Supply & Demand - Cannabis Pricing Pressures

The legalized cannabis industry is incredibly exciting, and is the fastest growing segment of economy.  That being said, incredible amounts of supply capacity are coming online which will put further pressure on marijuana wholesale pricing.  There is not a week where I don't hear about  10-12 groups wanting to either start a new production site, or increase the capacity of an existing operation.

We have seen this across the country personally over the last two years, especially in WA, OR, and CO states, and the WSJ in its article further talks to this issue about the strong pressure on pricing, and this has clearly impacted profitability for many of these operators.  For some, the "Green Rush" of profits have never come for the growers, and many are looking to sell and move on with their lives to something else.

For us, there will be a select few cultivators that will win, and which will include those with unique genetics, those that are vertically integrated, those that have developed strong brands, and of course, those growers who can most efficiently cultivate quality product at a highly competitive cost.    Most operators coming into market will either be too small to grow and produce at scale or will ultimately be under-capitalized and lack the talent to produce efficiently when they companies compete not only within their states but across the country, and ultimately with international players as barriers and restrictions come down.

For Salveo Capital, with this phenomenon which happens with other commodity products, we become very interested in companies and innovative technologies that address the following:

  • increased yield technologies and services
  • novel genetics
  • proprietary formulations for processing flower to meet unique conditions
  • powerful branding with strong value propositions

By 

Jacob Bunge

Aug. 30, 2017 8:00 a.m. ET

208 COMMENTS

After decades of dodging law enforcement and fighting for legalization, U.S. marijuana growers face a new challenge: low prices.

From Washington to Colorado, wholesale cannabis prices have tumbled as dozens of states legalized the drug for recreational and medicinal uses, seeding a boom in marijuana production.

The market is still tiny compared with the U.S. tobacco industry’s $119 billion in annual retail sales, but the nascent cannabis business has grown to more than $6 billion a year at retail, according to data from Euromonitor International Ltd. and Cowen & Co.. 

For marijuana smokers, the price drop is sweet news. Recreational users and those prescribed cannabis for health reasons have seen prices decline as wholesale prices have fallen, though some retailers have pocketed part of the difference, according to New Leaf Data Services LLC, which researches the U.S. cannabis market.

At Hashtag Cannabis, a Seattle-based retailer running two dispensaries, co-owner Jerina Pillert said wholesale price declines show up on the plastic vials holding green-and-tan nuggets of “Super Silver Lemon Haze” marijuana produced by Longview, Wash.-based Bondi Farms. A gram sells for about $10 currently, down by a third from the $15 a gram it fetched in September 2015, she said. 

But for growers—ranging from high-tech warehouse operations to back-country pot farmers gone legit—the price drop has been painful. 

Since peaking in September 2015 at about $2,133 a pound, average U.S. wholesale cannabis prices fell to $1,614 in July, according to New Leaf. That is the sort of market decline that hit Midwestern corn and soybean growers in recent years after a string of record-breaking crops.

“There is an increasing recognition, on the part of the industry and those that grow and dispense, that this market is a commodity,” said Jonathan Rubin, New Leaf’s chief executive. 

 

Marijuana grows in a greenhouse at the Los Suenos Farms facility in Avondale, Colo., last year. PHOTO: MATTHEW STAVER/BLOOMBERG NEWS

In response, some producers are taking a page from the food industry, where farmers and food companies increasingly appeal to health- and environment-conscious consumers. Growth in organic food products for years has outpaced conventional grocery sales, and products made without genetically modified crops, gluten and artificial flavorings can command premium pricing and shelf space.

Stephen Jensen, who secured a state license to grow cannabis in Washington in 2015, has yet to turn a profit. He is promoting what he described as natural growing methods.

“We needed to give people a reason to select us,” said Mr. Jensen. He said his Green Barn Farms eschews synthetic pesticides and relies on natural light over high-powered lamps, which he said helps his cannabis stand out among more than 1,100 other Washington farms.

 

Because cannabis remains illegal under federal law, growers can’t get their crops certified as organic, a label that can only be bestowed by the U.S. Department of Agriculture.

Cannabis farmers instead have turned to alternative labels such as SunGrown Certified, which requires that growers use sunlight and water-conservation practices. They hope such labels will entice smokers and secure shelf space in the 29 states where marijuana is legal in some form.

Another label, Clean Green Certified, is modeled on U.S. organic standards. It bars synthetic pesticides and emphasizes what the program deems fair-labor practices. In May, Washington State passed a law that would set up a state-level organic-certification program, though it may need to use a label that doesn’t use that word.

That push to differentiate is splitting pot farmers into rival camps.

Indoor-grown cannabis, where climate controls and high-powered lights allow several crops per year, typically is of a more consistent quality, industry officials say. Its dense, often bright-green buds catch consumers’ eyes, often fetch a higher price and can be costlier to produce.

Proponents of marijuana grown outdoors and in greenhouses say indoor facilities rely on synthetic fertilizers and heavily consume electricity. They point to a 2012 paper by University of California Senior Scientist Evan Mills, which estimated that indoor cannabis production accounted for 1% of national electricity use, though some growers have been adopting LED lights, which consume less electricity.

Jeremy Moberg, owner of Riverside, Wash.-based CannaSol Farms and head of the Washington Sungrowers Industry Association, says marijuana smokers will come to care about the environmental cost of their high.

“The socially conscious, premium customer is going to want us because we’re sustainable,” he said. “It only takes me 30 seconds to convert somebody wearing Patagonia and driving a Prius that they should never smoke indoor weed again.”

At Hashtag Cannabis in Seattle, Ms. Pillert said customers occasionally ask for pesticide-free or sun-grown varieties. Smokers’ main fixation, she said, is the potency rating for the key active ingredient, tetrahydrocannabinol, or THC: “They want to make sure they are getting the biggest bang for their buck.”

 

A ‘Bud tender’ stocks packaged marijuana in display cases at the grand opening of The Cannabis Corner in North Bonneville, Wash., in 2015. PHOTO: JASON REDMOND/REUTERS

Many in the emergent industry expect marijuana to eventually resemble the beer business, where pricier craft brews have built followings in the shadow of cheaper mass-market beers like Budweiser and Busch.

While high-quality strains and specialty brands may secure premium prices, more low-quality marijuana will be processed into oil used in vaporizer cartridges or adult-oriented baked goods like brownies and cookies, growers and retailers said.

Mr. Jensen, the Seattle cannabis producer, said he hopes that his sun-grown, naturally produced plants over time will yield a 20% to 30% premium over the average market price.

“I always buy organic products at the store and think there is a future for that in the [cannabis] industry,” said Mr. Jensen. But, he said, “it’s a battle getting that awareness out.”

Write to Jacob Bunge at jacob.bunge@wsj.com

Appeared in the August 31, 2017, print edition as 'High Returns Wither for Marijuana Growers.'

Read more

Benefits of an Investment Fund in the Cannabis Industry

It’s certainly possible for savvy individuals to navigate this avalanche of information with a lot of time and work. For others, though, an investment vehicle such as a diversified investment fund could be the key to mitigating the risks of cannabis investment.

There are tremendous opportunities to be had in the legal cannabis industry. If you’re reading this then you’ve probably seen the numbers: $2.7 billion market value in 2015 behind 74% growth in 2014 with an ancillary market that could be three times the size of the market of the plant itself. These enormous positives obviously come with some challenges, and while all investments involve some degree of risk cannabis investment definitely has some unique hurdles. How can a new investor make sense of the variance in state and local regulations (or lack thereof), 280e, and the trials of an emerging market? It’s certainly possible for savvy individuals to navigate this avalanche of information with a lot of time and work. For others, though, an investment vehicle such as a diversified investment fund could be the key to mitigating the risks of cannabis investment.

 

Benefits of a Fund:

Diversification

A diverse investment portfolio is important with any kind of investment. With the uncertainties and exploding competition in the cannabis industry, diversification is a necessity. Companies now are generally looking for minimum commitments anywhere between $50,000 to $200,000 so someone looking to invest $200,000, for example, will not be able to participate in enough investments to achieve real diversification. Spreading the risk among 8-12 companies would be ideal, and pooling money together in a larger funding vehicle allows for that without individually having to put up a million dollars or more.

Term Sheet Negotiation

Investors aren’t the only ones that see the opportunity in cannabis. The individual companies see the coming years as more lucrative than anyone else, and they have put in the sweat equity to prove it. Consequently their valuations often reflect a lot of potential value that can be much higher than actual current value. Individual investors – again around that $50,000 to $200,000 point – might not have the negotiating power to secure a better valuation which means their dollars would purchase less equity and/or lower return. Once again, pooling money into a larger fund creates advantages, this time in leverage. A single entity controlling a large investment amount will have more negotiating power than several smaller individuals.

Expertise/Resources

One of the things that makes the cannabis industry so potentially lucrative is that it touches so many other industries: software development, technology, agriculture, retail sales, research, etc etc. It would be very difficult for an individual to amass expertise in all of these fields along with having the financial experience to evaluate the business side of each company. Additionally laws across the nation are constantly shifting. Researching and vetting companies and keeping up with the industry is a full-time commitment, and vehicles whose principal occupation is investing in this sector exist to handle this work.

Deal Flow

There are good companies in the cannabis industry, but finding them can be like looking for a needle in a haystack. You often have to sift through hundreds of companies to find ones with the idea, the team, the experience, and the plan to make investment worthwhile. Research, going to conferences, making connections, and being a public enough face that good deals search for you is yet another enormous commitment of time and money.

 

Considerations of Investing in a Fund:

Management Fee

Expertise, travel, accountant fees, and legal fees are necessary expenses and with investment vehicles these costs are paid by the investors, usually in the form of either a budgeted fee or 2% of committed capital.

Decision Making Authority

In addition to the management fee, the benefits listed above come at the cost of some authority as to which companies will be selected. Individuals obviously have 100% of the decision making power with their dollars, but once money is committed to a fund some of that is ceded to the firm. This may not be a negative, however, as the investor is able to rely on the firm’s industry knowledge and expertise.

Illiquidity

Committed funds are not liquid investments. Once the capital is called it is often working – and inaccessible – for a period of three, five, eight or more years. Investors should understand this before putting money into a fund.

 

As mentioned earlier, individual investment is absolutely possible, and groups like the ArcView Investor Network take care of a lot of the research and deal flow legwork – for a cost. Folks with the time to commit, a large amount of money, and a larger appetite for risk are certainly able to have an impact in funding in the cannabis space. For those with interest and capital but without the time and the expertise there are already several options to help you participate in the industry without sacrificing your piece of mind.

Read more

Salveo Capital To Host Marijuana Investment Summit

This Summit will outline not only the tremendous potential of cannabis, but will also outline the legal and business pitfalls. The Salveo team will spotlight the difficulties of investing in cannabusinesses and will highlight the ways savvy investors are overcoming the hurdles of such a young market. Additionally, representatives from businesses from several sectors of the industry will be on hand to provide a glimpse at the best of the companies fundraising in the marijuana space.

The Salveo Capital Marijuana Investment Summit is an invitation-only event open only to accredited investors. Contact us to inquire about an invitation to learn about investment in the cannabis space.

summit.jpg

The Salveo Capital Marijuana Investment Summit will provide attendees with the knowledge to confidently invest in the next great American industry.

With an astronomical 74% growth rate in 2014 legal marijuana is the fastest growing industry in the United States, and while its current $2.7 billion market value sounds impressive it’s only the beginning. As legalization spreads to new states, as markets begin to open, and as the federal governments eases its restrictions the limitless opportunities of this nascent industry will be revealed.
 
Opportunities to build dominant, national brands; to have a hand in constructing an industry from scratch; to get in before the ground floor is even constructed.
 
As with any investment there are risks and challenges. This Summit will outline not only the tremendous potential of cannabis, but also the potential legal and business pitfalls. The Salveo team will spotlight the difficulties of investing in cannabusinesses and will highlight the ways savvy investors are overcoming the hurdles of such a young market. Additionally, representatives from businesses from several sectors of the industry will be on hand to provide a glimpse at the best of the companies fundraising in the marijuana space.

The Salveo Capital Marijuana Investment Summit is an invitation-only event open only to accredited investors. Contact us to inquire about an invitation to learn about investment in the cannabis space.

 

The Salveo Capital Marijuana Investment Summit

When: August 12, 2015

Where: Salveo Capital HQ in Chicago

Contact for more information

 

Topics will include:

  • A Green Rush? More Like a Green Explosion - The legal marijuana market is ready for an explosion unlike any we’ve seen in our lifetime. From growing and selling the plant to cannabis tech, research, and development, billion dollar ideas are being hatched right before our eyes. Right now there is an opportunity to invest in one of the most exciting and profitable industries of all time, but this opportunity won’t last forever. Even now, the clock is ticking.

 

  • The State of the Marijuana Investment Market: The Good, the Bad, and the Ugly - Think investing in marijuana is easy? Think again. The industry is fraught with bad investments - from entrepreneurs with a lack of business acumen, businesses with unreliable and untrustworthy employees, to an unsophisticated and cash-based infrastructure. In this talk we address the many problems that accompany any attempted foray into the market.

 

  • Risky Business? The Legal Risks of Investing in Legal Marijuana - Is there any risk of prosecution? Seizure of assets? What truly are the risks of investing in marijuana? The Salveo legal team walks you through the state of the law, the latest developments, and the risks (or lack thereof) of investing in legal marijuana.

 

  • To Fund or Not to Fund? The Benefits of Working With an Investment Fund in the Marijuana Market - So you’ve decided you want to invest in marijuana - Now what? In this presentation we discuss the pros and cons of investing in a diversified fund versus an individual company. We will also explore the landscape of different investment vehicles available.

 
Salveo Capital is a noted thought leader in cannabis investment and has been featured as such in publications such as:

Read more

Legal Marijuana's Biggest Growth Is Still To Come

The legal marijuana industry is already the fastest growing industry in the United States.  The revenue projections from both the growing and selling of cannabis, and from the ancillary industry, are truly staggering, and even conservative projections predict that the legal marijuana industry will be valued in the tens of billions of dollars within the next five years. 

The truth, however, is that this industry’s potential, even when compared to some of the great industry explosions in history, is undervalued. Although the “gold rush” and “oil boom” are commonly referenced as comparative markets, none of those industries currently match the immediate growth potential of the legal marijuana market. Given the convergence of medical marijuana, recreational marijuana, and technology we haven’t scratched the surface of how large this “green boom” is going to be.

The legal marijuana industry is already the fastest growing industry in the United States.  The revenue projections from both the growing and selling of cannabis, and from the ancillary industry, are truly staggering, and even conservative projections predict that the legal marijuana industry will be valued in the tens of billions of dollars within the next five years. 

The truth, however, is that this industry’s potential, even when compared to some of the great industry explosions in history, is undervalued. Although the “gold rush” and “oil boom” are commonly referenced as comparative markets, none of those industries currently match the immediate growth potential of the legal marijuana market. Given the convergence of medical marijuana, recreational marijuana, and technology we haven’t scratched the surface of how large this “green boom” is going to be.

Consider these facts.

One: Legal cannabis is headed in two different directions, each with the potential to be multi-billion dollar industries. Comparisons to alcohol after Prohibition forget that, unlike alcohol, marijuana has very real application in medicine. Pharmaceutical companies are already preparing for the inevitable consolidation that will take place once the federal prohibition on marijuana is lifted. The amount of money that will be made from the medical side of cannabis – research and development of new strains and treatments, new delivery mechanisms, extractions of certain components – might very well dwarf the amount of money made from the regulated adult use market.

And adult use will be a massive market. In 2014 legal marijuana sales in Colorado doubled in the first year of expansion from medical-only to full adult use. It is possible, if not likely, that marijuana will be fully legalized throughout the entire west coast by the end of 2016. California and Nevada are almost certainly passing such bills in 2016, with states like Arizona, New Mexico, and Montana considering laws as well. On the east coast, Vermont, Rhode Island, and Maine will have full legalization bills on the books in the next two years with much of the rest of the northeast corridor following suit soon after. 

Two: The federal prohibition on marijuana is ending much quicker than even the most ardent supporters anticipated. Rand Paul, who yesterday announced his candidacy for President of the United States, is the sponsor of a bill to legalize medical marijuana. This makes the legalization of cannabis a legitimate election issue, and not one that a viable candidate can readily oppose. Not when swing states like Ohio, Pennsylvania, and Florida are set to pass comprehensive cannabis laws, and a recent Quinnipiac poll in these states showed over 75% support for medical marijuana. Several other swing states – Colorado, Nevada, Washington – already have recreational or medical laws on the books, and even Ted Cruz and Jeb Bush have both stated that they would not interfere with state marijuana programs.

Three:  Underlying both the recreational and medical marijuana markets is the fast-growing ancillary and technology market. This market (often referred to as the “pick and shovel” market) is growing just as quickly as marijuana itself.  As state laws are passed and prohibition is lifted, new startups are working quickly to fill the vast infrastructure gap left by marijuana’s former illegal status. These firms are offering cutting edge solutions in a landscape with no entrenched leaders, and together these they could develop into yet another billion-dollar industry. 

The legal marijuana market grew by an astounding 74% in 2014, and with legal expansion on the way in many parts of the country that growth is likely to continue. We are receiving funding requests from every imaginable sector – cultivation centers and dispensaries, research labs, pharmaceutical companies, software developers, and the like – as entrepreneurs pair with established business professionals to capitalize on the astonishing opportunity the legal marijuana market presents. In the industry we like to talk about the boom of recent years as a “green rush” but the coming months will show that we haven’t seen anything yet.

Read more