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Licensed cannabis producers are looking to make deals with both legal and black-market small-scale craft growers to add variety to their product offerings for the recreational market.

Since Oct. 17, prospective growers have been able to apply for micro-cultivation licences from Health Canada. The licence limits plant canopy size to 200 square metres, but has less rigorous security rules than the standard cultivation licence. Health Canada says so far, it has received 15 applications under the micro subclass to cultivate or process cannabis.

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Even though the first micro cultivation licences aren’t expected to be issued for many months, established licensed producers have been negotiating with small growers and in some cases have signed supply deals. Some of these small growers are new entrants, while others are currently producing cannabis illegally or are growing under medical licences.

Some within the industry warn that the small growers may be placing themselves at a disadvantage in the long-term with these deals, but the large firms making the agreements emphasize the benefits a big partner can offer.

“If you have a micro class licence and you’re limited to how much you can produce, it will be difficult to have branding, packaging, a sales team – everything you need to be able to stand out in consumers' minds," says Jordan Sinclair, vice-president of Canopy Growth Corp.

Canopy has a dedicated team focusing on making deals with craft growers, which is also working with them through its venture capital arm Canopy Rivers. Canopy Growth hasn’t yet announced any finalized deals, but is negotiating with micro growers while they wait for licensing.

"It’s a very competitive space, even early on, so we have a lot of interest from micro growers and prospective micro growers who are wondering how they are going to get their product to market,” Mr. Sinclair says. “It could be someone coming from the black market who wants to transition over, or it could be someone who used to grow cannabis in the medical system.”

The deals Canopy is negotiating are customized, Mr. Sinclair says. A producer could agree to sell a certain percentage of its cannabis at a pre-determined price to Canopy, which could offer financing and support in getting a licence, and handle branding, packaging and distribution. If the cannabis producer already has its own established brand, it could maintain it and use Canopy as one of its distribution channels, Mr. Sinclair says.

Cam Battley, chief corporate officer at Aurora Cannabis, says his company obviously can’t be involved in anything outside the legal regulated system, but sees potential to work with micro cultivators that will fall under the new licensed regime.

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“We are in touch with a large number of people across the industry and we want to see the quality of the product that comes out of the various micro cultivators," Mr. Battley says. "We’ll select the very best craft producers and we’ll investigate the possibility to help them develop their market and allow us to provide high quality craft grown cannabis to our patients and customers.”

He says that with Aurora on track to produce 150,000 kilograms of cannabis next year, he doesn’t need micro cultivators to fulfill the company’s supply agreements to distributors.

“We don’t lack for supply but we’re always looking for interesting craft-grown products and interesting genetics.”

BC Craft Supply Co., a Victoria-based company in the process of becoming licensed, is working primarily with black-market growers looking to go legal. The company has signed up half a dozen growers so far, offering to help them get licensed with Health Canada for an upfront $25,000 fee. The growers agree to give BC Craft Supply first right of refusal on cannabis at “market” rates.

Bron Hogan from BC Craft Supply says interest from growers is high, but many are holding off for now as they wait for municipalities to determine zoning rules for cannabis facilities so they know where they can legally grow.

Surrey, B.C.-based Zenabis is another licensed producer offering to help growers with regulatory compliance, distribution and financing. The company has six craft growers signed up so far to its Zen Craft Grow program.

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Jaclynn Pehota of Vancouver’s Althing Consulting says some of these arrangements are good for independent growers, but she advises caution. "The licensing process is new, and there’s a lot of fear amongst the micro cultivators. It’s a lot of paperwork for people not used to that kind of paperwork, and people think they need someone to do it for them. I have been approached by a lot of folks who are afraid they’re not going to get into legal market any other way, and I don’t think that’s true.”

One medical grower in B.C.’s Fraser Valley, James Gallagher, says deals between bigger players and craft growers could have negative repercussions down the road. He worries that if one player comes to dominate the market, it will be able to set prices for the smaller players.

Instead, Mr. Gallagher is looking to create a co-operative with other craft growers, which would allow them to scale up and share costs. Ideally, he says, they will be able to find a property that can be subdivided to allow multiple licensees to operate near each other, and get a standard processing licence to package the cannabis.

“By putting a bunch of craft brands together, it’s going to be a lot stronger and more investible," he says. "If we move forward with building a processor ourselves, then we get to control our own distribution, and as long as we’re not tied into any contracts, we’re more free to do what we wish and set our own price.”

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