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.
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.