Here’s an interesting press release from a marijuana producer company Alefia (TSX: ALEF, ALEF.DB) – the relevant snippet I’ve quoted below:
2019 OUTDOOR HARVEST HIGHLIGHTS
10,300 kg of dried flower harvested
1,000 kg per acre yield in Zone 1, which was planted in June 2019
$0.08 cash cost per gram to harvest (unaudited)
$0.10 all-in cash cost per gram to harvest, including facility capital costs (five-year amortization) (unaudited)
Cannabinoid content (THC and CBD per gram) of harvested flower was strong, at levels near to the cannabinoid content in identical strains harvested indoor
Quality assurance testing to date is successful, including for microbial content, pesticides and contaminants
“Our inaugural 2019 outdoor harvest was successful due to the commitment and capabilities of our team. I’d like to thank our on-site growers who navigated the challenging environment of starting the cultivation season late into the year and ultimately delivered an excellent harvest that we are measuring in tons,” said SVP of Production Lucas Escott.
The key line here is the $0.10 per gram “all-in” cost per gram to harvest, which bakes into some “half-baked” amortization scheme (pun most definitely intended).
Simple math follows.
1 kilogram (kg) is 1,000 grams.
So this batch of 10,300 kg of dried flower marijuana cost $1.03 million using their numbers.
How much is 10,300 kg?
Apparently 5.2 million Canadians have consumed cannabis over the past three months.
Consumption statistics are not that easy to find, but apparently in 2017 (when Marijuana was still technically illegal in Canada) the annual consumption was about 20 grams per user (with the distribution of consumption highly skewed towards the high frequency user in a typical Pareto distribution – I’d argue that these people are more likely to have their own sources, but let’s ignore this for now). This works out to 104,000 kg per year of consumption (if legal).
The latest statistics (link 1 – October 2018 to June 2019, link 2 – July and August 2019) show the annualized consumption at around 155,000kg (medical and non-medical usage – the pretense of medical usage has gone completely away after legalization).
So let’s say it is 155,000kg and rising. What I find particularly amusing is that if distributed evenly among 37 million Canadians, that’s 4.2 grams for every man, woman and child – apparently this is good for about 10 joints per individual.
Of course, not every Canadian is going to smoke marijuana. Statistics suggest that about 1 in 6 Canadians use it. The addressable population for Cannabis is about 6 million people in Canada – or about 26 grams per person. Assuming this 1 in 6 number is constant (I don’t see how non-smokers can convert into smokers too easily), that works out to about 26 grams per smoker – how much higher is this going to go?
Later in Alefia’s press release, we have the following:
Based on the 2019 results, the Company estimates that it can produce 1,200 kg per acre for a total of 102,000 kg of dried flower in 2020 at its expanded 3.7 million sq. ft. (86 acre) outdoor site, at full capacity. The modest increase in the expected yield per acre for 2020 is due a number of factors which should improve the overall outdoor grow operation, including commencing cultivation several weeks earlier relative to 2019.
So we have one company that is making a claim they can produce 2/3rds Canada’s annual consumption of (legal) marijuana, and implying they can do it for a relatively low cost (10 cents per gram, all-in).
If this is true, then there are a few implications, especially considering that growing marijuana doesn’t appear to involve much in the way of patent-able or proprietary technology (it is a weed, after all!).
One is that there is going to be a massive over-supply of marijuana, and there will be a huge “race to the bottom” effect as price leaders attempt to leap-frog each other to dump their supply into the market place. This is already happening.
Two is that because the marginal cost of production is effectively nothing, that the value chain in producing is going to capture precisely zero profit beyond a cost of capital – and indeed, that will only happen when other inefficient producers get squeezed out of the market due to oversupply – is the company that is able to produce at 6 cents per gram all-in going to have a competitive advantage when all others can do it at 8 cents? Sure it will, but how much value will they be able to extract from that advantage? Not a lot.
Three is that governments are going to make a huge amount of profit on volumes (one of the winners of the value chain, and also having a huge financial incentive to encouraging as much volume as possible to be transacted in the legal market). (CRA Cannabis Excise Duty Information) At the federal layer, the government stands to make a minimum of $1/gram sold, or 10% of the product cost.
Four is that the low price of producing cannabis is going to create its own markets for ultra-low priced product, but this has to happen before it hits the excise tax layer – hence, the production of oils and other cannabis knock-off products that try to find some way to use what is otherwise worthless biological inventory.
Where is the profit going to be in the product? Obviously it is going to be in branding and marketing like most commodity products – tobacco has its Marlboro, and if/when Cannabis has their equivalent, that brand will probably end up making money. These brands take decades to build, sort of like Coca Cola and Pepsi. Until then, good luck – everybody in the marijuana production industry is going to lose.
