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Part of cannabis and small business and retail

Nearly nine months after applications were submitted, Canada’s first legal small-scale recreational cannabis growers are finally open for business – but so far, there are just three of them.

Health Canada’s regulatory framework for cannabis producers includes provisions for microcultivators, which grow cannabis, and microprocessors, which develop and package the product for final sale and may create items such as oils.

Unlike larger licensed producers, microcultivators are limited to 200 square metres of growing space, while microprocessors are generally capped at handling 600 kilograms of product a year. These sites also are subject to less stringent security requirements than their larger counterparts.

The licensing categories are meant to allow small businesses and black-market growers to join the legal market, but the number of companies getting approval so far has fallen short of expectations. Tens of thousands of unlicensed growers still supply the lion’s share of the recreational product to Canadian consumers, and large licensed producers control the legal supply. Meanwhile, microlicence candidates face many challenges securing financing and some grapple with complex municipal land-use issues, making it difficult to transition to the regulated market.

According to Health Canada, as of July 31, there were 192 applications for such sites in the queue at various stages of review, of which 15 are in the final stage. Three microcultivation sites have been approved; one of those companies also holds a microprocessing licence.

That dual-licensed site is owned by Gord Nichol, who operates North 40 Cannabis with his family in Nipawin, Sask. North 40, licensed in late July, cultivates cannabis through a method called aeroponics – without the use of soil or rocks – and is Canada’s only licensed microprocessor so far.

Gord Nichol, owner of North 40 Cannabis, stands for a photograph with some grow pods in his new building near Nipawin, SK, Aug. 9, 2019.Liam Richards/The Globe and Mail

Mr. Nichol says he has a background in the cannabis “grey market," and is also licensed as a medical grower. North 40 plans to use seven grow rooms on a perpetual harvest cycle, meaning that the various rooms are all in different stages of the growing cycle. Mr. Nichol planted his first batch of seedlings in a growing room in early August and he expects his products to hit shelves in December.

North 40 signed a four-year, price-a-gram supply agreement with Pasha Brands and its subsidiary, BC Craft Supply in early August. Pasha Brands, which owns licensed producer Medcann, is focusing on selling craft cannabis, a term used to describe cannabis grown in small batches.

Mr. Nichol says that as a processor, he had many options when it came to selling North 40’s product; for example, Saskatchewan allows licensed processors to sell directly to retailers. Mr. Nichol won’t reveal the detailed terms of the agreement, but said Pasha Brands “made us an offer we couldn’t refuse.” The fact that Pasha Brands plans to promote North 40’s unique brand was an important factor in his decision, he said.

North 40 began construction on its facility in October, 2018, before submitting its application the following month. Mr. Nichol’s team includes people with experience in project management and regulated industries, which factored into his decision to undertake the application process without the help of consultants – saving the company potential costs $50,000 or more.

Mr. Nichol tapped $1.25-million of his own money and built his operation on a 160-acre property that he already owned. He is in the final process of securing financing for an additional $600,000 to fund continuing operating costs and additional capital expenses. That is proving harder than expected: While he says Farm Credit Canada, the country’s biggest farm lender, has committed to financing North 40, it’s been a difficult process.

Prospective licensees face a chicken-and-egg problem with financing: Big banks will only provide credit to micros that already have a licence, but most of these businesses need that very financing to build the facilities required to be approved by Health Canada.

One method for microcultivators to secure financing is through signing multiyear supply agreements with large cannabis processors or brokers, guaranteeing the sale of product at a fixed cost. However, Ian Dawkins, the co-founder and principal consultant at Althing Consulting, a cannabis consulting firm with a focus on craft growers, says that there can be downsides to these partnerships if cultivators aren’t careful.

Some brokers, Mr. Dawkins says, charge 15-per-cent interest a year on loans and include finders’ fees for every gram sold. “There are some extremely predatory contracts being promoted by these people,” he said.

The Northern Ontario town of Hearst is home to another of the newly licensed microcultivation sites. Joël Lacelle runs Hearst Organic Cannabis Products with a partner and the company received its microcultivation licence in mid-July. A former diamond driller and trucker, Mr. Lacelle worked overtime and spent extended periods working away from home last year to save money to launch the business. Last week, he transferred clones from two mother plants into 340 pots to start his first batches of cannabis.

Mr. Lacelle has always had a passion for growing and as speculation about cannabis legalization increased, decided he would do something with those skills. “I’m living the dream right now,” he said.

He began building his site in June, 2018, and applied for his licence on Oct. 19 – two days after federal cannabis legalization. He also worked without a consultant and said the process had some complications. Mr. Lacelle read the lengthy Cannabis Act a number of times. While dense and complex, he is confident that his knowledge of the material will aid him maintaining compliance requirements.

It was a risk to build the site before it was certain his business would get a licence, but Mr. Lacelle says that at some point, “you just have to commit.” The licensing process took nine months and cost Hearst Organic approximately $350,000, aside from the value of existing property and buildings on the site. Hearst Organic, like North 40, has signed a supply partnership with Pasha Brands.

Prospective microgrowers in other parts of the country have been slowed by land-use issues. According to James Walsh, president of the B.C. Micro Licence Association, initial resistance from many B.C. municipalities prevented a first wave of growers from securing the permits necessary to build sites. While it is now easier for cultivators to secure municipal variances or building permits, it’s still an expensive process that has many unlicensed growers balking, Mr. Walsh said.

While it hasn’t been easy for small-scale producers to get up and running, the few that have made it through so far believe their status as craft growers will help them stand out in an increasingly crowded marketplace.

“Our cannabis is grown under ideal conditions, with lots of care and attention to individual plants,” said Mr. Nichol of North 40. "The cannabis market is going to mature, and our goal is to put out a superior product. If the craft growers can deliver a real, high-end, top-shelf product, they’ll be okay. If they can’t, they’ll be wiped out.”

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