Today’s cannabis consumers expect high-quality cannabis products, and growers are answering with premium cannabis strains.

The legalization of cannabis in key states such as California, Washington and New Jersey has created a new marketplace for consumer goods. In this modern cannabis marketplace, we are witnessing exponential growth in product diversity, especially in concentrated forms such as oils, soft gel pills, transdermal patches, shatter and vape pen cartridges.


With all of this product variety, today’s cannabis consumer is increasingly more likely to purchase concentrate products over traditional cannabis flower. Arcview Market Research and BDS Analytics dubbed concentrates “the hottest product category in cannabis” in a recent report on the US cannabis market that projects cannabis concentrate sales will pass flower sales by 2022 and reach US$8.4 billion.

 

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The divergence between retail sales of flower and concentrate in the US cannabis market doesn’t have cultivators worried, however. For experienced cultivators with the skills to produce premium flower, this competitive landscape offers an opportunity to rise to the top of what is projected to become a US$20.9 billion market in 2021.

You don’t have to be a master grower to understand that premium-quality flower is necessary to create premium-quality cannabis concentrates. Just as premium grapes are necessary to create the finest wines, so too are premium flowers a necessary input in order to create a quality concentrate product.

“The starting material is the most important factor in determining the end quality of each extraction. A cannabis plant’s genetics are the starting material and hold extreme value for each strain to reach its potential,” said Will Hyde, cannabis strain specialist and co-host of Leafly’s “What Are You Smoking?” podcast.

How cannabis strains influence yield

When it comes to quality cannabis flower, consistency is key. Just like your typical pot aficionado, major cannabis brands with large-scale operations prefer consistent, high-quality flower for their product lines. Those cultivators that can provide top-shelf flower at high yields are expected to outperform the competition in any market despite changing preferences for concentrates over flower.

The effect, potency, aroma, taste and yield that define quality flower are all determined by genetics. “Genetics hold the key to your bud’s effects, flavors, vigor and growth attributes,” said Hyde on his podcast.

“Every strain carries a unique genotype that serves as a blueprint for its growth, as well as a specific phenotype that is influenced by its environmental factors and affects a range of strain attributes like color, smell, structure and potency.”

Selecting the right cannabis strain

Encompassing both recreational and medical consumers across varying demographics and geographic regions, the US cannabis market is as diverse as the country’s population. This diversity of consumer preferences calls for a variety of cannabis profiles, each specifically designed to target a wide range of consumer preferences for potency, flavor, aroma and effects. While cannabis genetics research is limited, to date more than 25,000 different genes have been identified in the cannabis plant. Crafting experiences for recreational consumers and delivering relief to medical consumers requires the ability to purposefully select for certain terpenes, cannabinoids and flavonoids within that profile.

The art of cannabis genetic selection isn’t an art at all, but a science that starts at the molecular level. Nicholas Zitelli, AKA Nico Escondido, co-owner and chief cannabis officer at HIGH TIMES, has become one of the leading cannabis genetics experts in the industry. Zitelli is also the founder and CEO of the Amsterdam-based Cannabis Genetics Institute, which focuses its research and development on the breeding of ailment-specific medicinal cannabis strains.

While most cannabis consumers have heard about the effects of well-known cannabinoids like THC and CBD, there are more than 100 other cannabinoids in the plant. According to Zitelli, one of those cannabinoids, THCV, has significant medical potential. “THCV has been found to reduce anxiety, stress and panic attacks, making it an effective treatment in PTSD. Additionally, it is known to alleviate tremors and aid in motor control skills, making it a possible treatment for MS and Parkinson’s Disease.”

The unique properties of THCV could aid in the creation of a pharmaceutical product treating conditions like PTSD, MS or Parkinson’s disease. While most cannabis strains are known to stimulate appetite, THCV has also recently been shown to act as a strong appetite suppressant, meaning it could help users who struggle with overeating.

Adding to the complexity of selecting the right strain to meet consumer needs, the large variety of terpenes responsible for flavor and aroma can have a strong influence on the type of “high” recreational users experience. “Terpenes that are most common in cannabis, such as myrcene, limonene, pinene, humulene and terpinolene, all have their own sets of medicinal values, have been used by humans for centuries and are easily derived from many other plants as well as cannabis. The various combinations when added together, and in conjunction with cannabinoids, can produce feelings of euphoria, energy, relaxation and hunger,” said Zitelli.

Strategically minded cannabis producers have recognized the importance of genetics management and are stacking their teams with experts whose in-depth understanding of cannabis genetics can bring significant value to their cultivation programs.

Chemistree Technology (CSE:CHM,OTCQB:CHMJF) welcomed Zitelli to its board of directors in April. The same month, the company appointed one of the world’s foremost experts on commercial cannabis cultivation, Sheldon Aberman, to the position of chief cannabis officer. Aberman’s decades of cannabis industry experience include managing and designing thousands of grows worldwide. He’s also built several multimillion-dollar brands, including Quantum Horticulture, Pure Essentials Black Label and Cannabis Consulting. Chemistree’s asset portfolio includes a 50 percent interest in a cannabis processing company in Humboldt County, California; prospective cannabis cultivation lands in Desert Hot Springs, California; a strategic investment in Canada-based Pasha Brands; and operational assets and branding rights for the Washington-based Sugarleaf brand. Sugarleaf produces 18 unique high-quality cannabis strains, such as Cannabis Cup winner White 99, a 50/50 hybrid that boasts a THC level of 36.6 percent.

Canopy Growth (NYSE:CGC,TSX:WEED), the world’s largest legal cannabis producer, is also taking on genetics management. “You can get more yield off of a plant if you can refine the genetics and that allows us to have more grams, more kilograms coming out of this place per year,” said Jordan Sinclair, Canopy Growth’s vice president of communications, during an interview at the company’s Tweed Farms operation. Beyond higher yields, a strong focus on genetics could also enable companies like Canopy and Chemistree to develop new proprietary strains as plants with quality genes are bred with one another to create new varieties.

Takeaway

Whether for medical or recreational use, cannabis consumers in the legal markets expect consistency and quality. As a necessary input for concentrate products like tinctures and oils, high-quality cannabis strains are expected to remain in high demand as consumers embrace new concentrate products. For licensed producers focusing on cultivation, quality genetics could provide the difference in a highly competitive marketplace.

This article was originally published by the Investing News Network in June 2019. 

 

This INNSpired article was written according to INN editorial standards to educate investors.

INN does not provide investment advice and the information on this profile should not be considered a recommendation to buy or sell any security. INN does not endorse or recommend the business, products, services or securities of any company profiled.

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Cannabis Market Update: Q3 2020 in Review

Click here to read the previous cannabis market update.

During the first few months of investment time in 2021, cannabis faced some volatility alongside optimism about federal changes in the most important market for the drug.

The cannabis business found its stride during Q1 thanks to policy change signals and consolidation.

To find out more, the Investing News Network (INN) asked experts about progress in the market during the first major period of the new year, and which developments investors should watch out for.

 

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Cannabis market update: New York and US potential boost operations

New York state’s legalization of recreational cannabis was a huge Q1 announcement that added pressure to the US federal government when it comes to cannabis policy, said George Mancheril, co-founder and CEO of Bespoke Financial, a debt financing business with a particular focus on servicing cannabis businesses.

“It’s going to add to the chorus of voices in the federal scene to basically move sooner rather than later,” he explained to INN.

Following the US election in 2020, the momentum for cannabis businesses went on the upswing, as did company valuations, with the idea of expansion at the heart of it all, according to Mancheril.

Before starting Bespoke Financial, Mancheril learned from traditional investment banks, working in the lending, fixed income and debt markets with Goldman Sachs (NYSE:GS) and Guggenheim Partners.

Nawan Butt, portfolio manager with Purpose Investments, agrees with Mancheril. The financial expert told INN the ongoing legalization process seen in the US market is leading to expansion.

“It’s becoming more of a national move, then small pockets of proliferation. That’s very exciting about cannabis right now,” said Butt, who co-manages the Purpose Marijuana Opportunities Fund (NEO:MJJ).

This proliferation effect is causing a change in valuations and enthusiasm for US-based operations. Mancheril told INN that by the end of Q1, multi-state operators (MSOs) had raised approximately US$3.3 billion.

The cannabis lender said he sees the industry as having grown from the woes of 2019; it is now undergoing a return to form as excitement about the US opening up increases.

The expert explained that there is likely to be a windfall of capital in the wake of major federal changes in US cannabis policy, although the timeline for these changes is becoming increasingly hard to predict.

Leading up to that capital influx, Mancheril said he wants to see operators really drill down on the value of desired assets and whether they make sense.

“What I’d hope is that we continue to see bullish sentiment, but with some measure of responsibility, and let’s not just get over ahead of ourselves,” Mancheril told INN. “The idea is let’s minimize the volatility and continue growing responsibly.”

 

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As far as struggles go, Butt explained that the cannabis industry has cemented itself as a growth-type sector, and as such there are macro pressures affecting the way these assets operate.

“We’ve seen this preference for cash flows at growth in the current or in the near future, rather than in the far future, and that’s what we’re seeing as far as valuations go in the broad market,” Butt said.

Cannabis market update: Volatility continues to rule as industry foundations build

Despite the industry’s potential and the growing pains it has gone through as a whole in both the US and Canada, volatility remains a key factor in the cannabis investment scene.

Butt explained that the current shareholder base, which is dominated by hedge funds and retail investors, still lacks enough institutional support to avoid the day-to-day volatility cannabis has come to be known for.

These two investor groups, Butt said, can be easily spooked and excited by the news of the day when it comes to their investments.

“A lot of these institutions’ strategies are not about short-term profits, but they’re about long-term sustainability of the businesses themselves,” Butt said.

“That’s why you see a lot of volatility in the space, and that’s essentially what we’ve seen over the past, I’d say, three to two months as well,” he added.

That means investors shouldn’t expect an end to volatility anytime soon.

“It’s not about whether we continue to expect volatility, because we do,” Butt said. “We really think that the volatility will be taken out when the shareholder base becomes more institutional, but it’s really about understanding why there is volatility in the first place.”

Cannabis market update: Canadians talk up US business, but questions remain

A surge of mergers and acquisitions has taken over the Canadian cannabis sector recently as more producers see potential in America.

One of the biggest announcements in this regard came when Organigram Holdings (NASDAQ:OGI,TSX:OGI) secured a C$221 million investment deal from British American Tobacco (NYSE:BTI,LSE:BATS).

Using the funds, the two will work in tandem to develop new branded products designed for the international stage, including in the US. Organigram CEO Greg Engel previously told INN that the US represents a critical opportunity for Canadian companies, but the entry point isn’t as clean as it could be.

 

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While the long-term potential may be exciting for investors, Butt told INN he’s still unsure how the approach will work for Canadian companies.

The Purpose Investments expert said there will be plenty of space for the biggest Canadian names to pursue US market entries, beyond the initial hemp-derived CBD moves some operators have mde, since the US represents the biggest market in the world.

“But there’s just way too many unknowns right now to say exactly what that participation is going to look like, or when that participation will happen,” he said.

“What we do know is that currently the US MSOs are in a wonderful sort of position to expand on their market leadership that they have. And it will be tough for Canadians to come in and compete with them,” Butt said.

Canadian players still retain the upper hand at times in terms of valuation, which is confusing for both Butt and Dan Ahrens, chief operating officer and portfolio manager at AdvisorShares.

“The performance in quarterly earnings of US companies has been rather spectacular. They’ve knocked it out of the park in most instances,” Ahrens told INN.

Butt praised the recent performance reports from MSOs across the board, pointing to year-over-year growth lines and projections for continued positive performance. In his view, share prices still don’t reflect company value. “Those are really being discounted at this point,” Butt told INN.

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Cannabis market update: Investor takeaway

The cannabis investment proposition finds itself at an interesting moment in time, as the entire sector eagerly awaits confirmation in the US at the federal level.

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