“If I may give one solid piece of advice, it's that it's better to build a properly designed cultivation facility that's a little smaller over building out big and fighting your environment in perpetuity. You'll very quickly be able to generate profit from a properly designed facility, whereas an inferior facility plagued with pathogens and pests and a general lack of environmental control will result in lower quality products and a higher rate of incidents. The best advice I have is to do it right from the beginning, even if you have to start a bit smaller.”
Growing cannabis commercially is a very intricate science. If you don’t have your math right, you can make large financial losses in spite of “going all out.” There are numerous variables that must be factored in to get the true cost of each gram of cannabis that you produce. Taxes are another thing; this may bump up your production costs by another 30%. As Kessler explains, ‘many people growing cannabis are using nutrients and fertilizers that were designed for the hobbyist market.” This of course is not sustainable in the long run as it increases the cost of production unnecessarily. At the end of the day, these extra costs have to be pushed to the end consumer. In short, establishing a sustainable grow operation is complicated, however, it is still achievable.
David Kessler is the executive vice president and CSO of a vertically integrated company that offers cultivation solutions to hemp and cannabis commercial grow operations- Agrify. In this interview, David takes us through some of the important considerations for cultivating cannabis on large scale such as the use of technology, calculating the cost of production, and offers some tips on measuring cultivation success. He also alludes to “the race to the bottom for mgs of THC at the lowest possible cost as an overarching business strategy for overseas cultivation.”
As an intro, how did your career path lead you to the cannabis industry?
As a student, I was president of the pre-law club and double majored in psychology and philosophy, all while being a cannabis cultivator and aficionado in my spare time – but I didn't think cannabis was a viable career path. Instead, I decided on law school. It was actually my (now) wife (then girlfriend) who pointed out my passion for plants and how I spent so much time studying and reading about them, and what ultimately led me to this industry was the decision to take this passion more seriously. It wasn't just about the grow side either; I wanted to learn cannabis down to a cellular level. I wanted to understand how to manipulate it and then maximize the genetic potential of each and every individual strain.
What I figured out about how to get involved in the cannabis space is that it can't be boiled down to a specific formula. There is always some way to apply your previous experiences, even if they seem unrelated on the surface. For example, my experience designing hydroponic curricula for public schools has been enormously helpful when it comes to how I train individuals and explain concepts and SOPs. My career owning and operating a commercial tropical plant nursery and becoming a judge with the American Orchid Society taught me how microclimates can be used to both further the growth of specific plants and to manipulate the phenotypic and chemical expression based on environmental changes. Ultimately, it just goes to the varied experiences you have, and then applying them to your facet of the industry. Every set of skills from every job I had before working in cannabis has proven valuable in one way or another; it just came down to making the decision of where I wanted to be.
What are some of the factors that drive up the cost of cultivating cannabis?
One of the primary things that can drive up the cost of flower is using needlessly over-the-top nutrient programs, which can cost between $50-100 extra per pound. A lot of people growing cannabis are using nutrients and fertilizers that were designed for the hobbyist market. However, when you look at cannabis cultivation on a commercial scale and consider agronomy and fertilizer science, you'll notice that at the end of the day, nitrogen is nitrogen – only the grower knows whether it was organic or mineral based. As long as it's clean and void of impurities or heavy metals, and you supply it to the plant at the right pH to enable absorption, elementally, it all is the same.
Another thing that can influence the price of cannabis is the equipment being used to grow it. Using environmentally efficient equipment to cultivate makes a big difference in product pricing, because you have to be aware of what you're spending to grow each gram. That cost is going to be transferred onto consumers based on what the market will support. On the flip side, if your production programming is too expensive, then you're not going to be able to support yourself sustainably in the marketplace. So making sure that you can reduce that cost of cultivation while ensuring the quality and sustainability of your growth practices is a delicate but important balance. Beyond the cultivation factors, there's also the matter of taxes, which can easily account for 30% of the cost of a consumer purchase. If you don't include the taxes into your COGs, then you are not seeing your true costs.
Can technology be leveraged to bring down the cost of cultivating cannabis?
It absolutely can. For example, typical high-labor, high-touch physical tasks like irrigation, defoliation, and trimming – these are all things that can be automated. Integrating technology for the automation of your facility is a great way to reduce overall cost. Plus, this type of solution reduces costs in perpetuity, because that level of automation will continue to pay dividends crop cycle after crop cycle.
Another great option is incorporating more energy-efficient lighting. Electricity is typically the second highest contributing factor to cultivation costs behind labor. High pressure sodium lighting, or metal halide lighting – what is categorized as HID (High Intensity Discharge) Lighting – has been the backbone of the industry for over twenty years. Now, we're seeing it surpassed by LEDs, with rates of efficacy almost twice that of HIDs. When growers are looking to both save money and produce at a lower cost point, then adopting energy efficient technology and technology that reduces labor touches is really a key avenue.
Vertical integration versus horizontal integration or specialization – which trend is more economical for the cannabis industry?
I think the two can be used in conjunction. I'm a huge fan of specialization. When designing cultivation facilities, we make sure to incorporate software that allows time-and-motion studies. So we assign a task to a cultivator – let's say it's defoliating a certain number of plants. They can then be timed at that task, which allows us to understand the costs associated with that particular plant-touching event. In addition, it lets us understand the individual strengths of our client's employees, and make sure we're assigning the most competent individuals to the tasks most suited to them. For example, you might find that some of your team is really fast at defoliation, and others are really good at IPM pest scouting. The degree and the need for specialization is just a best practice that must be customized.
If we take things to more of a macro level, the question becomes if it's better to specialize in one area of the industry instead of being vertically integrated. Vertically integrated operators must handle cultivation, processing, packaging, all the way through retail sale, which can involve 3 or more different licenses. If both routes are options, then you have to look at it by market to decide what will be the most advantageous move while playing to your strengths. With vertical integration, you have control from raw ingredients to the final end product, and therefore have control over the entire supply chain. This allows you to maximize profitability on every unit sold.
In this industry, it's helpful to be a jack of all trades. What you need to do first and foremost is honestly assess your own personal skill set, and that of your team. Then, follow up with an assessment of your state market. Starting with research, you can formulate a business plan that will be most advantageous to you achieving your specific goals. With vertical versus horizontal integration, I don't think one is better than the other; it's very much a case-by-case basis, where one will be more suitable for your particular needs and applications, which may change over time and vary state to state.
Morocco is currently the largest producer of cannabis resin with 47,000 hectares under cultivation. It is followed by Mexico at 15,000 hectares. What's your take on overseas cultivation and how is this trend likely to take shape in the near future?
It comes down to the changing global geo-social and geopolitical climates. We're at a point now where the majority of people on the planet believe that cannabis is acceptable, safe, and has medical value. It's much more socially accepted than it was 20, or even 10 years ago. When we look at the impact of international cannabis production, we have to understand that what's currently limiting that market are international regulations that still classify cannabis as an illegal substance. Currently, cannabis cultivation is allowed under strict but varied regulations in many places across the world. Until we have a globally agreed upon regulatory strategy for cannabis, I don't envision the full impact of international cannabis production will be known. Will that be in the next five years? Probably not…
International importation of cannabis from places like Morocco or Mexico is worth talking about because it will be what changes the face of the industry. Right now, the US is essentially isolated in terms of legal cannabis – in fact, it's even worse than that; we have isolated cannabis production down to a state level. What will ultimately happen over time as international export and manufacturing are legalized is that low cost, field grown biomass and biosynthesized cannabinoids will cause market compression, while a race to the bottom for milligrams of THC at the lowest cost becomes the overarching business strategy.
Generally speaking, here in the US we have higher costs of labor and we're further away from the equator – which is a naturally easier place to cultivate due to temperatures and photoperiod. We won't be able to compete as readily with producers with naturally lower-cost environments. Additionally, the industry will likely begin adopting biosynthesis cannabinoids as another alternative for low price THC. What gives me great comfort is that Agrify specializes in controlled environmental agriculture, and allows client operators to produce the highest quality cannabis flower at the lowest possible price. While low cost biomass can be used to create many cannabis 2.0 products, high quality cannabis flowers hold 50% market share in almost every state across the US. This category will be primarily addressed by domestic, indoor flower producers. The race to the bottom for dollars per milligram of THC will be something that those international players will fight out in the coming years.
How would you measure cultivation success?
When I think about how I assess or score different types of cultivation operations, I'm first looking at whether or not they have a clearly defined plan. Do they have a business model that is understandable and executable? Can they define their goals? To a point, it's really for the operator to decide what success looks like, and then work to achieve it.
One of the challenges is how you compare cultivators that are growing different strains with different methodologies in different markets. The value of cannabis flower in the Oregon market is very different from the value of cannabis flower in the Massachusetts market. It's all relative. At the end of the day, the key to comparing different growers is to have a key performance indicator (KPI) that allows for a more equalized and meaningful comparison.
When I look at different cultivation facilities, I'm keeping an eye on how many grams of flower they can produce per day, per square foot of canopy, and what it costs them. If I know how much they can produce per square foot, then I know how much canopy they will audit. If I then measure it per day, it removes the variability of those varieties that take twelve weeks to reach maturity and get very bulky, versus a seven-week strain that's very uniform, but won't produce as much due to its shorter maturation time. Using this KPI allows me to level the playing field by taking metrics back down to grams per square foot of canopy, per day cost. That way, the most complex and disparate facilities across the country can be fairly compared and contrasted.
For a newbie, what are some of the tips and pitfalls of building a commercial grow operation?
Hire good people and stay on top of the regulated environment, for starters. Make sure you have enough capitalization and don't cut corners. I've seen so many growers that are so eager and rushed to get started that they build an inferior cultivation environment, and they end up “fighting their grow” from the beginning. If I may give one solid piece of advice, it's that it's better to build a properly designed cultivation facility that's a little smaller over building out big and fighting your environment in perpetuity. You'll very quickly be able to generate profit from a properly designed facility, whereas an inferior facility plagued with pathogens and pests and a general lack of environmental control will result in lower quality products and a higher rate of incidents. The best advice I have is to do it right from the beginning, even if you have to start a bit smaller.
Thank you for the great interview and for all of the work that you have done to help move this industry forward, readers who wish to learn more about David and Agrify should check out the Agrify website.