Tuesday, January 24, 2017

Yet another industry trying to keep the lid on production costs

Perhaps intuiting that things, election-wise, were going to pot, and that we might need a spliff or two on hand to get us through the next four years, Massachusetts voters decided to legalize marijuana, as did voters in California, Nevada, and Maine.

In truth, I haven’t been following the story all that closely. (I don’t even remember how I voted on that referendum. I think ‘yes’, but I’m not 100% certain.) I don’t know what the status of the law’s implementation is, what the rules are, or when there’ll be a head shop on every corner, a la Dunkin’ Donuts. I don’t imagine I’ll ever be adding a dime bag to my shopping list. (Paper towels, cherry tomatoes, pistachios, half dozen of whatever the marijuana equivalent of a loosie is…)

But apparently one of the outcomes of the declining fear of reefer madness is yet another demonstration of how the old laws of supply and demand work:

The increasing supply of legal marijuana is turning into a major buzz kill for growers as prices plunge -- and an opportunity for companies that can help cut production costs.

Prices are tumbling as formerly illicit cultivators emerge from the shadows to invest millions of dollars in massive pot factories. In Colorado, the average price sought by wholesalers has fallen 48 percent to about $1,300 a pound since legal sales to all adults started in January 2014, according to Cannabase, operator of the state’s largest market. Supply is surging as growers expand and install the latest agricultural technology.

“Anybody that is investing in this sector or starting a business in this sector needs to be doing so with the understanding that the price of cannabis is going to drop precipitously,” said Troy Dayton, chief executive officer of Oakland, California-based Arcview Group, a marijuana investor consortium. “The agricultural technology space is already booming, and now they get to lay their hands on the cannabis industry.” (Source: Bloomberg)

The wholesale price of a pound has fallen 48% to $1,300. An ounce of something good in Colorado goes for $200. Didn’t a dime bag of weed, like, man, used to cost, like, $10?  Or something. Oh, wow. Maybe back in the day that dime bag was a baggie full of seeds and twigs. Maybe sensimilla cost more. But the times sure have changed over the decades. (Of course, when I was a girl, a Hershey Bar cost a nickel. And a phone call cost a dime.) However high those prices seem to me, as tends to happen when there’s more supply than demand, and prices drop, the focus will be on cost cutting.

Pot growing can’t be that big biz that the suits can just sit there and decide to cut heads. Across the boards cuts – 10% of marketing gone. 10% of finance. 10% of HR. But they can become more efficient by using technology from outfits like Urban-Gro, which:

…sells machinery originally developed for tomato greenhouses, such as automated feeding and watering systems from Israel’s Netafim Ltd. and France’s Dosatron International.

And if you thought Miracle-Gro was just for little old ladies planting petunias and peonies, think again. Scotts, which owns Miracle-Gro:

…has been on a buying frenzy over the past two years, gobbling up leading companies that provide specialty fertilizers, lighting and other supplies for hydroponics, the indoor method of growing crops favored by U.S. cannabis cultivators.

Price pressures and all, the market for regulated pot is forecast to grow to grow to more than $20B over the next 5 years, up from a bit under $7B last year. That is, unless, new AG Jeff Sessions decides that he doesn’t want to focus exclusively on supporting state voter-suppression initiatives and promoting open carry laws (that’s open gun carry, partner, not open carry of a can of Bud Light), and decides to take on the states (all blue, I do believe – payback can be such a bee-yotch) where marijuana is legal.

One of the areas where efficiencies will be gained is in moving grass growing from basements hung with grow-lights to greenhouse production, which is a lot cheaper. (You don’t need grow-lights like you do in a dank dark basement…)

And, of course, automation will be coming into play as well. One grower is expanding operations without proportionately expanding headcount.

A machine mixes soil ingredients, pours the dirt into containers and then digs holes for young plants. A conveyor belt carries the container to an employee who does the delicate job of planting. Rather than relying on people to trim away leaves and stems from harvested pot, he’s trying out machines that automate the job.

Automation. Technology. Efficiencies. It’s all kind of business 101, isn’t it? No more knowing the guy who knows the guy who knows the guy from Mexico. No more a couple of plants interspersed with the tomatoes in the backyard garden. No more pot in a pot on the windowsill.

Nah. It’s just another big business, trying to keep the lid on production costs.

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