Cannabis Cultivation Will Be A Race To The Bottom

Article by Kris Krane, Forbes

Cannabis Cultivation Will Be A Race To The Bottom. Kris Krane

The current “green rush” has brought with it an intense focus on large-scale cannabis cultivation. Across the United States and around the globe, we routinely hear stories of companies building larger and larger cannabis farms. In Arizona, Colorado, California, and Oregon, cannabis is being cultivated in greenhouses in excess of 250,000 sq. ft. that are capable of yielding more than 50,000 pounds of flower. While large-scale Canadian producers are building greenhouses in the millions of square feet and building similar-sized facilities in Europe, Australia, and elsewhere.

In the United States, cultivation licenses are often viewed as the most valuable in the highly competitive application processes that most states use to determine who is allowed to cultivate and dispense in their states. This value is partly derived from the fact many populous states initially only grant a limited number of cultivation licenses. For example, Pennsylvania, with nearly 13 million people, only granted 13 licenses; Florida, with a population over 20 million, granted 7; while Ohio, with more than 11 million people, granted 12; and New York, with a population of nearly 20 million people, granted only 5 before recently expanding to 10. For context, Colorado has roughly 1,400 licensed cultivators for a population of just 5.5 million people. Competition for these limited permits is fierce, and those companies fortunate enough to win one see sky-high values attached to these licenses even before they become operational. In Florida, a coveted cultivation/dispensary license sold for $40 million before the company had seen a dime in revenue. Similarly, a pre-revenue New York license sold for $26 million.

Indeed, in states with limited cultivation licenses, those companies that hold them can see large returns on their investments in the near term. With artificially limited competition due to restricted license classes, cultivators in many states are able to control pricing and sell their product in large volume. Many of these cultivators grow their product in state-of-the-art indoor warehouses with clean-room environments that resemble pharmaceutical production facilities more than traditional commercial agriculture.

But is this trend sustainable? Or are these companies setting themselves up for long-term failure? As mentioned in my previous column “Are Canada’s Cannabis Companies Overextended?”, we’re already seeing a trend towards large-scale greenhouse and outdoor production, which is driving prices down in states that do not have strict limits on the number of licenses they grant. For example, the average wholesale cost of cannabis in Colorado has dropped from nearly $3,500 per pound at the start of legalization in 2013 to roughly $1,012 a pound on April 1, according to the Colorado Department of Revenue. In Oregon, where the state ramped up licensing after early product shortages, wholesale marijuana trim (after harvest, the cannabis is trimmed of its leaves; those leftover leaves are referred to as the “trim” and can be used to produce cannabis products) is now selling for as low as $50 per pound, which is reportedly driving some cultivators in the state out of business.

Read the full article here.

 

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