CANNABIS investors need to be wary when it comes to cultivation, says Oliver Zugel, Founder and CEO FoliuMed Holdings.
Where Did The Green Gold Go ?
When James Marshall, a carpenter from New Jersey, found shiny nuggets in a Californian river on the morning of January 24, 1848, he couldn’t have imagined it would spark a frenzied gold rush.
With billions of dollars now wiped-off the balance sheets of many Canadian cannabis licensed producers investors in the ‘green rush’ have also learned the hard way that all that glitters isn’t gold.
And, the harsh reality is that over the next decade, global cultivation capacity will outstrip demand by one hundred-fold.
Just the top ten producers in Colombia have more capacity today than the whole of the Canadian industry combined – and adding more land, more plants and more extraction is inexpensive and easy.
Earlier this year it was reported that an an estimated 1,000 tons of unsold cannabis has been destroyed by Canada’s licensed producers between 2018 and 2020 – no wonder the government closed its border to cannabis imports.
On a single farm the size of ten football fields – FoliuMed´s footprint in Colombia – you can produce the world’s entire 2020 medical cannabis demand of less than 100 tonnes, outside of North America, that is.
Germany – often cited as the powerhouse of medical cannabis – imported around 10 tons of flower last year, reports consultancy Prohibition Partners, with the rest of demand split between Australia, Israel and a list of also-rans which can be counted on one hand.
So Why Invest In Cultivation?
As Canadian ice hockey ace Wayne Gretzky once put it, you skate to where the puck is going to be, not to where it has been.
That rule clearly applies to the cannabis investment community, and on the plus side there are a number of catalysts – adult-use, CBD regulations, registered cannabis drugs, industrial hemp applications – which could materially drive-up demand and decrease the current supply overhang.
However, when you can add cultivation capacity in low-cost countries at a capital cost of 25 cents per gram, any surge in demand will be quickly followed by even more plants being put in the ground, and the downward price spiral continuing.
But all is not lost, and I can think of four good reasons to be in cultivation – although there are probably a lot more reasons not to be.
1. You are a pharmaceutical cannabis producer who needs to ensure strain consistency and reliable, long-term quality supply to feed into drug development efforts. That’s what GW Pharma did, and why we at Foliumed established a small cultivation footprint in Colombia with proprietary genetics.
2. You are a grower in a low cost jurisdiction able to provide pharma-grade cannabis biomass consistently, reliably and globally with not too much capacity.
3. You are operating in a jurisdiction with few licensees, no imports and sizeable domestic demand. For example, the US east coast states for adult use, or the Netherlands.
4. You supply hemp for construction, animal feed, and, or textiles. Albeit this is an agro-commodity play which has nothing to do with medical cannabis and where China is likely to emerge as the world-leader.
Going back to the Californian gold rush, history shows that ‘mining the miners’ – selling shovels, overpriced food and advice – is a superior path to riches than standing knee-deep in a riverbed.
If only James Marshall had known that, he may have left behind more of a legacy than the $9,000 monument erected on his tomb by the State Legislature of California.
Oliver Zugel, Founder and CEO FoliuMed Holdings