Is Aleafia’s Outdoor Harvest A Game-Changer For Canadian Cannabis?

Canadian cannabis LP, Aleafia Health (CAN:ALEF / US:ALEAF / GER:ARAH) has reported very exciting news with its first outdoor harvest at the company’s Port Perry cultivation facility.

Aleafia has produced 10,300 kilograms of dried flower from its outdoor cultivation. But it’s the cost/efficiency details here that will attract the attention of investors – and other cannabis companies.
 

• (all-in) cash cost of CAD$0.10 per gram
• 1,000 kilogram per acre yield (from Zone 1)
• Cannabinoid content/potency “near to the cannabinoid content” from cultivating the same strains indoors

Typical cash costs in the Canadian cannabis industry, for indoor or greenhouse cultivation is >CAD$1.00 per gram. Indeed, breaking that threshold with indoor/greenhouse cultivation is a general efficiency goal of the industry.

Outdoor cultivation offers greater efficiency. The fear with outdoor cultivation is that the quality of cannabis would be grossly inferior to indoor/greenhouse cannabis.

Aleafia has demonstrated the efficiency gain. And if its yield and crop quality can be consistently maintained, this could be a game-changer for the entire Canadian cannabis industry. Aleafia’s CEO Geoffrey Benic framed the news in general terms.

More specifically, it could be the key to unlocking much greater sales (and profitability) in Canada.

There is a huge problem facing the Canadian cannabis industry. It’s also its biggest opportunity. The cannabis black market.

Thanks to decades of misguided cannabis Prohibition, the cannabis black market was well-established when Canada fully legalized cannabis in October 2018. One of the government’s stated goals in legalizing was to eliminate this black market.

To date, it hasn’t worked out that way. After one year of full legalization, the cannabis black market still controls 85% of sales in Canada. This equals roughly CAD$6 billion per year in revenues.

One of the major problems facing the legal cannabis industry has been to attempt to compete with the black market on price.

The average retail price of legal cannabis in Canada remains above CAD$10 per gram. The cannabis black market, meanwhile, has reduced its prices. Today, black market cannabis averages below CAD$6 per gram.

With black market prices well below legal prices and cannabis retailers prevented from virtually any form of advertising, it’s been hard to claim market share. Greatly exacerbating this problem has been provincial delays on licensing (and opening) retail cannabis stores.

HEXO Corp (US:HEXO / CAN:HEXO) recently made the news when it announced “Original Stash”. This is a low-priced offering from HEXO with a unit cost below CAD$4 per gram. HEXO explicitly stated that the product line was meant to be an inducement to lure more cannabis consumers away from the black market.

With cultivation costs of ~CAD$1 per gram, it would be difficult for LP’s (and retailers) to bring to market cannabis dried flower at a unit cost much below that. This is especially true with the sudden focus on early profitability in the legal cannabis industry.

However, if Aleafia and other licensed producers can produce outdoor cannabis at roughly 1/10th the current cost (while maintaining quality), this completely changes Canada’s supply/demand parameters.

The cannabis black market boasts several competitive advantages apart from its multi-decade head-start on the legal industry.
 

• It pays no taxes.
• It has no compliance costs associated with regulation.
• It can operate freely across the country.

One thing the cannabis black market cannot do (without great risk of exposure) is to cultivate its cannabis outdoors. If the black market had that luxury, now available to the legal industry, it could ratchet down its own retail costs much lower.

This means that outdoor cannabis cultivation could be the single greatest operational advancement in Canada with respect to phasing out the cannabis black market – and claiming all those additional consumer dollars.

Year 1 of legal cannabis in Canada yielded a reported CAD$1.1 billion. It was well below expectations. But given the incompetence of several provinces (notably Ontario) in licensing stores, it was a solid performance.

Sales are now increasing monthly at a consistent double-digit rate. Most provinces (except Ontario and Quebec) are now licensing new cannabis stores at an accelerated pace.

To sustain this momentum in revenue growth, the legal cannabis industry needs to be able to win the price battle with the cannabis black market. Both Canada’s provinces and the federal government are not making this easy.
 

1. Over-taxation
2. Over-regulation
3. Near-zero advertising

Canadian politicians say they want to phase-out the cannabis black market, but their actions (with the exception of Alberta) have belied those words.

At this point, defeating the cannabis black market is being entirely left up to Canada’s cannabis companies. Outdoor cannabis cultivation is the industry’s best answer to this problem/opportunity to date.