productivity. So those are the condition statements that we believe our strategy has been to partner with the best greenhouse farmers, we call them operators. That’s greenhouse farmers that are ready to scale and to consume large blocks of capital to build more and more greenhouses, and who are technology adept enough to be able to consume and implement technology on a constant basis? All right, that’s a tall order. All right. And the field of greenhouses has shifted in the last, I think, very clearly in the last five years from incremental growth, you know, another five acre expansion, another five acre expansion, another five acre expansion, to now we’re building blocks of 50 acres, 100 acres. And just to put a price tag 50 acres translates to approximately 75 to $90 million and 100 acres is going to run us somewhere between 150 100 $80 million, of which half of that is technology infrastructure. It’s a energy layer, a water management layer, a climate management layer, there’s usually a light management and light spectrum management layer. And then lastly, there’s usually an automation layer. software and hardware, smart sensors, Smart Control Systems, smart valves, runs throughout the entire and those four or five layers that I just rattled through also has a profound implications for workforce. You’re now looking at a permanent agricultural workforce that is semi skilled, and you’re looking at a technician layer of skillsets. So when I say water management system, you should be thinking, Oh, well, that means that there’s a drip irrigation management engineer or technician, and at 120 acres, that’s a big building. That’s a lot of water management, right. And so you have multiple jobs now that are automation engineers or automation technicians. You have climate management. So when you walk into some of our greenhouses, you’ll see the equivalent of what is called the NOK network operation center, you’ll see a room full of screens. You’d think you’re in, you know, a Comcast or an at&t facility because we’re monitoring blocks of the greenhouse. We’re monitoring it, as you pointed out for oxygen for co2 content for humidity patterns for the microclimates that exists from one block to the next. And is there something wrong or did we do that on purpose? And so you’re monitoring all this and so the workforce absolutely changes. So so what we do is we partner with the best operators that are appropriate and ready for growth at this hundred million dollar block size expansion. We will do both existing facilities and effectively help the operator manage their balance sheet, or we will build brand new facilities. And so for example, as we speak today, we’re the largest set of construction, cumulative construction going on in the United States right now. One of our marquee projects is in Morehead, Kentucky. It’s a Exactly what you imagine in Eastern Kentucky, coal country, tobacco country, both are economies that are, you know, have been on the on a decline. And so you can just imagine the unemployment in those in those regions. And for us to be there to not just talk about low wages or low skilled jobs, but the talk about basically high tech farming and the need for careers in agriculture in a rural county. That’s a significant conversation. And so you asked, What do we do? We partner, we expand, we invest in facilities. At times we’ll invest in private equity, but we’re basically carving our niche in the expansion of controlled environment foods and controlled environment, agricultural growth,
Borna (ClimateAi) 38:51
and that’s great to hear. And then the question of labor is definitely an interesting one and one that I was thinking about a fair bit coming up to this, this recording with you Just thinking about what the role of the current farmer is in this new setup, and do they just get displaced? Or in reality, are we just creating new types of roles for a new era of farmers, we always talk about ageing farming population. One of the best ways to create new jobs is to create these these, you know, very techie skilled roles that, you know, someone who’s the son of a farmer might want to go out and study mechanical engineering doesn’t want to be a farmer anymore, but maybe now they’re getting pulled back in. So how do you guys think about the question of labor and the role of the farmer in this trend and in this progression,
David Chen 39:35
farming, it almost every society around the world holds a special place. We have an emotional attachment to land. We have an emotional attachment to nature. Almost every society around the world started with an agrarian economy. Almost everybody has a farmer somewhere. Two or three generations back. So farming is a very, I use the word romantic and rich with history topic. And I’ll say something that that may get me in trouble here. But asking how we get young people back in farming is the wrong question. asking how we create careers in agriculture for young people so that they can have a meaningful life, for their families for their careers, is the right question. And farming, whether you like it or not, is moving in that direction. And so, we see this as one of the trends that will allow rural America you know, we always talk about the decimated communities in rural America, and that leads oftentimes to social strife. And we see opportunities like this opportunities for value add within the community, opportunities for these kinds of technical jobs. meaningful careers as part of the next generation of rural future and in farming. So I’m sort of ducking your issue, which is that there’s always going to be a place for the Hundred Acre and 10 acre farm. But But farming, given the deed for food safety for logistics for automation, is increasingly becoming a scale game. And in a technology infrastructure.
Borna (ClimateAi) 41:34
Yeah. So each of these things getting set up in any location would be a huge opportunity for that region, bringing in all sorts of high tech jobs, but they’re also massive investments you mentioned, I think, what you said 75 to $90 million for a 50 acre plot of one of these things. Yep. So what is the path to profitability look like for each of these facilities? How many years does it take in order for us to hit break even On one of these greenhouses and then start bringing in profits after that point? Well, I’ll give you the simple answer, and I’ll give you the tough
David Chen 42:07
answer. Gotcha. The simple answer in greenhouses is that they are very, very economically viable. And oftentimes, when we go to a meeting with some of the largest operators of greenhouses, we’re the only ones flying commercial. So these are very economically viable investments. And on this podcast, I won’t go into the numbers. But the second question that you asked is much more fundamental. Look these things pencil, but it’s a very different business model than traditional field farming. And I’ll just the the the history of agricultural investing in the history of agricultural holdings is all About land. All right, and land in farming is oftentimes thought of as quote unquote, a repository of wealth. In other words, I own 1000 acres of Salinas. farmlands, which is beautiful. It’s worth $40,000 an acre. So at 1000 acres, I am $40 million of solid, you know, capital wealth. It’s not a synthetic, it’s not a stock, it’s $40 million of land. And, and so if I have a good year, if I have a bad year, I still have that $40 million of wealth. And land as an asset has historically always been appreciated, and always, almost always in excess of the rate of inflation. So long term over long periods of time. It’s been a great investment. But it’s a repository of wealth. And you know, that old joke, land God ain’t making any more it. All right? Well, that’s exactly the right way to think about nothing about a greenhouse, I’m going to ask you to put a million and a half dollars to two and a half million dollars per acre on that $40,000 acre. And oh, by the way, I don’t need that fertile soil of Salinas. So I can buy the crappy land at five grand an acre or thousand dollars an acre, put my million and a half or two and a half million dollars on it. All right. Think about what I just said. What I just said is that your store of wealth is now de minimis compared to the cap x that’s necessarily sitting on top of the land. Think about what else I said, what I’m now managing, not a intrinsically appreciating asset, I’m now managing a depreciating means of production. Right, and one that needs lifelong maintenance. Right. So so the entire business model is changed from I’m a caretaker of a repository of well to I’m an operator of cap x. Yeah, and the cap x dwarfs the underlying land value Completely different for the investor. Completely different for the honor.
Borna (ClimateAi) 45:04
Yeah. And as an investor or an operator, what are kind of the key risks that you need to look out for in these things? I would imagine it’s not all sun and flowers here. There’s there’s some level of risk that you are taking on as there is with any sort of investment. What are the key risks? What are the key downsides that could potentially happen with an investment in greenhouses? Alright, so, unfortunately, I’m putting I’m putting you in a car.
David Chen 45:25
No, no, no. So so people get seduced, and you see this all the time in your company. They get seduced by the fact that wow, gosh, there’s this climate AI company. That’s a
Borna (ClimateAi) 45:43
look at that. Look, tell me everything
David Chen 45:45
I need to go. Okay. And it’s all AI now and it’s all expert systems, and they’ve got perfect data. And so when I hear the words controlled, environment, agriculture, Sure, I think wow, I build this building and there’s three pipes on one end, I pour a little water, I pour a little fertilizer in it, pour a bag of seeds in, and there’s a pipe at the other end and tomatoes pop out,
Borna (ClimateAi) 46:13
shoots them straight on the wall.
David Chen 46:16
And, and all I can think about is, this is great, the computer does everything, I can go home and sleep. Alright. And I think the guys that are the operators that we fear the most are the ones that read too many articles about high tech farming, and believe that the ability to manage disease, the ability to manage people, the ability to actually manage the climate, and the learning that’s necessary to be able to manage change and risk. You know, a lot of Silicon Valley likes to say things like all farmers don’t get it. You know, they’re there. They’re just risk adverse Well, if you are a farmer and almost every risk is a downside risk, you know, between a bugs pestilence, locusts, rain at the wrong time of year hail, lots of things you can’t control. I bet you’d be pretty risk adverse to, because you spend most your life as a risk manager. Yeah, right. And so so if you don’t have a healthy respect for the fact that even in a greenhouse, even with all the computers, even with all of the climate management and all the AI that’s starting to come at it, that there’s still a lot of risks that you’re managing and heuristics that you have to learn. Just remember, it’s a two edged sword. I’ve got a facility that’s 120 acres, and 150 100 and $80 million in value. It produces 365 days a year 20 semi trucks leave every day. Realize if I make a mistake, I have a huge friggin mistake and it keeps producing that mistake and keep repeating it over and over until you get on top of it. So that means you Then next week, two weeks a month before I get on top of my mistake, those 20 semi trucks are showing up every day and I’m shipping crap. Yeah. All right. So you’ve got to have a healthy respect for the fact that these are operationally intensive. It isn’t free pipes on one end, and and the tomatoes shooting pipe at the other end.
Borna (ClimateAi) 48:17
Yeah. Yeah. And I mean, there’s there’s a ton of value that greenhouses in general, are providing to society. And I’m wondering, given that it’s pretty early on in the development process, at least here in the US, are greenhouses being rewarded the full value that they’re offering to society? And by that, I mean, you know, they’re consuming less water, they’re potentially freeing up land to be used for other purposes. Are there policies in place or are there rewards that are given or are they simply negligible or non existent today?
David Chen 48:50
In the US, they’re very small voice and you have to understand that our USDA policy is driven by 85 million acres of soy and 85 million acres of corn. And so there’s not much attention being paid to this area. However, the good news is that our investments are based on economics and economic viability. And so we really don’t ask for or need a lot of government intervention, or a lot of government subsidies or grants at this point, these things are economically viable.
Borna (ClimateAi) 49:21
Yeah. The other thing when I think about, you know, rewards or potential risks is, these things are dependent on an energy source coming in to be able to manage a lot of the technology that’s going on inside. So what sort of infrastructure Do you have set up? A lot of these things have, you know, solar panels on them? Do they have backup generators? And how, how much risk is there for if the power goes down? Like are these things just done, you know, if the power goes down for two or three hours, or can it come back on and they’ll they’ll bounce right back.
David Chen 49:52
They’re very dependent upon the availability of energy when you need it. And so it’s not unusual that you In our greenhouses, we will operate our own codegen and CHP units. It’s not unusual that we will not only have solar will have solar storage, it’s not unusual that we’re making full use of available heat sources etc. Our facility in Mona Utah is actually uh, attached to a Berkshire Hathaway energy 500 megawatt gas fired power plant. And we are literally stripping the flue gas coming off the power plant the waste and the waste that’s coming off there. And then allows us to actually strip hot air which we convert to hot water, and it allows us to strip the co2, which may surprise listeners. This is your third grade science teacher telling you that plants breathe in co2 and exhale oxygen. That’s exactly what we’re doing. We’re breathing in to the greenhouse, the co2 coming off the The natural gas power plant, we’re actually doubling the daytime co2 during the photosynthesis period. And using it as effectively a plant’s precursor for growth. And then we use the energy available from the hot water as part of our h PAC System. So so we’re very mindful of the energy footprint. And we’re also very mindful of how we can use expert systems to actually decrease the amount of energy dependency that we have per square meter of the greenhouse.
Borna (ClimateAi) 51:34
Yeah, what does that actually end up looking like? Like, have you I’m sure you guys have actually have you penciled out the numbers for what the you know, co2 equivalent emissions are for a pound of some crop relative to grilling out in the field because obviously, you’re much more productive, but potentially consuming a lot of electricity or a lot of energy. So has that analysis been done?
David Chen 51:55
Yeah, we have done analysis that we’ve supplied some of our investors’, which is the full court systems use of bt EU, between a field crop and greenhouse crop, including the food miles. But more importantly, actually for food shrinkage. In other words, the spoilage that happens on every path along the way of field crops. And then the advantage of greenhouses with just in time delivery, near to your consumption source, greater shelf life, etc. And then compared the lifecycle use of energy in that footprint. And, as you mentioned, we’re significant significantly lower in water consumption, upwards of 90 95% in comparison to field cropping. But in energy, we’re approximately on par with the use of energy to field crops when you take that full lifecycle view of it.
Borna (ClimateAi) 52:55
Interesting. Yeah. And that makes sense. And just one more one more question here before I let you go How has COVID changed your current operations or the way that you think about resilience with a lot of these greenhouses?
David Chen 53:08
So I’ll take apart your question into two pieces on a on a human level. When COVID really started hit in the first week of March in the United States in the awareness of it, we swung in with a set of risk metrics that we distributed to all of our greenhouse partners operators. To monitor the exposure. We also pulled together all of our greenhouse operators into co working groups, where they shared best practices and what they were doing inside the greenhouse for the protection of the workers and the protection of the crops. And so that was one of the first things we did was to swing out with a pretty comprehensive set of best practices. Knock on wood. We know it’s going to happen COVID outbreak in one of our greenhouse projects, but because of the size of these things, because, again, we don’t get to show pictures on this podcast. But these things are seven, generally seven meters. So 22 feet high, a large open spaces, air circulation. So generally and by definition, given the productivity of these facilities, our workers are spread out. So you might have a half dozen people per acre. In a lettuce greenhouse, we have one person per Hector, the one person for two and a half acres. So we did put in place these practices. The supply chain question that you asked, however, is interesting because it became very apparent to certain countries around the world that food security was no longer a conceptual word. It was now a national story. Security word. And it was now a civil unrest word. Right. And so we’ve seen within the last three months, several countries actively asking us to engage with them at the level of architecting, a food security architecture for their country’s food, but specifically produce and fruit supply chain. we’ve inserted in many of these discussions because many of these countries are non us countries. we’ve inserted the concept of food sovereignty, front and center. We’ve asked one Asian country Why would you eat a diet that an American high tech company prescribes, when your country and your culture already has a heritage of eating plant protein because of Hindu Buddhist Muslim Heritage’s were these are not called All proteins, they’re just called protein for more commonly, food. Yeah. Okay. And so why would you adopt a paradigm or framing of this? And why would you want to relegate yourself to just a tomato, or just a green pepper, when you as an Asian country, eat upwards of 30. And so part of your food security strategy and your must incorporate food sovereignty, and use these high tech tools to ensure that your country not only gets access to calories, but they get access to the food long term that your culture is built on? and expects?
Borna (ClimateAi) 56:42
Yeah, the issue of food sovereignty is also a really interesting one. And I’m curious if you hear any concern, or maybe you can just speak to the idea that you know, with large pools of money, there’s I’m not sure where the majority of your LPs are. Basically, your investors are From I’m not sure if it’s concentrated in certain countries, but ours are certain people concerned about essentially, foreign interests, owning their own assets
David Chen 57:12
is always concerns because as I said earlier, agriculture has a very important part of almost every country’s culture. It’s rooted in a land centric mentality. And when you think about critical foreign powers owning big parts of your land, it gets pretty complicated pretty quickly. Yeah. And, and so we’re always mindful of that. And we’re also mindful that countries are now asking the question of how do they control the food system? So we’re going to see both sides of that. We’re going to see an inward looking at a country level, which is what do I want to do about what we do within our country, and we’re going to see countries becoming increasingly sensitive about other countries capital buying up their land, the good Good news is in a greenhouse. I can make the argument, well, it’s not really land because there’s not a lot of land. It’s just another ball, you know, or it’s just another build office park. And I mean, this isn’t this is not even just like an equilibrium capital issue. This is just in general in the investing space. Even in the US a ton of land is owned by quote unquote, foreign interests. So it’s just an interesting topic to think about. If you could give one piece of advice to our listeners who are interested in breaking into either the impact investing space or in sustainable agriculture in general, what would that advice be? stay humble. If this were easy, somebody else would have done it. Yeah. All right. And I’m not a huge conspiracy theorists. You know, it’s not that 30 years ago, they told us that butter was bad because it was some margarine conspiracy. It was because at the time science thought that was the case. And now they’re telling us Hey, butters, not so bad for you. Right? And and when you deal with this stainability of any sort, you have to remember that it’s the intersection of economic systems, human behavior systems, natural systems. Right. And, and the truth of it is, we don’t know. Yeah. Right. And so stay humble. And stay humble in I would call it the eastern sense of the word humility. Which is, constantly be learning. Know what you know, what you don’t know, know your place. And be comfortable enough with what you do and who you are to be able to iterate. We are messing around when we talk about sustainability and the intersection of complexity. And we just don’t know.
Borna (ClimateAi) 59:42
I love that that was a great answer. How can people support your, your work before I let you go here, David,
David Chen 59:48
no matter what you do in life, and no matter what you do in business, it’s all about the team. It’s all about the people. We’re looking for the sharpest tools in the shed that have huge amounts of competence and are humble, tall order. All right.
Borna (ClimateAi) 1:00:05
All right, David. Well, thank you so much for your time. This was a fascinating episode. I personally learned a ton. And this clarified a lot for me with with a lot that’s going on in general in the Sustainable Agriculture space, but more specifically with a lot of these high tech greenhouses, so thank you for your time.
David Chen 1:00:19
Thank you so much.
Borna (ClimateAi) 1:00:22
Hey, everybody, thanks for listening if you have any feedback, or you’d like to add your own two cents on the topic discussed today, or if you’ve just got your own ideas about something that we should discuss in the future, please feel free to shoot me an email at podcast at climate data AI. At its core. This podcast is just a way for us to learn and we want to share our learnings as we go. So we’re always open to building on these conversations and hearing new perspectives. Thanks for your support and see you next time.
CEO and Chairman of Equilibrium