The late bird gets the worm – the sweet spot for LP applicants

Health Canada’s focus on public health and safety is woven throughout the task force report, which is no surprise. Bearing in mind that the latest report is full of recommendations (and not actual policy), what stood out from an applicant and LP’s perspective is that outdoor field production and lower security costs could be near on the horizon. Could it finally  be that cannabis is being accepted as an agricultural product? Agricultural products grow the best in their natural environment.

Allowing people to grow outside in Canada means that those feeling restricted by the costs of building a pharmaceutical grade facility might now be able to participate in production if they couldn’t before. Investing less than $5M to build operate a cannabis facility to date has been rare.

That being said, if outgrown production is allowed and security regulations are loosened , operating a cannabis farm could come out to be about the same cost as a small winery or organic vegetable farm. These operations still need money to produce a product with yields reliable enough for a consumer market. Farmland across Canada that isn’t in the dire dry lands of the prairies can be found at upwards of 100k per acre, rising on average 10% per year.  Pricey farmland is a problem that food producers face too. The high acreage price coupled with a short growing season makes farming hard in Canada, which is why we find more than half of our produce imported from places like Miami, Mexico, and California. Greenhouses came into play for a reason, and to make a greenhouse that will withstand Canada’s winters is no small feat. Does the suggestion of field grown acceptance suggest that cannabis could now be imported from these tropical locations eventually, too?  If imported by those with licenses to distribute so that prices are controlled and the Canadian market stays strong – quite possibly.

Perhaps the ones most impacted by a recommendation to lower security requirements and accept field grown production will be those existing applicant LPs that have already footed bills in the millions to satisfy existing security controls as part of their applications and current operations. There are some applicants that have already built facilities costing $5-$7M to build and maintain before even having a license.  This might sound like a lot, but fancy HVAC systems can cost over $1M alone, and a security vault to spec around the same. If these specs are no longer required, the best these applicants will have is a first-to-market advantage when licenses start to amalgamate.

If you’ve been frustrated by a long line of licenses being approved before you, or weren’t convinced until recently saw that it was worthwhile to submit an application, it could be that luck is still on your side.  If you recently submitted, or submit now, you’ll probably save a lot of money in your build-out if these recommendations are accepted with the proposed new recreational system. You’ll also be in a nice position to produce perhaps at a lower cost from start-up than the existing market  without having lost any of the finances that some facilities have put into their strict security operations. More analysis would be needed to compare these different growing systems over time. Greenhouses still have traditionally had a higher yield than crop fields in Canada.

Now, as it relates to marketing, the task force recommends that cannabis promotions be limited to areas where minors are prohibited, similar to those restrictions laid out under the Tobacco Act which “Specifically prohibits promotions by means of a testimonial or endorsement, false or misleading advertising, sponsorship promotion, lifestyle advertising (which evokes image of glamour, excitement and risk) and advertising appealing to young people.”

The task force also alludes to a preference for plain opaque packaging with warning symbols and prohibition on sales of mixed products including not only alcohol, tobacco and nicotine, but also caffeine. No coffee and cannabis? Maybe not for mixed sales, but people will still find a way.  Less of a push for those Starbucks and Tim Horton’s edibles many were hoping would go mainstream one day.

So, if I’m a licensed producer and I’ve already made a deal with a celebrity group — or am working on a deal with a celebrity group – how will the value of this deal stay with me if there are no such sponsorship promotions allowed in the new system? If Health Canada allows existing sponsorships to be grandfathered into the new recreational market, this could be a huge advantage to LPs already in licensing agreements. If however, they ban them, we could see a loss of value in the partnerships already made. The report suggests however that brand loyalty will fall back less on celebrity sponsorship, and more on quality of product.

Back to cannabis as an agricultural commodity. It’s time to focus on quality control, which in the end will be what helps you gain a foothold in the new recreational market. As security and production controls relax, we’ll start to see faster application acceptance. Getting an application in now before ideas like caps on licensing come into play isn’t a bad idea.

Further to an easier licensing application process, the task force recommendation is also proposing it be made easier for other cannabis product submissions to be accepted. The report stipulates that “The government must work with industry, the medical community and the patient community to promote and encourage clinical research and drug approval submissions for cannabis and cannabinoid based products.”

Getting in on a license to produce and handle cannabis could therefore apply to more than just your agricultural product, and this is why we can then appreciate some of the other parts of the regulatory framework that treat it less like a plant, and more like a drug. There can be lots of money in approved drugs, and now is the time to start thinking about what kind of products you might like to make, too.

– Tegan Adams