The first few years of a new cannabis market are usually the most lucrative for a cultivation business. Typically, there is great demand and limited supply. New medical markets are met with a growing patient base, while throngs of customers line the sidewalks outside of adult-use dispensaries. In both scenarios, cultivation businesses that launch quickly enjoy early market share and high price points.
But as other licensees ramp up production and supply increases, cultivators may be forced to lower their selling price. However, growers can only cut production costs so far before the business becomes unsustainable. How do cultivators stay competitive in the face of increased competition? They future-proof their business.
Expand with greenhouses
Indoor cultivation carries the highest capital expenditure (capex) and operational expenditure (opex) in the industry. Capex costs can top $200 per square foot to build an indoor grow site, while opex costs can exceed $2 per gram. As competition increases, these costs may no longer prove sustainable. For future projects, commercial cultivators should expand through greenhouse production to minimize their capex and opex requirements.
Consider that roughly 50% of all dispensary sales are dried flower. The other 50% consists of extracted oils and products infused with cannabinoids and terpenes. These compounds are pulled from raw plant material — called biomass — which is a mixture of flowers, leaves and stems. The more biomass, the more oil can be extracted, and greenhouses provide an excellent option for high-volume production of cannabis biomass. Any imperfections in the flowers at harvest time are irrelevant since the essential oils are extracted, and the end consumer never sees the finished flower. In my opinion, for cultivators looking to remain competitive in the future, product destined for dried flower sales should be grown indoors, while everything else can be cultivated in a greenhouse.
Not only does it cost less to build and operate a greenhouse ($75 per square foot capex, and about 50 cents per gram opex), but it’s also much better for the environment. According to one report, for every gram of cannabis produced, greenhouses consume 26% less power and release 42% fewer carbon emissions than indoor cultivation facilities.
Leave CBD alone
Cultivation businesses should not bank on producing CBD for future success. Since CBD does not create a psychoactive high, it is easier in most jurisdictions to acquire a license to cultivate high-CBD plants, and the barrier to entry is lower. Most U.S. states allow for CBD cannabis production by growing hemp, as long as the finished product contains no more than 0.3% THC. Furthermore, CBD is currently being imported and exported freely from the U.S., and many countries allow the cultivation of hemp and the subsequent export of CBD.
Global production has relegated CBD to a commodity in a very short time. A year ago, U.S. companies were paying $6,000 per kilogram of CBD isolate, but today they’re paying one-tenth of that price. Scientists have even developed a method for producing CBD inside of the laboratory by using yeast to turn sugar into cannabinoids, and a Japanese company recently discovered a way to make CBD oil from orange peels. These methods will allow for faster production of CBD at a fraction of the cost of cultivating it. Why place your business at risk by operating in such a volatile commodity market?
CBD growers should consider switching to industrial hemp for seed and fiber production. Although these hemp plants are typically too tall to be grown indoors or in greenhouses, they can seamlessly replace most outdoor crops. Industrial hemp enjoys the same low barrier to entry and lack of heavy regulations as the high-CBD varieties most hemp growers are producing — but without the competition. Although industrial hemp was once an integral part of U.S. society, its cultivation today is practically non-existent.
Companies that emerge as pioneers in industrial hemp genetics, cultivation and processing will be rewarded with the fruits of first-mover advantage. So far, few have ventured in this direction. To date, only one large company has formally made a foray into the industrial cannabis space. Based in Austin, Texas, Collective Growth Corporation recently went public on the NASDAQ exchange and raised $150 million to pursue hemp-derived cannabinoid and fiber products. Cultivation entrepreneurs certainly don’t need that much money to pursue the opportunity. Still, the raise is proof of industrial hemp’s potential in the United States, and there are very few players currently in the market.
Invest in technology
Breakthrough technologies will drive the future of large-scale cannabis cultivation. As cannabis legalization spreads across the globe, growers will come under increased pressure to produce cannabis more cost-effectively while minimizing their impact on the environment. We already see this in Massachusetts. The state’s cannabis commission has placed a cap on electric use for all commercial growers at 36 to 50 watts per square foot of cultivation space, depending on the operation’s tier classification. California has proposed similar measures, and other states are sure to follow.
Growers who ignore the inevitable will face costly retrofits and production delays once new environmental regulations become law. Commercial cultivators can avoid these disruptions by incorporating advanced technology into their existing operations and future buildouts. The most promising technology should help cultivators produce more cannabis from the same area while using less energy, less water, less fertilizer and fewer pest control products.
Fortunately, this technology already exists. The newest LED lights generate so little heat that cooling costs are only a fraction of more traditional grow rooms that utilize high-pressure sodium lamps. Irrigation and vapor pressure deficit (VPD) sensors work in tandem to determine precisely when and how much to irrigate a crop, thereby improving plant productivity and eliminating excess water and fertilizer runoff. Tissue culture labs produce certified disease-free seedlings that allow the grower to start clean with every crop, substantially decreasing the need for pesticide and fungicide applications.
Cannabis businesses should expect that the current cultivation status quo will soon become outdated. Growers must begin planning today to ensure their success tomorrow. By lowering their production cost, avoiding commoditization and investing in technology that allows them to do more with less, commercial cultivators can begin sowing the seeds of success for many years to come.