'Pot' growers push to cut costs

Ag tech firms offer solutions as cannabis prices tumble

Brian Lade, owner of Smokey Point Productions, stands inside a marijuana grow room last week at the company’s farm in Arlington, Wash. As prices fall, growers are looking to cut costs.
Brian Lade, owner of Smokey Point Productions, stands inside a marijuana grow room last week at the company’s farm in Arlington, Wash. As prices fall, growers are looking to cut costs.

The increasing supply and plunging price of legal marijuana are turning into a major buzz kill for growers -- 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 large indoor farms. 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, Calif.-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."

The focus on efficiency can cut production costs for some indoor growers to less than $300 a pound from more than $1,000, said John Chandler, vice president at Urban-Gro in Lafayette, Colo. His company sells machinery originally developed for tomato greenhouses, such as automated feeding and watering systems from Israel's Netafim Ltd. and France's Dosatron International.

"If you want to compete on a price game, you have to use versions of our technology to do it," Chandler said. "Everybody is putting in irrigation systems, so that's good for us."

Urban-Gro also sells high-efficiency lights from Canada's P.L. Light Systems Inc., which competes with Gavita, a Dutch company purchased this year by Scotts Miracle-Gro Co. Scotts 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.

Retail prices are also dropping, though not as fast as in the wholesale market. Marijuana shops in Colorado collected an average $6.61 per gram in November, down 25 percent from the first quarter of 2014, according to BDS Analytics, a research firm.

The regulated market in North America could triple to more than $20 billion in five years, from $6.7 billion last year, after California, Maine, Massachusetts and Nevada legalized adult recreational marijuana use in November, according to Arcview. Canada's plan to legalize marijuana this year also will contribute to the growth, Arcview said.

One caveat surrounding the booming cannabis industry is President-elect Donald Trump's choice for attorney general, Republican Sen. Jeff Sessions of Alabama, an ardent marijuana foe. But it remains to be seen whether Trump or the Republican-controlled Congress will attempt to challenge the states that have legalized the drug.

While more than half of U.S. states permit medical use, transporting cannabis across state lines remains a federal crime, making each state a market unto itself. That means growers in cloudy coastal Oregon or frigid Maine must use technology to create the warm, sunny conditions favored by marijuana plants, and they need to do it as efficiently as possible.

Decades of prohibition necessitated growing marijuana clandestinely in basements, warehouses and garages, making growers comfortable with indoor production, said Leif Olsen, managing partner at Denver-based Good to Great Consulting. But with legalization comes an increasing need to compete on cost, and that will eventually shift the industry to efficient greenhouse production, he said.

"Growing inside is definitely an antiquated concept," Olsen said. "It's coming out of hiding."

A hybrid greenhouse featuring insulated walls and a glass ceiling may consume less than half the energy of a warehouse, said Brandy Keen, vice president at Boulder-based Surna Inc, which sells climate-control systems for cannabis growers. And a well-designed climate-control system can cut energy needs while also providing pure water for plants with reclaimed condensate, she said.

The drive toward efficiency isn't cheap. Brian Lade, owner of Smokey Point Productions in Arlington, Wash., started growing marijuana in a garage at age 17. He endured police raids and a few days in jail before the laws changed. Now he's raised $25 million to expand his 15,000-square-foot warehouse farm operation to 135,000 square feet.

That's enough space to pump out 1,700 pounds of buds monthly from dozens of custom-bred strains such as Dirty Girl and Cinderella's Dream, up from 100 pounds. He also can process 2,200 pounds of purchased marijuana into cannabis oil and other concentrates for use in e-cigarettes.

While Lade increased production by 16 times, his employee count is up only four-fold, to 100, thanks to economies of scale and automation, he said.

"If you want to provide cannabis to your people, you've got to adapt or die," said Lade, 40. "We are basically just going way bigger and then adding efficiencies like the machines and computer software."

Information for this article was contributed by Jennifer Kaplan of Bloomberg News.

Business on 01/18/2017

Upcoming Events