Four cents per gram? Outdoor pot is piling up Four cents per gram? Outdoor pot is piling up in a ‘constipated’ market
Growing cannabis under the free rays of the sun costs a fraction of indoor or greenhouse cultivation. But outdoor producers have yet to sell millions worth of last year’s harvest, and at least one has slashed its expected selling price amid an oversupplied market.
Indoor and greenhouse-grown pot make up the vast majority of legal cannabis in Canada, since it can be grown year round under far more controlled conditions. But more producers are turning to the great outdoors to push cultivation costs down to pennies per gram. Industry observers warn this year’s harvest will be up to four times bigger than last year’s. A “Croptober” flood of bud this fall could trigger a wave of writedowns as supply surges past demand.
According to Health Canada, nearly 700 acres were licenced for outdoor cannabis as of April, up more than 20 per cent from October 2019. Meanwhile, pot companies are sitting on record stockpiles. As of April, Canadian cultivators and processors had amassed 620,144 kilograms of unpackaged dried flower inventory. That comes despite record retail sales of $185.9 million in May.
WeedMD (WMD.V) finished planting more than 18,000 cannabis plants in a 27-acre field in Strathroy, Ont. in June. Last year, the company grew nearly 9,000 kilograms of saleable flower at a cash cost of $0.11 cents per gram. In the company’s greenhouse, grams cost $0.84 to grow.
“You can’t beat the cost. It’s fantastic,” Angelo Tsebelis, the company’s CEO, told Yahoo Finance Canada in an interview. “You can never substitute what Mother Nature provides. All you can do is try to replicate things like sunlight, heat, cool nights, and the rest of the conditions that are ideal for growing.”
Knocking on wood, Tsebelis expects about the same yield from his second outdoor harvest. This year, the company will use one-third the labour and spend less on startup costs, since the field required only minor upgrades. He said the farm is “well advanced” from where it was at this time a year ago, and predicts a significant cost-per-gram reduction.
In Brant County, Ont., 48North Cannabis (NRTH.V) is also in its second season of outdoor cultivation. Last year’s crop brought in 12,000 kilograms at a total cash cost per gram of $0.25 on its 100-acre farm. Like Tsebelis, 48North’s new CEO Charles Vennat told Yahoo Finance Canada he expects a bigger, cheaper crop this time, but declined to disclose numbers while the plants are still in the ground.
Aleafia Health (AH.TO) said it produced 12,747 kilograms of outdoor dried flower at an all-in cash cost to harvest of $0.10 per gram last year. The company’s CEO, Geoffrey Benic, recently referenced growing outdoors for as little as $0.04 per gram. He said the company could potentially grow 100,000 kilograms of low-cost outdoor cannabis in 2020.
“When someone's coming and offering you $2.50 a gram for your outdoor grow, or even $2 grams, it's hard not to want to take some of that, because it’s profitable for you as you build your business,” he told a virtual investor conference on June 24. “But make no mistake folks. I want to be very clear on this. We're not wholesalers. We are building consumer experiences.”
Aleafia reported $13.7 million in net sales in the quarter ended March 31, $11.7 million of which came from bulk wholesale cannabis. WeedMD booked net revenue of $12.2 million during the same quarter, $5 million of which was from bulk sales to other licenced producers. 48North brought in $2.8 million through sales to other licenced producers and provincial regulators in its most recent quarter.
48North and WeedMD told Yahoo Finance Canadathey do not have confirmed contracts to sell their 2020 harvests. Both intend to sell outdoor cannabis through retail channels as flower and extract products like vapes. WeedMD said it is having ongoing discussions with multiple groups looking to buy a portion of the crop. Aleafia did not respond to an emailed question about plans for its 2020 harvest.
Craig Wiggins, managing director of the research firm TheCannalysts, predicts this year’s outdoor harvest will be four times the size of last year’s. That could mean bigger problems than asparagus sprouting up around the plants, which has been known to happen on WeedMD’s former vegetable farm.
“We’re just pouring more water into a full bathtub,” Wiggins said, referring to the glut of cannabis and excess cultivation capacity weighing on the industry as it adjusts to a smaller-than-expected global market.
Large players like Canopy Growth (WEED.TO)(CGC) and Aurora Cannabis (ACB.TO)(ACB) have recently shut down indoor growing facilities and laid off scores of workers. Organigram (OGI.TO)(OGI) became the latest major producer to write-off excess and unsaleable inventory, amounting to a $19.3 million charge in its most recent quarter. Of that total, $11.9 million was related to excess trim and concentrate.
48North, WeedMD and Aleafia still have portions of last year’s outdoor harvest on their books. In recent financial filings, 48North cut the expected selling price for its outdoor cannabis inventory from $1 per gram to $0.50 per gram, resulting in a negative fair market adjustment of $5.4 million.
Tsebelis said WeedMD sold about half of its outdoor harvest to a wholesale buyer in Australia for roughly $5 million, or about $1 per gram, in the company’s most recent quarter.
Aleafia has said its 2019 outdoor harvest improved wholesale profitability in the quarters since the 2019 harvest, but it is unclear exactly how much outdoor product has been sold.
“They better be able to clear their existing harvests before they harvest again,” Wiggins said. “I think a lot of people have misread the economics. We’re going to see what happens in about five months when the [2020] outdoor harvest comes in.”
48North, WeedMD and Aleafia all say their best quality outdoor strains are good enough to be sold alongside the indoor-grown dried flower they currently distribute to retailers. However, the bulk of their next outdoor harvests are expected to go towards in-house manufacturing of extracted products.
While a growing selection of vapes, topicals, oils, edibles, concentrates, capsules and drinks continue to hit the market, dried flower still commands the lion’s share of cannabis spending. Stockpiles of extract-based producers are surging as well. Health Canada data show record inventory levels of packaged extracts and edibles in April 2020.
“You thought the market was badly constipated with flower? The glut for oil [extracts] is bigger because the market is starting off so much smaller,” Wiggins said.
Vennat, 48North’s CEO, argues the glut concern is an oversimplification.
“Oversupply is relative. An oversupply of what? People paint cannabis with a wide brush. The reality is, much like grapes for wine, there are many different grades. What we are really trying to do is get the best quality off the field,” he told Yahoo Finance Canada. “What really matters ultimately is, are you selling it profitably when you turn it into a retail product?”
WeedMd’s Tsebelis agrees. He said trim, a low-grade byproduct that all cultivators have on hand, can be repurposed for extraction. But using his outdoor buds will result in a better product that will gain traction with increasingly discerning consumers.
“We have a glut of biomass. Not necessarily a glut of high quality cannabis,” he said. “It is pouring gasoline on the fire. But I think there are two different fires.”
Since taking the reins as CEO in February he’s attempted to steer the company away from reliance on wholesale revenue towards a stronger retail focus, emphasizing brand’s like its Colour Cannabis line. That said, he expects the 2020 outdoor crop will be sold both through wholesale and directly to consumers.
Aaron Salz, founder and principal at the Toronto-based cannabis finance firm Stoic Advisory, said he expects high quality outdoor cultivation will eventually squeeze out lower-end indoor and greenhouse producers. For now though, he believes many outdoor producers will be forced to settle for pennies above their cultivation costs if they are motivated to sell.
“I’ve been pitched a couple of deals from companies in the outdoor space. They’re all assuming they’re growing at $0.10 [per gram] and selling at $1.50 or $2,” he said. “It’s a pipe dream.”
Vennat also sees the cost benefits of outdoor cultivation winning in the long run as the cannabis sector matures, and supply and demand smooth out.
“We feel very strongly about our method. We’re hoping to prove out that model over the coming quarters,” he said. “I’d be a lot more nervous if I was a greenhouse grower than an outdoor grower.”
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