Canada’s cannabis industry is at risk of disrupting itself, and hardly anyone seems to notice. Not investors, not producers.
Since the spring, the industry consensus is that Canada’s market dynamics are set in stone, so the best prospects for growth are beyond producers’ home borders. Today, the race is on to sign export deals and production licenses in foreign countries.
With so much focus on distant markets, very little attention has been paid to the potential for outdoor production at home. Yet as legalization approaches, this corner of the market is heating up. With some luck, it will dramatically alter expected profits.
On Monday, Ontario producer Good & Green, a late-stage ACMPR applicant, signed a streaming deal with 48North Cannabis Corp. to deliver cannabis grown outdoors in exchange for $1.5-million in cash up front. Although it is a small transaction, it signals movement in outdoor cultivation and illustrates that new entrants are lining up behind CannTrust Holdings Inc., one of the few established producers to show interest in this type of production.
“It is very surprising how few people are talking about outdoor cultivation, because it is a real game changer,” said Daniel Goldberg, Good & Green’s chief executive officer. “Growing outdoors requires significantly less capex and operating expenses, resulting in the cost per gram being a fraction of indoor or greenhouse production.”
Outdoor growers, of course, are motivated to talk up their own prospects. But the industry’s economics speak for themselves.
As it stands, investors tend to reward companies with massive indoor production prospects, and these producers play along by investing in, and touting, their indoor capabilities. Aurora Cannabis is building a new flagship facility near the Edmonton airport that is expected to yield 100,000 kilograms of cannabis a year when it is finished in 2019.
Yet indoor production is expensive, with costs per gram that often range between $1.50 and $2. While there is hope that technological advancements will lower this burden, significant change will be difficult because some of the main inputs – such as water and lighting – are costly expenses.
Greenhouse production, meanwhile, is certainly cheaper. Because it requires much less lighting and HVAC, costs per gram can range from 80 cents to $1. But even that is multiples more than outdoor growing.
Outdoor cultivation requires minimal infrastructure, mostly simple solutions such as fencing and security provisions, and its producers rely on natural sunshine and natural rainfall. Its cost per gram can be 25 cents or less.
Indoor growers are “significantly disadvantaged against people like us who have low-cost product,” said Eric Paul, chairman of CannTrust.
Still, the major knock against outdoor growing is that the quality of its cannabis is inferior to marijuana grown indoors – something outdoor producers will acknowledge. Medical cannabis used to treat a condition such as post-traumatic stress disorder tends to need a high THC content, and producing marijuana of this sort requires the perfect conditions provided by an indoor facility.
Indoor grow ops also allow for easier repetition, because these facilities are not subject to natural elements. Their consistency, then, should allow for a standard, minimum level of quality.
But what may not be appreciated is that cannabis grown outdoors can be easily used to create oils and edible products, which are expected to be legalized for recreational use next year. It also is not clear what percentage of the market will be sensitive to the quality of their marijuana. Scores of Canadians drink cheaper wines, and the same could be true of cannabis as the drug becomes more commonly used.
“People are singing the hymnal of their quality,” said CannTrust’s Mr. Paul, referring to indoor producers who promote their top-notch marijuana. “The consumer is going to make the final decision.”
As for security, outdoor production probably will not be as risky as some people make it out to be. Canopy Growth CEO Bruce Linton has warned that cannabis grown in open fields is more susceptible to theft, including from drones that swoop in from the sky.
“I don’t really buy much of the security argument,” said David Hyde, president of David Hyde and Associates, a respected security expert in the cannabis industry.
For one, he noted the product is far more dispersed in fields than it is in a single production facility. Outdoors, “it’s much harder to steal in bulk,” he said.
If anything, he added, the risks that outdoor growers face could be similar to those that indoor producers wrestle with. “If you were going to steal cannabis,” Mr. Hyde said, “you’re probably going to look at where it’s stored.”
Tim Kiladze