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Major shift to outdoor cultivation will lead to lower prices

Canada, the  benchmark in the international cannabis industry, has doubled its regulated outdoor grow space in the last year. This is a significant marker in the evolution of medical cannabis cultivation and may spell good news for African producers faced with the high costs of establishing internationally-compliant grow-ops. 

However, it also is likely to be a predictor of a falling wholesale price over the next 12 months, a trend that will be reinforced as legal African cannabis production takes off and Canada finally buckles under the weight of its current glut.

 

Canada Indoor/Outdoor grow ratio now 1:3

The conventional wisdom in growing medicinal marijuana is that it either has to be indoor or greenhouse and that outdoor is best left to hemp. This has posed a quandary for African producers. The continent’s climate is ideally suited for outdoor cultivation yet compliance with international best practice has seen excessive start-up capital requirements which are beyond the means of most African farmers.

Health Canada began issuing licenses authorizing outdoor cultivation only in April 2019, having previously licensed only indoor or greenhouse operations. The major players, facing financial fiasco from overcapitalizing in the initial ‘green rush’ began looking at outdoor with renewed interest. The lower costs associated with outdoors were particularly attractive.

 

wind turbines, cannabis, renewable energy

Outdoor growing on the up in Canada

 

Canadian switch to outdoor has implications for African producers

According to MJBiz, Canadian cannabis producers are sitting on three times more outdoor space than indoor space as the gap between indoor and outdoor cultivation is widens. Major producers such as Canopy Growth are shuttering greenhouses and other indoor grow facilities amid a glut of cannabis that is putting downward pressure on prices.

Canada’s licensed outdoor growing area has doubled to 59 million square feet so far this year, an expansion in cultivation capacity that could put added pressure on cannabis prices if and when that production reaches the market.

At the same time, indoor growing area – including cultivation space in greenhouses – has started falling, which in turn may alleviate at least some of those price pressures.

The switch to outdoor in Canada has implications for African producers who should think twice before investing in capital-intensive first-world grow ops, just because that’s what the buyers are used to. African producers should rather come at it the other way – to position ourselves as the world’s lowest cost marijuana and hemp producers and not to be driven by dreams of riches based on the current prices.

 

canada cannabis plants, animal and cannabis plants, canada cannabis

In Canada the buck will stop with outdoor growers

 

Costs of cannabis production falling

According to the State of the Cannabis Industry Report, the current cost of production per pound in the United States has dropped in the last two years, particularly for outdoor growers. 

Cost of manufacturing one pound of cannabis (US$) 

       
Cultivation Model 2018 2020 Difference % Drop
Indoor 425 396 29 7
Outdoor 175 100 75 43

Africa’s metric is in kilograms rather than pounds, so a translation of the above table in kilograms looks. Like this:

Cost of manufacturing translated into kilograms (US$)

       
Cultivation Model 2018 2020 Difference % Drop
Indoor 193 180 13 7
Outdoor 79 45 34 43

To take it one step further and look at US costs in ZAR terms, the average 2020 cost of production in the US is R per kilogram indoor and R per kilogram for outdoor.

US Cost of manufacturing one kg of cannabis reflected in ZAR (US$1 = ZAR 15)

       
Cultivation Model 2018 2020 Difference % Drop
Indoor 2 891 2 694 197 7
Outdoor 1 190 680 510 43

From the above its clear that outdoor cultivation costs have come down sharply in the past two years and that a new cost baseline is being established of around US$0,68/gram.

 

African export plans should be based on costs not dreams

In Africa the holy grail appears to be aim for production costs of US$0,50, which may be achievable depending on regulatory hurdles and compliance costs. It should be off this base that African cannabis exporters make their business plans rather than hoping for returns at today’s prices.

Currently the spot wholesale of cannabis in the US is around US$1400/pounds or US$2860/kg for indoor. This is not an accurate indicator of what African exporters should expect as the US market is driven by its own legalization dynamics and is not open to imports from Africa in any meaningful way. 

 

cannabis tunnel, cannabis greenhouse

Outdoor with hoops may be the way

 

More to the point is the massive glut of legal cannabis in Canada, estimated to be nearly 900 tons that will have to find its way onto the market in the next year. Combined with a higher proportion of outdoor producers working off a lower cost base and the first significant exports from Africa into Canada and Europe in 2021 has prompted industry warnings that prices will come down.

Craig Wiggins, managing director of market research firm TheCannalysts, says the increase in outdoor cannabis production will present its own challenges given the glut of legal cannabis in Canada.

“If outdoor growers do not have a channel to the consumer,” he said, “wholesale opportunities will be few and far between, as producers will draw from their existing inventory versus buying new inventory.”

African producers should also note that Canada’s exports have experienced steady growth, but the overall volumes remain insignificant.

And they’re mostly going to only a few markets – a warning for African producers that commercializing medical cannabis exports remains much easier said than done.

 

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