California’s fresh salad market is worth around 2 billion USD annually, while the currently legalized cannabis market is estimated at around 2.6 billion USD. Therefore, it is not a surprise that the organizers of The Forbes AgTech Summit 2017, which took place in Salinas, CA on 28th and 29th June 2017, invited participants of the event to visit – probably – the largest legal indoor cannabis growing facility not only in California, but in the whole of the U.S. The visit at the facility located just a few minutes north of Salinas, CA and right at the ocean’s shore, was truly an enlightening experience.
It is a well-known fact that the cannabis market in the U.S. is changing rapidly. Of course, the specific legislation in this field is left with each state and California is said to be the most progressive state on the issue. Currently, the only legal use of cannabis in California is for medical purposes and only after receiving prescription from the doctor. From 2018 on one will also be able to use cannabis for recreational use.
However, many do not believe that much of the current production is used for medical purposes. One can only speculate, as this particular market does not have any databases of data to analyze and understand what is going on. The reason is very simple: even the smallest piece of data can serve as proof of violation of federal law. Because the data is missing, the legal financing is also missing, as no bank can finance illegal activity. Therefore, the financing gap for the sector is estimated to be 100 million USD, which presents a clear opportunity once the market becomes fully legal.
In fact, in order to start growing cannabis one does not need much knowledge, as the crop grows practically on its own. Most of the new plants start as clones of existing plants. After 13 weeks of growth the crop is ready for harvest. Key to success is management of temperature, light and water during the growth period. The facility in Salinas is located next to the ocean which allows growers to naturally moderate their growing temperatures instead of using air conditioning for most the year, which reduces cost.
Even though the cost side of growing cannabis is very interesting, the revenue side is even more interesting. There are two major ways of selling marijuana. The first one is selling the flower itself, which generates revenue of approximately 2,000-2,400 USD/Ib. The growing compartment for marijuana consist of numerous growth chambers, each of which has 60 lamps. Each lamp is able to produce approximately two pounds of flower for a growing cycle, which lasts 13 weeks. If the flower is of a lower quality, than growers can squeeze out cannabis and produce oil. For each 100 lbs of flower, a grower gets 40 lbs of mass ready to be pressed, which contains approximately 22% of the oil. This oil can be sold for 6-9 USD/gram, while its costs of production are lower than 1.5 USD/gram.
Based on the above economics it is clear that cannabis can be a very profitable business. Knowing this fact inside out, California’s growers are confident that large number of new players will enter the market and therefore, the price will rapidly fall down. Therefore, only the growers with lowest costs will survive in the long-run.
Not only growers looking for abnormal profits are passionate about cannabis. During my conversations in California it was repeatedly mentioned that some big seeds companies own thousands of acres of cannabis in South America. Once this becomes fully legalized in the U.S., the whole genetics of the plant will be patented by those players. Moreover, it was mentioned that soybeans, as well as fiber markets can be really shaken up by hemp, which needs very little water and grows very quickly even in poor quality soil.
Even though, the cannabis market is only being legalized as we speak – and those are by no means global trends – the really big players anticipate this can be the next big thing. It is way too early to say who the winners and losers will be in this rapidly developing market. However, it is certain that each player in agriculture should know the developments in the cannabis market and be aware of how those are affecting her, or his business.
The Center for Industrial Development remains very curious to observe and report on the developments in this market, while hoping that cannabis farming will lead to economic development with, hopefully, little, or, ideally, no side effects.
Mateusz Ciasnocha is constantly on a mission to “unleash dormant potential.” He specializes in agriculture, energy, and Africa, and is also passionate about innovation and entrepreneurship. Mateusz currently studies at ESCP Europe Business School and the University of Oxford, where he is receiving a Masters in Energy Management and Philosophy Certificate, respectively.