In Search of Quality Cannabis: The Failing of Gross Cannabis Output to Measure Performance
By Chris Beals
As legal cannabis markets start to mature, looking at the reports on cannabis cultivators and publicly traded companies over the recent months, it is striking how many solely provide gross quantity of cannabis produced or total cultivation canopy size as the only measures of performance.
This is fundamentally flawed and based on a misunderstanding of cannabis production and output. Assuming that all cannabis output is created equal (or even a comparable benchmark) is an inappropriate translation of measures used in tobacco or other bulk agricultural goods that lack the complexity of cannabis. It also fails to consider the efficiency in production of said cannabis and the amount of product lost in the process. I believe looking towards the graded measures of production outputs that are utilized in the petroleum, precious stone or semiconductor industries would serve as a far better model for analyzing cannabis sales and production. Without the development of better measures of cannabis output, the industry and industry investors will be subject to additional disruption and upheaval in the future simply because there is no way to effectively know who is actually good at cultivating quality cannabis.
A Grossly Simplified and Dry Overview of Cannabis Cultivation
Note: What follows is a gross simplification that glosses over many things in the spirit of conciseness
Cannabis is among a relatively limited group of plants that are dioecious (meaning it has male and female plants) and reproduce via windblown pollination. Commercial production of cannabis focuses on cultivating female cannabis plants and using the various parts for consumption in a variety of forms.
The medicinal and psychoactive compounds in cannabis occur throughout the plant but are concentrated in the flowers of the plant; the small sugar leaves that emerge from the flower have fewer cannabinoids and the large fan leaves and stem matter have even fewer cannabinoids. In addition to the genetics of the individual plant, cultivation conditions and nutrients can create a wide variation in the concentration of the cannabinoids and terpenes found in a cannabis plant.
With the exception of auto-flowering plants, specific lighting conditions are needed to cause cannabis plants to actually flower. Propagation of cannabis plants is generally done via cloning from a mother plant, a process that is much more manually intensive than seed germination.
Cannabis plants generally want to grow from the ground with a single main stalk and produce one large flowering mass at the top (a dominant cola). To encourage more robust and potent yields, most cannabis cultivation requires extensive pruning of the top of the plant (e.g. topping, FIMing) to increase yield as well as manual ongoing trimming of the large fan leaves to direct more of the plant’s energy towards the flowers. This leads to plants forming a larger number of flowering heads off the main stalk that generally must be supported by manually stringing them through meshing (sometimes called a screen of green). This also separates the branches in an effort to avoid excess moisture building in pockets which can lead to mold or mildew that (i) spreads quickly through a growing space and (ii) generally requires destruction of all impacted plants.
Finally, because of the stringent restrictions on the use of pesticides, fungicides and growth agents on cannabis plants, almost all cannabis cultivation is done in clean-room type environments with separated growing spaces to prevent the spread of pests or pathogens through an entire crop.
The Limitations of Weight-Based Measure
Wholesale pricing for cannabis flower varies widely based on the quality of the flower (e.g. potency, color, compactness of flower structure, aroma). Nuanced characteristics like the flower visually having a dense structure and a vibrant color that shows the cannabis was cured slowly and properly have a heavy impact on wholesale pricing. Generally, the highest quality flower is hand-trimmed to remove any small sugar leaves and lower quality flower is run through machine trimmers that leave a less carefully trimmed and less visually appealing product. This results in machine trimmed flower generally fetching a materially lower price on the wholesale market which needs to be balanced against labor cost savings.
The variance in wholesale pricing of flower is astounding; in California, top-tier indoor flower can wholesale for up to $4,000 a pound versus prices as low as $1,000 a pound for low-quality indoor flower. Looking at the different parts of the plant, California pricing for trimmings from the plant range from $250 to $90 a pound depending on the quality and potency of the trim. Concentrates produced from cannabis vary widely in quality and wholesale pricing based on the quality of inputs, such as quality of the plant and parts of the plant used. Additionally, the yields on concentrate production range from up to 25% for extraction from high-quality flower down to single percentage points for low-grade trim.
This leads to the core thesis of this piece, weight alone is not a helpful measure of value produced through cultivation.
Potential Alternative Cannabis Measures
Given the wide range of pricing and yield, this only underscores the need for more nuanced measures of cultivation and manufacturing outputs. Additionally, as margins for cultivators compress as markets mature, being able to understand measures around loss and efficiency in production will grow increasingly more important. Both of these factors underscore that a raw kilogram of output measure fails to capture the wide variation on wholesale value of different parts of the cannabis plant, the variation in wholesale value of flower based on quality and the importance of growth efficiency.
Accordingly, the following are some possible measures to better improve understanding of cannabis operations:
- Kilograms of cannabis produced by category. At a minimum level of granularity, breaking down the cannabis produced into broad buckets of flower, flower trim, bulk biomass, and other categories would indicate the value of cannabis produced, at a very high level.
- Kilograms of cannabis produced by quality. Creating a graded scale of cannabis quality that is generally accepted would match the informal pricing system that currently exists in most cannabis products at both the wholesale and retail level. This could include delineating flower by trimming method and some form of loose flower grade. It would also entail grading cannabis trim by potency and concentrates by factors such as color, potency, and clarity. Reporting production within these buckets would give a much clearer picture of the ability of the producer to create quality products and also give a clearer picture of future revenue streams. In many ways, this mirrors the measures of diamonds and other precious stones to measure raw mine production or finished output.
- Grams of flower per watt or square foot. This measure has often been used in the traditional craft cannabis market to understand the skill of the grower to create high output in relation to its variable costs or the size of the canopy footprint. This measure has not generally been translated over to large-scale cultivators. It is worth noting that both of these measures can be gamed extensively. For instance, the height of the canopy allows a grower to boost the production per square foot and has led to some suggesting a cubic foot measurement or a measure that accounts for the amount of trim removed.
- Loss ratio. There are anecdotal reports of large cultivators suffering sizeable crop failures due to pathogen spread, improper lighting or nutrient poisoning. Seeing reporting on the degree of loss helps improve the understanding of how efficient the cultivator is and whether they have lapses and control issues in their cultivation procedures. Similar methods are used to measure yield and production efficiency in the semiconductor space and for industrial pharmaceuticals.
There are numerous other measures that could be used or added to the above, but these serve as useful baseline measures that are relatively easy to report.
Looking Forward
As the cannabis industry continues to mature, and consumers demand higher quality products that meet specific cannabinoid and terpene profiles, measuring cannabis production with an overly simplistic weight measurement will not generate valuable insights into grow quality and value. Analysts, investors and other groups looking to gauge these operations must start to demand additional measures of production, or they will only receive an incomplete picture of the business performance and accordingly the chance of the business to weather increasingly uncertain cannabis markets.
