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A store assistant holds marijuana buds at a marijuana dispensary in Toronto.Chris Young

Part of cannabis and small business and retail

While Canada’s licensed cannabis producers are in a frenzy of deal-making, jockeying to take control of rivals and massive greenhouses ahead of legalization, cannabis entrepreneurs like Kelly Coulter are operating at a different pace. This spring, she leased two acres of farmland in Vancouver Island’s Cowichan Valley with several other women and intends to launch an environmentally sustainable market garden and cannabis operation called Slo Farms.

“We will be applying for a micro licence and our intention is to be a small and slow cannabis farm,” says Ms. Coulter. “I think there is a real opportunity there for small independents.”

Last November, Health Canada said the upcoming legalization of recreational marijuana would include a category of licence aimed at allowing small producers into the legal market. Under proposed regulations, a micro-cultivation licence would permit a company to have a plant canopy of 200 square metres. Security regulations are expected to be lighter than those faced by the licensed producers (LPs) currently authorized to grow for medical users, as well as future standard recreational licence holders. (Current LPs are expected to be automatically licensed to produce and sell to the recreational market in the new system.)

Many of the details around the licensing won’t be known until the Cannabis Act regulations are revealed, although it looks like outdoor growing will be permitted. Optimistic entrepreneurs like Ms. Coulter anticipate that the rules will allow bigger canopies for outdoor growers, though lawyer Andrea Hill from boutique firm Skylaw says she thinks this is unlikely.

Both standard and micro-cultivators won’t be allowed to be able to sell directly to the public for recreational use, says Daniel Everall, a lawyer with Aird & Berlis LLP. The supply chain isn’t entirely clear, but one likely route would be for cultivators to sell to firms with standard processing or micro-processing licences, which would then sell the finished product to provincial distribution boards. These boards would distribute the cannabis to government retail outlets and to private retail stores in provinces that allow them.

Another route would be for a micro-cultivator to apply for its own micro-processing licence. This would allow them to process up to 600 kilograms of dried cannabis per year by packaging it or making it into other products such as cannabis oil.

With limited growing space available – one Health Canada document helpfully maps the 200 square metres onto a small section of a hockey rink – micro cultivators will likely face challenges pricing their products to compete with standard licence holders, which can apply to have their facilities licensed regardless of their size.

Lisa Campbell, who recently joined Toronto-based wine distribution company Lifford Wine & Spirits to work with cannabis companies, says craft producers will be able to distinguish themselves by growing better-quality marijuana than large-scale producers.

“A lot of the licensed producers right now, their goal as publicly traded companies is producing the cheapest cannabis possible for the commercial market,” says Ms. Campbell. She says craft producers will be able to use different genetics, grow in different soil and use other methods to distinguish their cannabis. “A lot of people say hand-trimmed buds is craft, so the trim is really important. If it’s dense and not fluffy, it’s great, and obviously, smell and flavour are factors … It’s like getting a bottle of wine for thousands of dollars – there will be certain products that will fetch a premium.”

James Walsh, a Maple Ridge, B.C.-based cannabis consultant who recently co-founded the BC Micro License Association, says the current LPs put out “a very subpar product” compared to what is available from illegal growers, so he sees big opportunities for small producers who can improve the legal supply.

“Micro growers aren’t going to be able to produce mediocre product and expect to compete with the LPs, because if the product is the same, the LPs’ cost of production is going to be considerably less.”

Mr. Walsh says the cost of production for existing large-scale LPs is between $1 and $2 for a gram of dried cannabis. He estimates the production cost for a micro-licensee would be about $1.50, with provincial cannabis distributors and retailers adding markups and tax before it reaches the consumer.

Statistics Canada reported that an online crowdsourced survey it conducted early this year found the average price Canadians paid for marijuana (medical and non-medical) was $6.83 a gram, with prices trending downward in recent years. Some provinces have indicated the legal recreational price may be around $10 a gram or lower, and provincial liquor distribution boards will be under pressure to keep retail prices low to discourage black-market activity. However, Mr. Walsh says “AAAA-grade” cannabis sells today on the black market for as much as $15, and he believes there will continue to be a market for premium products.

For micro-cultivators who get it right, Mr. Walsh thinks the businesses will be profitable. He says a micro-licensee could gross between $1.3-million and $2.4-million in revenue, enough to sustain four full-time and two part-time employees and to be profitable after expenses.

Interest appears to be high for micro-licences. Vindica, a newly launched craft cannabis consultancy in the Toronto area, hasn’t even started marketing, yet co-founder Mathew Columbro has received between 30 and 40 calls through word of mouth in the last few weeks. Many are vegetable farmers looking to supplement revenues or black-market growers looking to go legal. In fact, one of the purposes of the micro-licences is to provide an avenue for illegal growers to join the legal market. While many illegal growers are keen to get into the legal system, it could be a tricky switch for some.

“These people have been making good money for a long time and doing it their way without having to follow any rules,” says Mr. Columbro. “That’s hard for a lot of people who have been operating a certain way. Now you have to tell them, ‘Here’s a book of rules that you have to follow.’”

Both the big players and micro-cultivators will face challenges building brands in the legal market, given the expected limits on marketing and packaging. Mr. Walsh also warns that micro-cultivators and processors could potentially run into zoning and licensing problems from municipalities, which is why he’s already reaching out to local governments. “Municipal bureaucrats are going to hold the keys to the craft industry because they are the ones who issue the business licences.”

While many hopeful craft producers say they will take strides to distinguish their products from the LPs, it’s likely that many will end up doing business together. Even at this early stage, LPs are approaching prospective micro-cultivation applicants to sign distribution deals. One of the best known of the current legal growers, Canopy Growth, is actively scoping out the space through its investment arm, Canopy Rivers. The company is holding a pitch competition offering $1-million in investment to craft producers, touting it as a chance to remain independent while getting support from Canopy’s network.

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