The North American Cannabis Industry Moves Toward Extracts

In the minds of many, cannabis remains inseparable from that classic image of white smoke billowing from a rolled joint, accompanied by that telltale green smell. But consumer tastes and habits are quickly changing as the cannabis market matures.

While the classic cannabis flower isn’t going anywhere anytime soon, it’s far from the only choice for the picky cannabis consumer. According to Leafly, the good old-fashioned smoked cannabis bud has fallen to a less than 50-percent market share in some legal markets.

Where smoked cannabis flower is declining with consumers, extracts are rising in popularity. Extracts — or concentrates — are products derived from cannabis buds that contain higher concentrations of active cannabinoids than the unprocessed flower. Extracts come in a variety of forms from your basic oils to the glass-like solid commonly referred to as shatter, or cannabutter commonly used to make edible cannabis products. The most popular form of extract today is cannabis oil that can be vaporized.

There are several factors driving cannabis users away from the traditional and towards extracts. Oil, the most popular form of cannabis extract, is most commonly vaporized, which means that the toll on the consumer’s lungs is greatly reduced compared to breathing in smoke. Secondly, extracts are far more potent than bud, allowing for faster relief for medical users and offering better value for consumers of all types. Lastly, and likely not least, vaporizing extracts is discreet. Since there’s no combustion, extract vapor doesn’t cling to clothes or hang in the air the way smoke does. This means that a consumer living in a smoke-free building can enjoy in peace without worry of bothering any neighbors.

As Canada’s recreational cannabis legalization draws ever closer, and legalized US jurisdictions continue to develop, all segments of the North American cannabis market are on the rise. With an increasingly health-conscious consumer base and an overall trend away from smoking, extracts are beginning to look like the way of the future. A number of cannabis companies are taking advantage of the shift towards extract, creating significant opportunities for investors.

The extract supply chain

The process of producing cannabis extracts begins the same way as with all cannabis products, by raising the plant. On the commercial level, licensed producers grow a range of cannabis strains out of large-scale hydroponic growing facilities. At this point in the supply chain, cannabis plants produced to make extracts are the same as ones produced to be sold as bud. Companies producing extracts may operate their own growing facilities for vertical integration or partner with other licensed producers to source their raw bud.

There are a range of methods for extracting concentrates from the raw plant. The most common methods involve using a solvent like butane or ethanol to separate the cannabinoids and hydrocarbons from the rest of the plant matter. The exact process of accomplishing this varies from producer to producer and can result in a variety of different extract products depending on the method used. Finished products are then distributed to retailers across legalized jurisdictions.

The extract market landscape

To date in the US, nine states have legalized the sale of recreational cannabis for adult use, including extracts, while others have legalized medical cannabis. Additionally, nearly every state makes allowances for the sale of non-psychoactive CBD extracts. A bipartisan bill was introduced to Congress in June 2018 that would amend the controlled substances act to protect cannabis companies operating in legalized states and complying with state laws from federal prosecution. Even without the legislation, growers and extract producers in the US have thus far been left undisturbed in legal states so long as they follow state regulations.

The markets for cannabis and particularly extracts in the US are evolving quickly. In California, extracts made up 31 percent of California’s cannabis market in December 2017, with cannabis flower still dominating at 44 percent. Since recreational cannabis officially became legal in the state at the start of 2018, it is expected that half of concentrates sales will be procured by the recreational market by the end of this year. California’s total cannabis market is expected to hit US$31.4 billion by 2021. Assuming the shift towards extracts continues, extract will represent a sizable market by this point.

This trend can be seen in other US states as well. In January 2017, cannabis flower made up 49 percent of cannabis sales in Colorado compared to 23 percent for extracts. By November of that same year, flower accounted for 44 percent with extracts making up 26 percent.

The legal landscape is more solidified in Canada. Legalization and regulation of cannabis will officially come to Canada in October 2018, with concentrates becoming legal for sale to adults within one year afterwards. Until 2015, licensed medical producers were only permitted to sell cannabis in flower form. Upon taking office, Prime Minister Justin Trudeau’s Liberal government began to allow the sale of extracts in liquid form only.

Past and ongoing limitations have done little to stifle Canadian demand for cannabis extracts. Health Canada reports that sales of extracts in the country grew by an incredible 961 percent in the second quarter of 2017. Canadian licensed producers are now reporting difficulty meeting Canada’s insatiable demand for extracts.

Extract market players

Nutritional High (CSE:EAT,OTCQB:SPLIF,FWB:2NU) is one of the companies with eyes on that as-of-yet unmet demand. The company is an established player in the US after entering the market in Colorado and building one of the state’s biggest oil extraction facilities. Nutritional High’s current priority is becoming a dominant player in the California market after which the company will set its sights on Canada. The company was able to enter the Canadian market without going through the country’s lengthy licensing process via a strategic partnership with licensed producer Canada House (CSE:CHV). Through Canada House, Nutritional High is able to sell it’s FLÏ brand, gaining a foothold in what promises to be a very important Canadian market.

Two of Canada’s largest extract producers are Aphria (TSX:APH) and Aurora Cannabis (TSX:ACB), both of which are also giants in the country’s total cannabis market. Both these companies have recently made moves to establish themselves internationally, with Aphria acquiring Nuuvera (TSXV:NUU) and Aurora buying CanniMed Therapeutics (TSX:CMED) in January 2018.

In the US, Medical Marijuana (OTCMKTS:MJNA) was the first publicly traded company to break into the legal cannabis market. The company today is placing significant focus on its extract products. Medical Marijuana has a market cap of $480 million and is expected to reach $23.6 million in revenue in 2018.

The future

It’s beginning to look like extracts will become the dominant segment of the cannabis market going forward as legal cannabis continues to spread across North America. The Canadian extract market is projected to exceed $2.5 billion by 2020, while the extract market share continues to grow in the US as well. It’s not surprising that the cannabis market is quickly evolving as it becomes legitimate in an increasing number of jurisdictions. As this happens, the opportunity for investors to recognize the direction that the industry is moving towards and take advantage becomes clear.

This INNspired article is sponsored by Nutritional High (CSE:EAT,OTCQB:SPLIF,FWB:2NU). This article was written according to INN editorial standards to educate investors.