Cannabis Production Economics

Part
01
of five
Part
01

What are the costs associated with starting & running an indoor marijuana growing operation in Oakland, California?

The marijuana industry in California is booming as Proposition 64 will legalize recreational marijuana use, on top of the already legalized medical marijuana. It is estimated that California's marijuana market will grow into a $10 billion industry within a few years, making it the world's largest marijuana market.

While there is no doubt that the marijuana market will be a lucrative business, it is a fairly prohibitive industry, due to the large startup and operating costs associated with large-scale, indoor marijuana growing operations. The California Department of Food and Agriculture estimates startup costs somewhere in the neighborhood of $400,000 for all the necessary supplies, while another study suggests a startup cost of $75 per square foot for large, indoor operations. The operating costs of these facilities are high as well, with estimated annual expenses of $32.33 per square foot.

All cost information as been added to this spreadsheet, breaking down the costs by start-up, operating, and additional costs.

Start-up costs

Commercial marijuana growing operations are a very expensive venture, as the startup costs in many regulated states can top $1 million. However, the growing wholesale market in the states of California, Washington and Colorado has drastically driven the startup costs down. As a result, the average marijuana operation startup cost in California sits around $250,000, while some operations run as much as $500,000.

Due to the fact that operations can vary in size immensely, it may be more pertinent to examine the startup costs per square foot. The average cost of a large-scale indoor marijuana operation is $75 per square foot, due to the indoor cultivation setups. Indoor operations are a lot more expensive than outdoor and greenhouse setups due to the need to control all aspects of the growing environment, including grow lights and temperature and humidity systems. The high-pressure sodium lamps designed for growing the plants indoors run between $40 and $80 for the bulb, while the lighting ballast which regulates current to the bulbs costs between $89 to $120.

The cost to renovate a 15,000 square foot warehouse for the purpose of indoor marijuana growing operations is estimated to run between $1 million and $5 million, indicating a cost range of $66.67 - $333.33 per square foot for renovations. These costs are expected to go down with scale.

Additional costs to factor into the startup cost are all the licensing fees required to get the operation up and running. Some of the permits offered by the City of Oakland and their according application fees are: Medical Cannabis Dispensary ($3,644), Non-Dispensary Medical Cannabis Facility ($2,474), and On-Site Consumption ($2,813). There may also be fire and building inspection fees from the City of Oakland depending on the requirements of the specific building. The average licensing cost for a commercial marijuana cultivation facility in California is roughly $3,348, a one-time expense for the local permit.

A report commissioned by the California Department of Food and Agriculture found that the costs associated with gathering all the necessary supplies (i.e. building supplies, lighting, soil, irrigation systems, security systems and other miscellaneous supplies) may cost around $400,000.

Operating Cost

Energy costs are the most prominent operating cost associated with marijuana operations as utility bills often account for 12 — 15% of a company's operating costs. The largest contributor to energy costs for these operations is lighting, as it accounts for 38% of the total energy cost.

Again the size of operations will factor into the energy consumption costs associated with marijuana operations as monthly costs range between $3,000 to $100,000 a month. It is estimated that the utility bills incurred by large scale, indoor marijuana operations can vary from $0.60 — $1.20 per square foot per month.

Rental rates for the warehouse facility required to grow the marijuana represent a significant monthly operating cost as well. As of the end of the 2016 fiscal year, the average rental rate for warehouse space in Oakland was $0.59 per square foot per month. However, these rates are expected to increase due to local restrictions limiting the number of facilities allowed for marijuana related operations.

A study of indoor operations in California determined that facilities of 4,800 square feet average 2.6 full-time employees, while it is estimated that the average employee will receive close to $20/hour. Combining all of this information indicates that an indoor operation will be paying roughly $1.82 per square foot in full-time employee wages every month. However, in busy harvest seasons, many large-scale marijuana operations hire under the table seasonal workers.

The California Department of Food and Agriculture study estimated that a facility of 4869 square feet would face annual expenses of $157,438, based on the sample average production costs. This indicates that the annual expenses per square foot would be roughly $32.33.

Conclusion

Due to the looming legalization of recreational marijuana use thanks to the passing of Proposition 64, there has been a recent influx of marijuana growing facilities in California. However, there are many prohibitive startup and operating costs associated with large-scale, indoor marijuana growing operations. As per a study commissioned by the California Department of Food and Agriculture, startup costs will amount to roughly $400,000 for all the necessary supplies, while another study suggested startup costs of $75 per square foot. Due to the massive energy needs of indoor facilities, the operating costs will be very high as well, with estimates of annual expenses clocking in at $32.33 per square foot. Despite these costs, it will certainly be a lucrative market for those companies that manage to break through, as the California's marijuana market will be worth an estimated $10 billion within a few years.

All cost information has been added to this spreadsheet.
Part
02
of five
Part
02

What is the predicted market size for businesses growing marijuana (wholesale) in Oakland, California?

The predicted market size of the marijuana growing industry in Alameda County, California, in which Oakland is located, is between $671.84 million and $1.42 billion by 2021. Due to the lack of publicly available information pertaining specifically to the city of Oakland, we have focused our research and findings on the county in which it is located. We have also identified a number of factors they may influence this market, both positively and negatively, in the coming years, including the amount of marijuana grown in California exceeding demand and the uncertainty surrounding the Trump administrations plans for the industry. Below we provide further details on how we came to this market estimate, a spreadsheet of our predicted figures, as well as information on the future influencing factors of the market.

Marijuana Growing Market Size Prediction

Nation-wide
According to a report by Arcview, an Oakland-based cannabis investment firm, the 2016 revenue recorded from sales of legal marijuana products in the US totaled $6.7 billion. In contrast, IBIS World reports that the current marijuana growing market in the US is valued at $5 billion, employing approximately 791,098 people across 209,608 businesses. This revenue figure has demonstrated an annual increase of 26.1% according to figures from 2012 to 2017. Due to the fact that regulations for recreational marijuana use are expected to become more liberal in coming years and a boom is predicted, we cannot assume that this annual growth figure will remain steady over the coming four years. Overall, we can estimate the current market value of the marijuana growing market as between $5 billion and $6.7 billion.

According to a report by Marijuana Business Daily, the annual retail sales of marijuana in the US is expected to surpass $17 billion by 2021. Within this figure, recreational sales would account for between $7.1 and $10.3 billion and medicinal sales between $4.8 and $6.8 billion. This growth would record an increase of 300% from sales made in 2016. In addition to these figures, a report by Arcview Market Research predicts that marijuana sales revenue will total $22.6 billion in the US by 2021. This figure is based on a robust 27% CAGR expected from 2018 and as a result of increased adult-use sales in states like California. Overall, we can estimate that the national marijuana growing market will be valued at between $17 billion and $22.6 billion by 2021.

State-wide
The state of California specifically, is currently a wild card as there is a lack of regulation statewide which makes it very difficult to determine the exact size of the marijuana market. Furthermore, as marijuana use is still illegal according to federal law, the revenue generated in states, such as California, is very uncertain. This being said, it has been reported by Arcview, that California was responsible for 27% of the legal marijuana market in the US in 2016.

Marijuana Business Daily estimates that California is expected to generate between $4.5 billion and $5 billion in annual sales of adult-use cannabis within a few years of the January 1, 2018, launch of the state's recreational marijuana program. More specifically, Arcview reports that the revenue from sales of legal marijuana in California is expected to reach $5.8 billion by 2021, though other analysts believe this is a big unknown at this stage. An additional report by Arcview then predicts that the overall market for the legal adult-use and medicinal sale of marijuana in California will be $7.6 billion by 2020. This means a predicted compound annual growth rate (CAGR) of 23% for the state. Bloomberg also reports that tax collected from the sale of marijuana in California is expected to rise to $1 billion by the mid-2020s, up from $82 million in 2016. Overall, we can predict the marijuana growing market of California to be valued at between $5.8 billion and $9.348 billion*.

*As the figure for 2020 is provided ($7.6 billion), we have applied the expected 23% CAGR (($7.6 billion x 0.23) + $7.6 billion) to give us an estimate of $9.348 billion for 2021.

County-wide
Alameda County, in which Oakland is located, reported $129 million in annual medical marijuana sales as of Q1 2016. This accounted for 15.2% of total medical marijuana sales in the state of California. Therefore, we can use this percentage to calculate the predicted value of the marijuana growing market in Alameda County using the above-mentioned figures.

PREDICTION 1

(Based on US market figures)

2021 US market: $17 billion$22.6 billion
California State market (27% of US market): $4.42 billion — $6.102 billion
Alameda County market (15.2% of California market): $671.84 million — $927.5 million

PREDICTION 2

(Based on California State figures)

2021 California State market: $5.8 billion — $9.348 billion
Alameda County market (15.2% of California market): $881.6 million — $1.42 billion

Therefore, we predict that the marijuana growing market in Alameda County, in which Oakland is located, will be valued at between $671.84 million and $1.42 billion by 2021. These figures have been provided in the attached spreadsheet as well.

INFLUENTIAL FACTORS IN THE Marijuana Growing Market

Wildfires in California
Wildfires that spread through parts of California earlier this year have had an impact on the well-established cannabis growing region. However, the California Growers Association and a number of other organizations are offering marijuana growers financial assistance to get through this difficult time. In addition to this, many growers had already harvested their crops before the fires hit and the region is also known for having a stock surplus which may help the industry survive the period to come.

Uncertainty with Trump Administration
There is a great uncertainty over the marijuana growing industry since the implementation of the Trump administration. Comments from officials of the White House, including from Attorney General Jeff Sessions, have left growers concerned and unsure of what is in store regarding the enforcement of federal regulations in the future.

Surplus stock in California
According to the California Grower's Association, California currently grows eight times the demand of consumers in the state, and as of 1 January 2018, the law will prohibit the export of the product. As a result, the association is recommending that growers reduce their crops to match the demand.

Changes in Regulations
Unregulated states, like California, generally only handle approximately half of the number of patients as regulated dispensary markets, which in turn results in less revenue. This is expected to change in future due to upcoming regulation changes in California leading to an increase in use.

In conclusion, we predict that the market size of the marijuana growing industry in Alameda County, in which Oakland is located, is between $671.84 million and $1.42 billion by 2021. These figures have been added to the attached spreadsheet. Factors that may influence this market in future include changes in regulations, the surplus of marijuana stock in California, the uncertainty surrounding the Trump administration's views of the industry and with wildfires that tore through the Californian region earlier this year.
Part
03
of five
Part
03

What is the future (in ~4 years) outlook for the commercial warehouse market in Oakland, California?

Our research findings have concluded that ideally, it would be in your best interest to move into a new warehouse space now. This is because commercial warehouse prices in the Oakland area are expected to rise in the coming years as a result of rising demand for such spaces due to impacts from the marijuana, e-commerce, start-up, port development, and general real estate rental markets.

Overall, we weren't able to locate any research or data which offer direct and definitive insight regarding an exact 4-year projection, however, we focused on locating trends and shifts in this space which are already buzzing and beginning to stir, and therefore, we assume it is highly likely that these trends and shifts will be making a significant impact on the commercial warehouse market in Oakland over the next few years.

Additionally, we didn't place a ton of emphasis on the influx of marijuana producers, as we assume based on your request details that you are already aware of this impact. However, we have provided some insight in this regard, and then focused the rest of the research on other evolving trends and shifts which are making an impact on the Oakland commercial warehouse market.

overview of the Oakland warehouse market

According to a report published by Colliers International in 2016, vacancy rates for industrial spaces around the size of 34 million square feet fell from 1.3% to 0.4% in recent years. Vacancy rates for warehouse spaces specifically was only slightly higher at 2.1%. At the time the report was published, there were already zero vacancies for Class A industrial spaces located in Oakland.

As a result, many prospective tenants have been driven away from the Oakland area in recent years and have been forced to seek spaces in other areas, or they have had to accept a lease in lesser quality spaces, which we assume are not as in demand as higher quality spaces.

impact of the cannabis industry

The impact of the cannabis industry in Oakland has revolutionized the industrial market landscape. As a result, sale prices and lease rates have already doubled in the past few years. This is because "when a cannabis business or other big business buys a property at a premium, it drives up the prices of the surrounding property and makes real estate in general more scarce."

impact of e-commerce and emerging start-ups

The e-commerce industry in the U.S. has been booming in recent years. Currently, the e-commerce segment has a 9% share of all retail sales within the U.S. market. This is a figure which has "more than doubled since 2010."

Although online shopping has significantly reduced demand in the brick-and-mortar retail space market, "it has had the opposite effect on the industrial real estate" market, as online retailers base their operations out of commercial warehouses.

Prologis is a key player in the commercial warehouse landscape and has recently built a brand new 260,000 square foot warehouse located in Oakland. San Francisco based Prologis is the largest industrial real estate owner in the world. Their share price has gone up 22% in 2017. Their competitors, "DCT Industrial and Duke, are up 21% and 7%, respectively." Prologis's revenues have increased by 58% year-over-year for the past three years.

Much of this growth is being driven by the booming e-commerce market, which is obviously great for Prologis and their competitors, but we assume not so great for prospective warehouse/industrial real estate tenants, given that "in the last quarter, rents on new or renegotiated leases were up 23% year-over-year and occupancy was at 96%." (The last quarter ending in October 2017).

Based on these findings, we asses that over the next four years the warehouse industry will see demand as a result of emerging e-commerce companies, and that this demand will spur growth in warehouse building companies such as Prologis. We assume it to be likely that companies like Prologis will continue to build new warehouse structures to meet this demand. We further assume that companies such as Prologis will attempt to meet the demands of the rising marijuana industry, especially in areas such as Oakland, where much of this demand currently exists. Despite this, it is clear from this research that lease prices for industrial real estate are going up, and there is no indication of this slowing down over the next four years.

Another factor which might have an effect on the demand for warehouse space are emerging start-up companies such as Starcity. "Starcity buys defunct hotels, vacant commercial buildings and other unused properties, renovates them, obtains the proper city permits, and turns them into community housing." So far, Starcity has developed two buildings in San Francisco, and has several more that are currently under construction. One of these buildings is located in Oakland. Based on these findings, we noted the possible likelihood of other companies whose business models rely on renovating and transforming commercial buildings and other old properties, which could also have an effect on the availability of these types of spaces in the Oakland area. On the other hand, we also assume that other businesses which typically operate out of warehouses (such as marijuana producers and e-commerce companies) may begin to seek out lower cost alternatives to warehouse leasing through companies such as Starcity, since we have noted above that warehouse prices are rising quickly.

impact of increasing port activity

Oakland is seeing even further demand for warehouse spaces due to its port market. New distribution developments on Oakland's port properties are attracting all types of businesses which rely on logistics and port shipping to the area, and we assume these companies will also need to make use of industrial spaces, which will even further rise demand and costs for such spaces.

impact of the overall Oakland real estate rental market

Overall, Oakland has been witnessing the fastest spike in rent growth out of any other city in the U.S. (with the U.S. ranking in the top ten for fasting growing rent growth overall). Currently, Oakland has been experiencing rent growth rates leveling out at 29.8% year-over-year. Even worse, "new construction can’t keep up with the demand boom fueled by e-commerce, [and this] supply gap [will] continue, pushing rents in top markets up another 6%."

Based on these findings, we asses that although there is a major warehouse builder near Oakland, Prologis, this company and others like it will not be able to produce real estate spaces fast enough to meet these excessively rising demands, and therefore warehouse space in the Oakland area will continue to be met with rising demand, rising costs, and low vacancy availability, based on our aforementioned research findings.

conclusion

In conclusion, given the evolving trends and shifts making an impact on the commercial warehouse market in Oakland, we conclude that the sooner you are able to relocate into a new warehouse space, the better, as there are various factors at play that will be increasing warehouse leasing competition and prices over the next few years.
Part
04
of five
Part
04

Are indoor or outdoor commercial marijuana production businesses more profitable?

Outdoor marijuana production is more profitable in the long run even though it requires more money at the beginning. Below I have outlined the benefits and basic costs of both indoor and outdoor marijuana production as a whole, and the costs of land/indoor space in Oakland, California.

Indoor Marijuana Production

Growing marijuana indoors requires not only a good space to grow, but also the right equipment. The most important aspect of growth is the light. As the plants will not be naturally exposed to the sun, it is important to have the right lights for the job. With experience, growers can eventually produce up to 1 gram of dried marijuana per watt of light when growing in soil (i.e. a 400 watt light will produce 400 grams of marijuana). Therefore, you must consider what wattage is right for you when building your indoor farm.

In addition to light, one must consider whether to grow the marijuana plant in soil or hydroponically. There are benefits to both growth processes. Soil provides approximately 1 gram of marijuana per watt and provides a buffer for error. Because soil holds onto nutrients, there is room for error with pH and total dissolved solids (TDS) without ruining your crop.

On the other hand, growing your plant hydroponically will produce a higher yield at 1.2 grams of marijuana per watt, but there is less margin for error. When growing plants hydroponically, even a small error in the pH or TDS can cause major damage to the crop.

Finally, you must be sure that there is enough space for your plants to grow and flourish. Marijuana plants do not like to be crowded, therefore your crop will be bigger if you only place 4 plants to each light than if you place 16 plants to each light. Ultimately, the key to success with growing marijuana indoors is to simulate the perfect outdoor environment.

Outdoor Marijuana Production

Similar to growing marijuana inside, the success of growing marijuana outside is affected by multiple variables. You will want to consider where you are growing carefully to provide the best location for your crop to get the right amount of sun and nutrients. However, there are definite advantages to growing marijuana outdoors.

Growing marijuana indoors can use up a lot of energy making sure that the plants get as much light as they need. Growing outside eliminates this problem as the sun provides natural light and nutrients for the plants.

After the initial costs of purchasing land and seed, an outdoor operation can be relatively cheap. Not only is the light free, and often better than artificial light, but so is the supply of fresh air, carbon dioxide, and rainwater. The main costs of tending outdoor marijuana plants are pest control, fertilizer, and water (when it is dry).

Outdoor marijuana plants are also typically larger than indoor plants. In a secure location, an outdoor marijuana plant can grow up to 180cm. A plant that size, can produce up to 500g of dried buds. With just 5-7 plants this size you can produce a years supply of high-quality marijuana for one person. With a bigger operation, this can produce more high-quality marijuana than an indoor operation of the same size which means more profit for the grower.

Outdoor Vs. Indoor Marijuana Production

There definite advantages and disadvantages to both outdoor and indoor marijuana production. A successful indoor marijuana farm will produce consistent high-quality yields that can be grown year round. Indoor marijuana farms are more hygienic than outdoor farms, and you have greater control over the environment thus avoiding problems caused by pests and extreme weather. On the other hand, indoor farms are a lot of work and require constant monitoring to ensure that the equipment is working correctly. They also require more money to operate as creating a favorable environment requires a lot of energy. In addition to a higher monthly energy bill, there will be a cost of repairing and replacing equipment.

Outdoor marijuana is very costly up front but becomes cheaper in the long run. With much of your resources being free there is a lower cost for upkeep than with an indoor farm. An outdoor farm also requires fewer people to operate, particularly before and after harvest time, which decreases labor costs. However, an outdoor environment will be harder to control which could be a problem should extreme weather conditions arise. An outdoor farm also does not provide a lot of freedom to play with hybrids or other new breeding techniques.

WAREHOUSE VS. OPEN LAND COSTS

Open land spaces in Oakland, CA are listed at a medium rate of $599,999 with $438 a price per square foot. Currently, there are "120 active lands for sale in Oakland, California." These lands typically spend 47 days on average on the market. Warehouses in Oakland can range in cost from 0.75 a square foot a month to 0.81. Yearly prices are an estimated $9-$9.72 a square foot and there are currently 91 available listings.

Conclusions

While both indoor and outdoor growth have large expenses up front, the repeated costs for farms growing marijuana outdoors greatly decreases after the initial start-up costs. With the selling costs of high-quality marijuana remaining the same no matter how it's grown, the outdoor growing operations are more profitable than the indoor growing operations. Warehouses have a cheaper cost per square foot than open land spaces and there are less available listings.
Part
05
of five
Part
05

How has the wholesale/retail price of cannabis fallen in Colorado after statewide, recreational legalization of cannabis was enacted in January, 2014?

Cannabase has reported that the average wholesale price of cannabis has fallen 48% since this drug was made legal in January 2014. Its price is now $1,300 per pound. The state of Colorado is the most mature market in the United States with three-plus years of legal cannabis sales. The state's liberal stance toward licensing and production has created a dramatic increase in the volume of marijuana growth and production. In recent times, the state of Colorado has had a dramatic year-over-year decline in the price of cannabis. It has also experienced a corresponding decrease in the volume-weighted average for a state that possesses a legal cannabis market.


THE FALLING PRICE OF CANNABIS IN COLORADO

In the time period between January 2014 and April 2017, the legal cannabis market in Colorado produced approximately $2 billion in sales at dispensaries and retailers. As noted above, the current price is $1,300 per pound, a 48% decrease from January 2014. Concerning wholesale prices, the lowest average weekly price for Colorado came in the first half of 2017. It was $1,181 per pound.

According to BDS Analytics, the average gram of cannabis sold for $5.83 in Colorado; this is a combination of the prices of both recreational and medical dispensaries. Recreational retailers on average sold a gram for the price of $6.92, and medical channels sold a gram for $4.20.

INCREASED NUMBER OF CULTIVATORS AND DISTRIBUTERS

Data from the Colorado Department of Revenue shows that in January 2016, there were 514 licensed cultivators of cannabis in this market. By December of that same year, that number had increased to 625, an increase of 22%. In 2016, the number of cultivators increased by 5.3%; it went from 751 in January to 791 in December.

People directly involved in the industry like Patrick, an ex-dealer, stated that he did not notice prices going down until the middle of 2015 when he saw an eighth for $30 at a store in Aurora, Colorado.


REASONS FOR THE FALL IN PRICES


The falling price of Cannabis in Colorado is due to hard competition, greater supply, and Colorado's convenient regulatory framework. In addition to this, increased efficiency of growers, increased number of operations outdoors, and an increased number of distributors going online has contributed to the decrease in prices. In July 2016, prices crashed, and after this, prices have been moving downward for a year and a half. From July 1, 2016, prices have dropped by more than 40 percent. The price of a pound in July 2016 was $1,994.

Supply is increasing as growers develop and incorporate agricultural technology. Prices are falling, as cultivators invest millions in cannabis factories. Many of these cultivators once worked illicitly. Troy Dayton, CEO of Arcview Group, states that the field of agricultural technology is doing well, and that they are now focusing on the cannabis industry.

The factors pushing down the prices of marijuana are likely to persist, and this will further reduce the profits of growers. The latest calculations based on operations during the period of Nov 1, 2016 to April 30,2017, show that the average market rate (AMR) of cannabis per pound is $1,298. It went down 12% from January 2017 and 35% from January 2015.

CONCLUSION


To conclude, Cannabase has reported that the average wholesale price of cannabis has fallen 48% in Colorado since this drug was made legal in January 2014. Colorado has had a dramatic year-over-year decline in the price of cannabis in recent times.








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