Attention Cannabis Investors: Get ready to lose everything

By Michael Brubeck | December 15, 2017

I’m talking to you, Peter Thiel.

It’s an exciting time for cannabis - legalization continues to gain momentum across the U.S. and globe. While cannabis businesses have a seemingly endless torrent of roadblocks, the industry never ceases to move incrementally forward.

In some legal states, the industry relies on independent growers who had been fine tuning their cultivation practices behind closed doors to supply the market. This means hand-tended cultivation and labor-intensive processes for steps such as propagation, cutting, trimming, bud sorting, etc. These same practices are largely still in place today, and capitalizing these systems is biggest hurdle for growth in today’s industry.

Imagine if the same manual cultivation practices applied to traditional agricultural commodities, such as tomatoes, were applied to cannabis. What would similar practices mean for, say, tomato growing? The price of beefsteaks would shoot through the roof! Italian restaurants would see a crippling increase in the cost of red sauce and salsa would be unaffordable.

The so-called green rush has begun to attract big-name investors. Peter Thiel’s Founders Fund investing millions into Privateer Holdings, parent company of Leafly and cannabis brand Marley Natural. And Constellation Brands bought a 9.9% stake in Canadian producer Canopy Growth.

But what investors don’t seem to realize is that in the next three to five years, 90 percent of cannabis investors will lose their money if they don’t pivot to scalable models.

Do I have your attention now?

Simply put, current production costs exceeding $3.00 per gram in modern, large-scale farms like Privateer’s Tilray (a Canadian MED producer) and Canopy’s Tweed are not sustainable and can’t be scaled to meet the growing demand.

The market is already changing. Well-funded and overstocked nurseries are driving down the average price per pound of wholesale flower to $1300 in Colorado. It averaged almost $2000 only a couple years ago (Q1-2 2016) and this is just the beginning.

With California on the brink of REC legalization, the current price of $2000 per wholesale pound is sure to drop in the coming months as regulations cut out the artificial inflation built into the illegal market.

Don’t be surprised when prices drop to $500 per wholesale pound. At the end of the day, cannabis is only expensive because both illegal and highly-regulated markets inhibit free-market competition, one by creating artificial risk and the other creating artificial scarcity, and both unfairly increasing prices for the consumer.

In this climate, the only way to remain profitable will be to implement a scalable business model. For cannabis companies, that means reducing the two biggest production costs: labor and non-mechanized cultivation processes.

As a fourth generation farmer, I’m confident marijuana will soon normalize into a crop like any other. Companies will need to farm cannabis the same way they farm tomatoes if they want to stay competitive.

At present, the average acre of canopy employs 80-150 people and requires an infrastructure investment averaging $7 million in U.S. regulated markets and $30 million in Canada. Reducing labor costs and incorporating farming equipment can reduce those costs dramatically.

My company, Centuria, requires an infrastructure cost of $28,000 per acre and requires two employees to operate. That allows my production costs to drop to one penny per gram of cannabis biomass. If you’re a cannabis consumer, those numbers should get you excited. If you’ve invested in a cannabis company, they should make you nervous.

To protect themselves investors can make sure any debt or equity structure has a trigger for recouping your principal within three years, if specific milestones aren’t reached. Hold businesses accountable for your money. Yes, the industry is always changing, but a skilled business professional should anticipate upcoming changes.

Additionally, investors should ask companies:

  •  Where is the price floor for your products being manufactured or sold under your current business model?
  • Do you anticipate wholesale pricing halving in 18 months?
  • What is the strategy should interstate commerce be allowed?
  • Who are your biggest competitors in that scenario?

Sound investments should have a scalable model that can move quickly and seamlessly adapt to market change. If you can’t get a clear answer at your next meeting, start putting the pieces in place to exit your position.

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Michael Brubeck is the author of the cannabis investment book, ‘Tipping the Scale: The Book That Changed Everything You Know About Investing in Cannabis’ and founder of Centuria, the world’s largest licensed manufacturer of cannabis, producing upwards of 300 tons per year, Michael Brubeck is a well respected cannabis innovator. For the past 12 years, he has refined every step in the grow, production, and manufacturing process, which has allowed him to manufacture cannabis biomass for one penny per gram. He is currently a petitioner in the lawsuit against the Drug Enforcement Agency for its changing language around the legality of all products derived from cannabis extracts, including cannabidiol. He hopes to serve as a figure to keep government and big business accountable to the cannabis consumer and as a resource to small cannabis businesses as the industry evolves federally. To learn more: www.centuriafoods.com.

Navigating the Frontier of Pesticide Analysis

By Caroline Gordon and Joshua Esquivel | November 24, 2017

The upcoming California cannabis regulations are creating a call to action for accredited laboratories to finalize development of highly accurate and reliable methods for detecting trace amounts of pesticides. Commercial cannabis testing laboratories have traditionally utilized Gas Chromatography (GC) and/or High Performance Liquid Chromatography (HPLC) to detect residues in cannabis flowers, extracts, and edibles. However, these instruments and their related methods are insufficient for multi-residue analysis of cannabis products at the detection limits outlined by the state, and even with more sensitive instrumentation (LC/MS/MS and GC/MS/MS), there are still many analytical challenges that must be overcome.

Pesticide usage on cannabis is problematic for a number of reasons. For one, it is unclear what constitutes a safe level of usage or consumption. Generally the EPA under FIFRA determines which pesticides are permitted for a crop and sets MRLs (maximum residue limits) for each. However, since cannabis is a DEA Schedule I substance, the EPA has not approved any pesticides for use on cannabis. Second, cannabis is an extremely high value crop susceptible to pest infestation and fungal infection. In an unregulated environment, this leads to overuse of pesticides as a preventative measure to protect crop yields. Third, cannabis is both inhaled as a vapor and consumed as an edible. The risk profile of pesticides can vary significantly depending on the method of consumption. Last, cannabis is often sold in concentrated forms, such as hash, wax, or shatter. However, the process of concentrating cannabinoids has the unintended consequence of concentrating pesticides and other contaminants as well.

A variety of pesticides are utilized in cannabis cultivation, some of which can pose serious health risks to consumers. The most common pests that affect cannabis are spider mites,aphids, and fungus gnats. Some of the most common pesticides used to eradicate these pests are “Avid” (Abamectin 2.0%), “Forbid 4F” (45.2% Spiromesifen), and “Pylon Miticide”(Insecticide with chlorfenapyr). The most commonly used fungicide is Eagle 20 which utilizes myclobutanil as the active ingredient. These products can provide effective hindrance of pests, but have been shown to have adverse health effects for humans. For example, it has been discovered that Abamectin can cause reproductive problems such as stillbirths, decreased viability, decreased lactation, and decreased weight in newborns. For another example, myclobutanil can result in the creation of dangerous byproducts such as hydrogen cyanide and hydrogen chloride upon decomposition at high temperatures (i.e. when smoked).

While California state regulators have properly identified the public health need to test for these pesticides, it is still unclear how regulations will be enforced. There are no standards for pesticide residue testing of cannabis, so each laboratory has its own proprietary methodology, often developed for instrumentation inadequate to the purpose of achieving the limits of detection mandated. While spot checking or auditing of results would ordinarily be a good way to weed out bad or incapable laboratories, the state itself has limited experience performing this kind of auditing, and may not be initially prepared for its oversight role. And as we have seen in food testing and other cannabis markets, when the playing field is not level, testing volume tends to accumulate at the labs with the lowest standards, at least in the short run.

While the frontier of cannabis research on analytical methodology is developing at a rapid rate and best practices from other industries are being adopted, there is going to be high variability in the quality of lab results in the short term. Until official testing standards have been adopted and/or quality standards are enforced, perhaps the best advice for growers and manufacturers is to to look for quality indicators when choosing a testing partner. Laboratories that have ISO 17025 accreditation, state-of-the-art instrumentation (i.e. LC/MS/MS and GC/MS/MS), adequate facilities, and experienced analysts may be more expensive than those that do not, but the potential for a brand-damaging recall is far more costly.

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Caroline Gordon and Joshua Esquivel are analysts at Anresco Laboratories, which has performed multi-residue analysis of foods for over thirty years and is now applying its expertise to cannabis.

 

For REC in Connecticut, Focus on Elections

By Seth Wakeman | November 17, 2017

Popular opinion suggests Connecticut could be among the next few states to pass a recreational cannabis law, but it will be difficult to accomplish legislatively. We and other states without ballot measures face unique and evolving obstacles to legalize REC. But these problems could be mitigated during the 2018 midterm elections.

As voter dissatisfaction increases in Connecticut, there’s a growing perception that the state legislature is acting against the general population's interests. And circumstances have grown riper for a new crop of pro-cannabis politicians. (Governor Dannel Malloy (D) opposes REC legalization but is not running for re-election.)

In Connecticut we are acutely susceptible to influence from the wealthy “donor class,” a group which skews older and more conservative. But by leveraging the public’s distrust of elected officials and the “donor class’s” influence, a wave of pro-cannabis legislators could be voted into office next year.

Low voter turnout during midterm elections presents a prime opportunity for pro-legalization organizations to pursue a new strategy; one that leverages the current dissatisfaction with incumbents. In low-turnout mid-term elections, an energized base can overpower entrenched interests. We just saw it happen in New Jersey where there’s now a Governor-elect, Phil Murphy (D), who included legalization as part of his platform.

In Connecticut, both the governor and state legislature oppose legalization. But our local patchwork of activists organizations have deluded themselves into thinking that somehow they can overcome these obstacles. In this environment cannabis legalization is but a pipe dream. There is far too much resistance from likely voters, and too little excitement and engagement on the part of supporters.

Cannabis users as a group are extremely passionate and energized on the subject. The problem thus far has been a dearth of vocally pro-cannabis candidates to choose from, coupled with low-name recognition of the few that do exist.

Considering the set of challenges we face, the most effective strategy would be to publicize the campaigns of pro-cannabis candidates. Social media platforms and local social scenes whose demographics tend to favor legalization are underused resources since the people they reach are less likely to vote.

If cannabis lobbying groups in Connecticut focus on electing pro-cannabis candidates from across the political spectrum, this political hail mary could then become a reality in the 2019 legislative session.

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Mr. Wakeman is a cannabis activist and a 20 year member of the local cannabis community. A Master Grower with 10 years of boutique cannabis cultivation experience, he is founder and lead consultant for Pinnacle Cultivation Services.

https://www.facebook.com/pinnaclecultivation/?ti=as

Marijuana Brands- Born in America, Made in Canada

By Patrick O’Malley | November 3, 2017

Canadian Licensed Producers (LPs) are moving fast and pioneering the first legal international marijuana market. LPs service markets as disparate as Germany and Jamaica, and the list continues to grow.

Canadian LPs are first to expand abroad because they’re the only firms with the operational sophistication, federally legal status, and the ability to raise inexpensive capital from public stock markets.  Although LPs are uniquely suited to supply marijuana products, operational expertise, and financing to the rest of the globe, there is one important area, branding, where their strengths become a weakness.  

The Canadian regulatory system and the resulting marketplace dynamics mean it is a sub-optimal ecosystem to create branded marijuana consumer packaged goods. This is true of the current Canadian medical marijuana market, and it appears that the same will be true after recreational legalization. A very simple example of this dynamic at play; edibles won’t be permitted in Canada until mid-2019. For now, it’s impossible to begin building a domestic edibles brand.

But, the primary reason Canadian firms haven’t developed strong consumer brands is that the marketplace hasn’t forced the issue. The current medical system has web-based ordering and mail delivery of product, no physical dispensaries allowed.  No physical retail presence means there is far less incentive to create meaningful brand identities. Even when physical retail dispensaries do come on-line in a year or more, they will often be owned and operated by provincial governments, which are never associated with innovations in either retailing or branding.

Instead of building brands around distinct consumer cohorts, the LPs have thus-far focused on building their brand as the seller, rather than the brand of the actual product the consumer identifies with. Consider groceries. It is hard to imagine that any consumer has ever bought the grocery store’s in-house brand because of a strong affinity for that in-house brand.  Consumers buy store brands because they are cheap. Selling on the basis of cheap is a bad way to build a valuable brand.

Contrast Canada’s brand desert to what we see in Colorado, Washington, and very soon California. These states have regulatory systems which foster brand creation for two reasons.  First, the low barriers of entry mean many market participants.  Whereas only a few dozen Canadian LP’s can create a brand, Colorado has over 3000 licensees who can create a brand.  With greater diversity comes greater creativity. Second, the state regulatory systems create a dispersed and non-centralized retail environment that absolutely necessitates brands to fill a gap in the marketplace. A customer walking into an unfamiliar dispensary knows to look for their favorite brands on the shelf.

The cross-border license deals have already begun. JuJu Royal and Maricann were among the first. Deals are being negotiated right now in Denver and Toronto, so expect to see the pace intensify in the coming months. As this article goes to press, the just-announced Constellation Brands deal with Canopy Growth shows just how quickly the pace is intensifying. Constellation Brands lives and breathes branding, albeit in the alcohol sector. This bold, forward-looking move by Constellation’s management and board was endorsed by the equity markets, which boosted its market cap by a healthy premium above the purchase price.

Regardless of how long it takes for U.S. legalization to arrive, expect that the brands currently being forged in the competitive trenches of U.S. retail dispensaries will step-up their licensing efforts. They will bring to the table their valuable branding and intellectual property. Their Canadian partners will bring inexpensive capital, large-scale manufacturing, and worldwide distribution networks. Together, the cross-border partners will create the global marijuana brands of the post-prohibition era.

NEWS SOURCES:

https://news.vice.com/story/heres-what-the-provinces-and-territories-have-done-so-far-on-legal-weed

https://globalnews.ca/news/3836502/ontario-marijuana-legislation/

https://www.newcannabisventures.com/canopy-growth-adds-to-strategic-content-branding-prowess-by-adding-ted-chung-dave-bigioni-to-key-roles/

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Patrick O’Malley owns MJ LaunchPad, a venture capital fund that creates cannabis brands in its licensed marijuana processing facility in Denver.

www.MJLaunchPad.com | www.Good-Life-Colorado.com