Canopy Growth Corporation (WEED), Aphria (APH), MedReleaf (LEAF), Aurora Cannabis (ACB) and CanniMed Theraputics (CMED), do not make any money. They are extremely over-priced, net nothing and probably never will.
They’re agricultural companies. Agribusiness is a capital intense industry. Most of these cannabis companies produce their product indoors. This is not practical because of the costs associated with simulating the sun and biosphere in which the cannabis plant grow’s. In order to scale up production, all of them will eventually switch to greenhouses. Some say that the selling price of the product substantiates the costs involved. They do now but it’s still illegal.
Cannabis currently retails between $7-12 per gram of dry herb, depending on the strain, the vendor, how much is purchased, the quality of the product, location, etc.
Cannabis, grown indoors, will yield approximately 50-90 grams per plant (2-3 ounces) every three months. Four crops could be turned every year. The costs associated with this are about $4-6 per gram depending on the size of the operation. If you could sell for $10 and it cost you $5, you’re looking at a 100% return on capital. A nice profit margin. Cannabis, grown in a greenhouse, will yield approximately 500 grams per plant (over 1 pound) per year. Costs associated with greenhouse production come to $0.70-2 per gram again, depending on size of operation. The profit margins on greenhouse grown product, some 900% if sold for $10 per gram, seem staggering. But that is because the price is staggering. Once cannabis is legalized, it will never sell at $10 per gram again. This is a plant that is easier to grow than a tomato plant. It’s easier to grow than tobacco. Not only that, it yields more than the tobacco plant. Tobacco, in the best of climates, yields 250 grams per plant (half a pound) outside.
Currently, tobacco wholesale’s for $0.05 per gram.
Agricultural and horticultural organizations grow on thousand-acre plots of land or in vast hundred-acre greenhouse operations. Aphria (APH), currently is the only licensed producer growing in greenhouses to scale and is located in a region (Essex County, Ontario, Canada) known as the tomato capital of Canada due to all the greenhouse operations within the area. Once legalization occurs, the price will fluctuate depending on the amount of competitors entering the higher margin cannabis industry. As demand increases for concentrates and edibles, even more cannabis will be needed. Demand could stimulate supply enough to over extend the industry into a massive credit fueled, expectation hungry frenzy. When the price tanks, defaults occur and millions of dollars are lost. Individuals and businesses base production, expansion and forecast on the selling price now, not on what it will be in the future. The costs of production won’t change, in fact, they might continue to rise as the selling price falls. Conducting business in a government regulated industry means conditions and restrictions on operating in that industry – barriers to progress.
We do not recommend taking any positions in these securities. Who knows what will happen to the industry. Agribusinesses are at the mercy of the commodity price. They operate on tight margins and are prone to seasonal fluctuations; booms and busts. They employ unreliable, and not so cheap anymore, offshore labour. Agricultural income is so bad that the government differentiates between two types of corporate income – farming and non-farming. This is because agribusinesses are in special tax brackets. Governments need them to feed people but they don’t make any money. They need subsidies.
In the end, the company that continues to generate more cash early on, retains that cash and maintains a solid balance sheet will do fine. It might even pay a dividend or two. Some day.
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