Happy 4/20! We continue with our 4/20 special series with insights on the cannabis industry’s developments and prospects. From growers gaining better results to low expectations concerning legislative relief, today’s article includes insights coming from a Canadian grower, a supplier of air systems, and an investing company.
Navigating price compression and lack of financial support
“We truly believe in vertical integration to succeed in the cannabis industry,” says Nick Sosiak, CFO of Cannara Biotech. “We have seen early on consumer sentiment for not only good quality and premium cannabis but a consistent supply of it as well. If you build your business solely as a grower, you will need to heavily rely on Licensed Producers to sell your product. With ongoing price compression, the Licensed Producers end up having control and forcing the grower to reduce the price earned for the crop. Same goes for Licensed Producers who have decided to move away from their grow operations. They heavily rely on micro growers to support their business but at the end of the day will be putting pressure on them to deliver during price compressions, which will ultimately force many of the small growers to close down.”
Cannara has 1.6M square feet of potential cultivation assets located in Quebec, Canada. “This is the province with the cheapest electricity cost in the country, and the biggest cost input in cannabis. Not only do we control the cultivation, but we have launched 3 premium cannabis brands, Tribal, Nugz, and Orchid CBD in order to get our harvests directly to consumers.”
According to Sosiak, the biggest challenge in the industry currently is navigating price compressions and lack of financial support. “Institutions and investors have closed their financial tap, forcing business to rely on operational cash flows to support and grow their business at a time where competition and price compression is at its highest. The goal is to keep focused on your operations, start scaling and deliver consistent and quality products that consumers enjoy and want to repeat buy.”
“Risk continues to shrink”
As new US states come on with legalization, the market continues to grow. The global market is also beginning to loosen, explains James Cunningham, Founder and Director of Cultivation at Vertical Air Solutions. “We anticipate large opportunities developing in Europe and Central/South America in the coming years. Within these markets and geographies, operators are increasingly educated and more well-informed on best practices for indoor cultivation on a vertical LED-based platform. Because of this, the entire industry is advancing, with more efficient operations and simply better results. What was in large part an ‘experiment’ a few years ago has become a far more predictable venture today.”
According to Cunningham, companies like Pipp Horticulture and Vertical Air Solutions, among others, have helped pave the way for cultivators nationally and internationally. “We serve an increasing number of facilities and are gaining knowledge at an increasing rate, leveraging that knowledge throughout their expanding client base. This has become a huge win-win for the industry, as the equipment producers learn from their clients, gain intel, advance their offering, and share their learnings with future clients. We see this continuing to advance and push the industry forward. As this happens, the overall risk associated with investing in and operating an indoor cannabis cultivation facility continues to shrink. This ‘sharing of knowledge’ is what makes our industry so awesome - growers helping equipment manufacturers to help current and future growers, and so on.”
“At Vertical Air Solutions, we want to make sure that we are continuing to expand with the growing market. Servicing international markets will present its fair share of challenges, and we will make sure to scale effectively and responsibly.” To do this while maintaining the highest value for our customers, Cunningham explains that they need to remain cost-efficient which requires establishing (market) local production, distribution, and service. “This is no simple task and remains one of our greatest challenges today, but we continue to make progress and believe we are closer than ever to having a true international fulfillment and support engine. In the meantime, we approach each unique customer as its own project with specific needs, and we do all we can to accommodate those needs.”
The company also sees new players entering the field and competing for this expanding market opportunity. “We of course welcome healthy competition and firmly believe it is in the best interest of our customers and the industry as a whole. However, it's difficult at times for end-users to properly evaluate new market entries and assure that they are a viable entity, offer a quality solution and will have the staying power to support and advance their offering to serve an ever-advancing need at the customer level. The real challenge here lies primarily with the customers and operators, to have the insight to properly evaluate and select the best provider for each of the key components required to build and profitably run a cultivation facility. In our niche space alone, there are new entries making bold and often false statements which can be difficult for a consumer to recognize. Our hope is that we'll have an opportunity to help inform, educate and share all we've learned since pioneering airflow solutions for indoor cultivation and serving now thousands of clients around the world.”
“In the coming months we will see big east coast markets like NY, and Florida begin to gain momentum. We are excited to see the opportunities there. As well as other markets that are transitioning from medical to recreational use like Ohio, Minnesota, and Maryland. These markets are sure to expand, and we are ready, as we are currently very established in these regions. We are also seeing some of our first produce farms being developed. Our solution fills a need in all vertical horticultural environments, and we expect to see more and more diversity in our crop application,” Cunningham adds.
No legislative relief
In terms of US legislation, John Mazarakis (Chairman of investing company Chicago Atlantic) does not believe there will soon be any relief for the cannabis industry. “I know it was much anticipated, especially for the operators - but I do expect to see movement sometime after the midterm election. While we are seeing numerous bills being proposed, and some have even passed the House, I don’t see any of them going to the president’s desk for signatures anytime soon.”
“Given that inflation is at an all-time high since 1981 and interest rates are rising, this overall hurts evaluation. We’re looking at a fast-growing industry with a 20% YOY benchmark that we are seeing being represented in the media. Nonetheless, I expect equity values to remain low because of the lack of capital in the space. I don’t expect any sort of capital infusion in the space coming from institutional investors anytime soon. Competition within the debt space will be more limited than it was in 2021,” adds Mazarakis.
See you tomorrow for part 3!