Strategies for Cost-effective, Scalable Cannabis Cultivation

He who controls supply, controls the market. Employing cost-effective, scalable cannabis cultivation strategies will help cannabis growers gain a bigger market position.

The global cannabis market could be worth $194 billion by 2025, according to a BMO report, as both recreational and medical demand for the plant expands alongside legalization. To meet that demand and get a leg up on the competition, cannabis companies will need a business model that aims to be both scalable and cost-effective. Some of the strategies smart management teams are employing to create such a model include innovative cultivation methods, renewable energy generation and water conservation, vertical integration and synergistic partnerships.

Mega facilities for scalable cannabis cultivation

Cannabis growers who understand the importance of scalability are building massive state-of-the-art grow facilities. Known as mega facilities, they have enough space to easily expand production levels to meet rising demand. For example, Canopy Growth’s (TSX:WEED) Smith Falls Ontario facility, historic site of the former Hershey Chocolate (NYSE:HSY) factory, currently has 472,000 square feet of total productions space; however, the 42-acre property offers much more opportunity to quickly expand its production capacity as global demand heats up.

A few cannabis companies are building mega facilities that approach or surpass 4 million square feet. In 2018, FSD Pharma (CSE:HUGE) acquired the 70-acre former Kraft Foods (NASDAQ:KHC) facility in Cobourg, Ontario which currently has 620,000 square feet of cultivation space but has expansion potential of up to 3.9 million square feet. Once retrofitting is complete, the operation will be the world’s largest legal hydroponic indoor cannabis growing facility.

Canadian-based Asterion Cannabis is developing the world’s largest greenhouse cannabis growing facility, a 40-hectare, or 4.3 million-square-foot pharmaceutical-grade medicinal cannabis facility in South East Queensland, Australia. The operation will feature good manufacturing practices (GMP)-certified greenhouses and, once completed, it will have an annual production capacity of more than 500,000 kilograms of cannabis.

Australia’s legal medical cannabis market is only about three years old, but is forecasted to experience stellar growth, rising from $52 million in 2018 to each $1.2 billion by 2027, making it the fifth-largest cannabis market in the world. In 2018, Australia became one of the few nations to export cannabis products, along with Canada, the Netherlands and Israel. A mega facility such as the greenhouse grow-op Asterion is building will easily allow for scalability as the Australian cannabis market matures.

Saving on energy costs

Cannabis production can be energy- and water-intensive. The increasing number of grow operations in some jurisdictions is leading both governments and consumers to demand more environmentally-sustainable practices in scalable cannabis cultivation. Some growers are incorporating renewable energy sources in the design of their facilities as both a cost-savings measure and as a means to reduce the environmental impact of their operations.

Solar energy is the most ideal source depending on geographic location. The continent of Australia has the best solar energy resource on the planet, and the region of South East Queensland is one of the nation’s sunniest, with consistent sun even through the winter months. Asterion’s greenhouse facilities will use solar cells and other mixed renewable energy sources to provide around the clock power and reduce its energy footprint.

There is some debate as to whether greenhouse-grown cannabis is less consistent in quality than indoor, but this is a misconception. Today’s modern cannabis greenhouses have many of the same environment control capabilities and cutting-edge cultivation infrastructure found in indoor growing facilities. However, even the most efficient indoor grow operations can’t compete with greenhouse when it comes to cost-effective energy sources. Using predominantly direct sunlight compared to indoor lighting can significantly cut energy costs not to mention lower the environmental footprint of a grow operation. In addition, these semi-permanent structures can be expanded easily and at low cost.

Cost cutting, yield increasing cultivation methods

A company’s choice of cultivation method can have a dramatic impact on both scalability and cost. Greenhouse cannabis grower Aphria (TSX:APH), for example, was able to bring production costs down 36 percent from $1.73 per gram to $1.11 per gram in 2017 by improving their growing techniques.

Controlled Environment Agriculture (CEA), which gives growers the ability to create the perfect grow environment just about anywhere and in any season, is well-suited to the large-scale production of cannabis. “CEA provides maximum control over the growing environment and allows you to optimize inputs such as energy and water to maximize crop production and quality,” Stephen Van Deventer, CEO of Asterion, told Investing News Network. “When your yield is maximized there is less wasted energy and materials, which can significantly reduce your operating costs and increase your profit margins.”

At its Australian facility, Asterion also plans to employ advanced tissue culture techniques, known for producing yielding thousands per crop of disease-free plants with genetically uniform strains. In addition to larger yield size, improved disease resistance and superior control over genetics, large-scale commercial production of cannabis using tissue culturing has many other advantages over conventional cannabis propagation including increased efficiency and lower costs.

CEA growing methods include hydroponic and aeroponic growing systems, which use less water and can deliver nutrients more effectively. Hydroponic and aeroponic systems can reduce water usage over traditional in-ground cultivation by as much as 70 percent and 90 percent, respectively.

James E. Wagner Cultivation (TSXV:JWCA) has incorporated aeroponic growing systems into its operations. This method of cultivation not only uses much less water, but also takes up less space, resulting in much larger yields. Pure Global Cannabis (TSXV:PURE) has developed a proprietary ‘multi-ponic’ system, which is a hybrid between hydro, aero and three other vertical farming systems that will provide three times the yield of cannabis as other comparatively sized grow systems.

Vertical integration and synergistic partnerships

Vertical integration and synergistic partnerships allow cannabis companies to build scalable, cost-efficient operations while setting themselves apart from competitors. Controlling the supply chain from seed-to-sale affords producers more control over the market and more opportunities to maximize profits.

Vertical integration starts with all-inclusive facilities that include more than just grow space, but processing capabilities and R&D space as well, granting superior quality control and operational efficiencies all at a lower overhead cost. Synergistic partnerships also help cannabis companies to vertically integrate other aspects of the supply chain into their business model and diversify their product range.

Asterion’s mega greenhouse facility will include full extraction and processing equipment as well as an R&D facility. “Being vertically integrated gives us more control over every aspect – including prices,” said Van Deventer. “Vertical integration means all steps from growth to final product will happen in house – no down time or additional logistics. It reduces costs on overhead, transportation and other operational expenses.” Asterion has also strategically partnered with PreveCeutical Medical (CSE:PREV,OTCQB:PRVCF,FWB:18H), a preventive health sciences company focused on developing preventive and curative therapies, for research and to develop new medicinal cannabis-based products. The partnership will allow Asterion to increase its future product offerings, which could include tinctures, oils, edibles, flower and gelatin capsules.

Other vertically integrated cannabis companies include Naturally Splendid (TSXV:NSP), which is building a portfolio of high quality hemp, CBD and plant-based products for global market; and Chemesis International (CSE:CSI,OTCQB:CADMF) which has operations in Puerto Rico and California.

Takeaway

Cannabis is going global. Cannabis growers with mega facilities, cost-effective operations and vertically-integrated business models will be the best positioned to deploy scalable cannabis cultivation and capitalize on the impressive demand and growth opportunities coming down the pipeline.