Rich Cardinal of Next Big Crop predicts the cost to produce a pound of cannabis will drop more than 95% to $100 by 2025.
Cannabis production standards are nowhere near a $100-per-pound price point just yet. But they will be very soon, and well-capitalized, forward-looking operators are now making the investments that will allow them to achieve these low production costs long into the future.
I know we can design and build cultivation facilities to produce cannabis for $100 per pound.
But more importantly, I know we don’t have a choice.
By 2025, or maybe even as soon as 2020, this industry will be based around per-pound production costs in the $100 range, or potentially lower, and companies that can’t compete at that level will be swiftly left in the dust.
Although average warehouse production costs in markets like Colorado and California currently hover around $500 per pound, we’re driving that price point down by working smarter and investing in highly efficient conveyors, automation, trimming and drying technologies, packaging machines and cutting-edge environmental control technology.
Why $100 Per Pound?
As new markets and increased competition come online, cannabis wholesale and retail prices are rapidly dropping in regulated markets across the country. Many new markets don’t have caps on production capacity, so there’s a lot of competition and a glut of surplus cannabis out there right now.
That means retail prices are dropping lower and lower. The first state to have adult-use cannabis sales offers a stark example. In April 2014, the median retail price for an ounce in Colorado was about $200 (not including tax), as reported by FiveThirtyEight. In 2018, it’s relatively easy to find ounces for less than $100 (including tax).
Most consumers are focused on finding the cheapest option available. They may have a rudimentary understanding about commercial cannabis cultivation, but it matters little to them how Company X applies nutrients or the type of lighting used by Company Y. What they care about is the impact on their wallet. It is essential for cultivators to adapt their techniques to reduce operational costs, or risk continually being undercut.
And despite the recent rising costs we’ve seen as California implements its new regulatory model and licensing structure, cannabis prices will inevitably drop in the Golden State, too, just as prices are dropping in every state with robust, regulated cannabis markets. This trend will no doubt continue on the same trajectory for the next few years until the market shakes out and prices stabilize.
Cultivation companies that aren’t equipped to produce high-quality cannabis at low prices will quickly find their costs of production far outweighing any potential profits.
Only facilities with advanced production models and automation will be able to survive the highly competitive cannabis industry.
Advanced Facilities
The only way to create facilities capable of producing low-cost, high-quality cannabis is through the implementation of efficient growing methods and investments in advanced production models that utilize state-of-the-art automation. These technologies already exist and have been developed for other commodity crops that operate under much tighter margins and face fierce competition from global markets; they just need to be incorporated into the cannabis industry.
For example, Next Big Crop is currently building a facility for a client in Sacramento, California, that is conservatively modeled around a $190-per-pound production price point. We expect the 213,000-square-foot greenhouse facility to be operational by late 2018 or early 2019.
By leveraging scale, new technology and systems like automatic fertilizer injection and movable plant benching, this facility will be capable of producing cannabis far more efficiently than the vast majority of other California growers.
And by 2020 at this facility, we aim to hit that $100-per-pound production price point through continued cost-reduction and by utilizing superior genetics and optimized processes.
To Overcome Obstacles, Look Within
When it comes to making necessary adjustments to the business operations, sometimes the biggest hurdles are all too human.
We find that in many cases, it is the operation’s own cultivator holding the business back in a quest for low production costs. Many traditional cannabis cultivators have an unjustified aversion to large-scale production and processing techniques — largely due to inexperience — and will often go out of their way to convince business owners that high-end cannabis is not achievable through commercial production methods like automated fertilizer injection and large-scale harvesting techniques. This is simply not true. Cultivation managers who take this approach will find themselves left behind, as the evolving industry favors the kind of grower who can do it for less.
When a business owner tries to expand cultivation capability, the go-to expert is typically their in-house grower. But traditional growers often demonstrate three key shortcomings that can cloud the owner’s decisions about which changes to make and when to make them:
– Lack of desire to try something different: A large percentage of today’s “professional” cannabis growers’ experience originated from the pre-legalization underground, not from traditional agriculture. Science and systems scare them. The fact is, many growers don’t actually know why their techniques work, so it’s not surprising they would shy away from changes that could potentially change the direction of the ship. Many don’t know, from a scientific perspective, how to get back on course without blindly reacting, until they stumble upon some new combination of conditions that will make their crop again appear to be optimized. A true horticulturist embraces change and the continued sophistication of systems and takes an analytical approach so they can proactively adjust for potential unwanted results.
– Lack of long-term planning: Until recently, the business model surrounding the cultivation and sale of cannabis has not been about the long game. Growers got in the habit of bolting as little to the floor as possible and were always ready for an eviction, followed by a hasty relocation. This all-too-familiar cycle has caused the idea of “permanence” to seem more like a mythological creature than a business strategy. Additionally, these businesses have not had the ability to garner the capital required to develop state-of-the-art cultivation facilities, nor have the historical operating margins demanded it. Today, with more institutional investors diving into the cannabis space, there are more funds available, requiring vision from the cultivation department to develop strategic plans for reinvesting in automation and other efficiencies to remain competitive.
– Lack of continuing education/research: This issue extends beyond the cultivator. Managing a commercial garden is an all-encompassing responsibility, and it’s easy to get buried in minutiae. In order to keep the ship afloat, lead growers often have to focus on each day’s set of issues. Having blinders on can obstruct the view of the technology, systems and technique advancements occurring all around. This is why owners and managers need to institute continuing education initiatives for their staff. Additionally, investments should be made into research and development, without fear of sacrificing precious, potentially revenue-generating square footage in the name of science and discovery. Attempting to justify R&D with immediate revenue generation corrupts R&D. This repurposed square footage will pay for itself repeatedly over time as it will allow for optimization-seeking experimentation, without putting actual production areas at risk of production hiccups.
Production facilities should modernize before it’s too late.
Don’t Delay Improvements
Savvy cannabis businesses are shifting focus and resources toward strategies that ensure long-term viability in this quickly evolving sector. And for cultivators, that means investing in highly advanced and efficient grow facilities.
Building such facilities requires more capital up front, but it allows companies to dramatically cut down production and labor costs. And that’s going to be absolutely essential for continued success. When the market shakes out in five years and people stop selling at a loss, companies capable of producing high-quality cannabis at an industrial scale and with low production costs will be the only players left in the game.
Rich Cardinal is the managing director of Next Big Crop, a consulting and management solutions provider offering hands-on experience and proven techniques for every phase of the construction, cultivation, processing and sale of cannabis.