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The ORGANIC Cannabis Opportunity - A Hole in the Clouds?

Jon Brown Jon Brown, Stockhouse
0 Comments| September 24, 2019

Cannabis consumption has been growing in popularity among Canadians since its legalization, but this has raised the question among consumers and investors alike - How is it that the “black market” product continues to be superior to that grown by multimillion-dollar-super-capitalized licensed producers (LPs)?

Why this is, is because growing a compliant cannabis product is quite difficult. The legal route means no illegal pesticides or fungicides can be used, which are in place to protect consumers from problems such as the ongoing severe lung issues and deaths related to vaping, for example.

Not only is growing cannabis legally on a large scale a hurdle to overcome, but growing a truly organic product is even more of a challenge.

But where there is a challenge, there is an opportunity.

The demand for organic cannabis is considerable. Consumer Health Products Canada has found an overlap between cannabis and organic product consumers. The Canadian Organic Trade Association reported that 83% of Canadian millennials buy organic on a weekly basis. Cannabis use is highest among the millennial market, Canadians aged 15-24, followed by 25-44. Organically-grown products also command a higher price point that a committed audience is willing to pay.

The question raised on the industry side is, how can an LP crack the code and control a truly crafted product over a large enough square footage to yield a profitable business?

Small-batch quality, large-scale execution

Click to enlargeOrganic growing is a popular trend consumed by those looking for a healthy lifestyle, but it is also a genuine certification for everything from food to cannabis. Both the medical and recreational verticals of the marketplace demand a price premium upward of 80% in Canada.

There are significant benefits to growing organic cannabis. The end product is made distinct by its colourful aromas, richer flavours and variety of effects. This comes through adding very complex living soils that give the fullest expression of the plant. Making something that is this flavourful and delicious costs a little more to produce, but it is what the connoisseurs who pursue this product are looking for. With their super-premium experience, consumers want the nuances and details.

A true premium organic product is about more than just potency and cannabinoids, it encompasses the entourage effect, which are the aromas and smells. What makes the psychoactivity interesting to consumers and the reason they look for different strains is because the effects are different. A consumer looking for an uplifting experience will seek out a specific sativa strain, while another seeking something more calming and relaxing will put their focus on something from the indica variety.

This is comparable to the wine market, where a large portion of consumers consider similar factors (aroma, flavour, potency) in their decision-making process and the cannabis market is similar. 32% of the $5 billion spirits and liquor market is captured by this premium category. Millennials are a major consumer of this market as well, and are bypassing the value offerings to head for top-shelf products.

Using an existing and mature marketplace as a lead to follow, Washington state has seen a consistent downward trend in flower price to 2$ (USD) a gram over the last five years, while the premium category has maintained its higher price point (an average of $23/gram USD), with no downward price pressure for the past three years. This means the market is holding its value over time.

Since legalization, the average price for a gram of retail cannabis sold by legal is $9.70 (CAD), according to Statistics Canada data. On the BC Cannabis Stores site, some organic CBD strains sell for as much as $17.99/gram.

The Organic challenge

Growing organic cannabis at a profitable scale is quite difficult. If it were easy, many megacap LPs would capitalize on the movement.

Canada’s largest LP and one of the biggest in the world, Aurora Cannabis ( TSX & NYSE: ACB ) already has. It saw the value of organic cannabis when it made the move to acquire the first certified organic producer, Whistler Medical Marijuana Corp. for $175 million in January 2019 . Whistler operates two indoor licensed production facilities with an anticipated combined capacity of over 5,000 kg per year and sells medical cannabis derivatives internationally to both Australia and the Cayman Islands.

Following this transaction, some founding members of Whistler Medical formed Rubicon Organics Inc. (CSE: ROMJ, OTCQX: ROMJF, Forum). This LP is focused on cultivating and branding certified organic, premium cannabis at its flagship 125,000 sq. ft. hybrid greenhouse in Delta, BC. Rubicon expects to produce around 11,000 kg of cannabis in 2020 and also owns a 40,000 sq. ft. licensed greenhouse in Washington state.

The Green Organic Dutchman Holdings Ltd. (TSX: TGOD, OTCQB: TGOWF) grows certified organic cannabis for medical markets in Canada, Europe, the Caribbean and Latin America, as well as the Canadian adult-use market. The Company has a planned capacity of 219,000 kgs and is building 1,643,600 sq. ft. of cultivation and processing facilities across Ontario, Québec, Jamaica and Denmark.

(Image via TGOD Instagram.)

These operations don’t exactly follow the same standard method for growing cannabis. Hydroponic greenhouse growing isn’t allowed under Canadian Organic Standards. When a mistake is made through common hydroponic growing, it can often be fixed quickly and implemented in the following days, like a lack of nitrogen, for instance. However, when growing organically, a change in process has to be planned weeks in advance. This is true for cannabis or any food; The soil must be amended, nutrients need to work their way through the plants. While the former is like driving a go-kart, the easiest control through the path of least resistance, the latter is like driving a supertanker through a minefield. One wrong move and it’s back to square one.

Some growers also follow a hybrid approach, combining the best of indoor environments (complete control of environmental conditions) with the natural environment nature’s free resources, especially the sun) to produce consistently high quality cannabis. This is advantageous operation reduces the high costs of greenhouse growing and unpredictable nature of natural growing. The key difference that separates hybrid growing, is that is circulates an active environment, rather than one that is completely static, found in most greenhouses where every inch of air and light is meant to be uniform across the entire harvest space. Organic systems should also include soil regeneration practices like crop rotation. This is difficult for cannabis producers, who often run single crop operations. This merely scratches the surface of organic growing compared to hydroponic and aquaponic growing. A further look into the discussion can be found through the Organic Council.

(Image via USADA.)

A promising future?

Health Canada currently regulates cannabis growing and any food, seed, or animal feed that bears an organic label is overseen by the CFIA under Agriculture and Agri-Food Canada. With the legal edible market set to come online in Canada next month, any product promoting an “organic” origin is likely to attract attention from consumers. This will probably be the case for CBD and other cannabis-derived health products for potential growth. The demand for organics in natural health products is already quite high.

FULL DISCLOSURE: Rubicon Organics Inc. is a client of Stockhouse Publishing.

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