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HIGHLIGHTS
  1. Investors increasingly monitor cost of production
  2. Tilray, Canopy Growth, Cronos expand to Latin America
  3. Some LPs aim to cut costs on farms despite reduced harvest numbers

Canadian cannabis producers facing large energy bills to heat their indoor operations are increasingly looking to lower-cost countries closer to the equator to grow their medical crop, as investors increasingly scout for companies that promise a global competitive edge.

Legal pot growers guided by Health Canada’s strict production regulations have made significant investments in their facilities, which require large amounts of energy to control the indoor environments with heat, light, air conditioning, and technology. But now that most licensed producers are publicly traded, investors are increasingly eyeing their cost of production, an indicator seen as key to a company’s success and ability to expand its market share.

“All of the big producers have eyes southward now where growing cannabis is much cheaper for them. There’s a move toward cheaper production and acquiring brands,” said Patrick Wood, founder and president of Tormont Group in Toronto, which advises cannabis companies. “They understand very clearly now that they have valuations and cash on hand. To meet shareholder expectations, they have to look south of the border and they have to think globally.”

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Canadian producers have raised millions of dollars but now they need to prove their viability to investors, Mr. Wood said.

Canada’s biggest LPs have already expanded their production capabilities to warmer countries. British Columbia’s Tilray Inc. is now licensed to grow medical cannabis in Chile through a subsidiary and plans to distribute product throughout Latin America. Last year, Ontario-based Canopy Growth Corp. bought Spectrum Cannabis Colombia, which is licensed to produce and distribute medical marijuana. Toronto’s Cronos Group formed joint ventures in Colombia and Australia that aim to cultivate and export medical cannabis products.

The smaller LPs also see the benefits of producing product in warmer locales. Khiron Life Sciences Corp., which trades on TSX Venture Exchange, has its core medical cannabis operations in Colombia and plans to extend its reach to Uruguay and Chile.

“Generally, poorer countries are seen as a tremendous opportunity. Investors have lost appetite in Canadian producers. Canada is not going to be a leader in cannabis demand or production going forward,” Mr. Wood said.

“Cannabis prices globally are going to come down.”

Canadian companies can set up operations in lower-cost countries such as Colombia and ship medical product to other jurisdictions where medical marijuana is also federally legal. However, international trade is not permitted for recreational cannabis. Companies wanting to supply Canada’s newly legal adult-use recreational market need to grow their products within our borders.

Some indoor producers are lowering costs through efficiencies and deals with power companies. New Brunswick-based Organigram said in its first-quarter 2019 report that it had cut its cost of cultivation, excluding packing and shipping, to 56 cents a gram, down 10 per cent from the previous quarter. Colorado-based MJardin Group said its Winnipeg facility is producing cannabis at roughly $1 a gram after locking in an electrical rate at roughly one-fifth of what it pays at its Colorado facility.

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One key benefit to producing indoors is the control LPs have over the growing environment, such as heat, light and insects. Outdoor and greenhouse production is subject to nature with varying light and temperatures, as well as adverse weather that can affect the crop’s quality and cannabinoid levels.

But many producers are still holding firm in Canada and aim to bring down their cost of production as well as their carbon footprints by planting cannabis in greenhouses and outdoors, as well as using alternative energy methods indoors.

Health Canada said it has not yet granted an LP permission to grow cannabis outdoors. Some communities have expressed concern about resulting odours and noise pollution.

Ontario-based WeedMD is growing cannabis in 14 acres of greenhouses and aims to plant its first outdoor crop this spring. “In our efforts to decrease our cost of goods sold, we’re also decreasing any impact we may have on the environment,” said Keith Merker, chief executive of WeedMD.

“In our forecast and in our research into this opportunity, we’ll be able to minimize our cost of goods sold exponentially. Even though it will be only a single crop each year, it will be very much worthwhile. We’re estimating less than 20 cents per gram, conservatively.”

In British Columbia, Flowr grows cannabis indoors but offsets electrical costs by reusing the heat that comes off its lights by dispersing it through water to reuse in other parts of the facility. It also captures water in the air to use, chief executive Tom Flow said.

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“We’re reusing that heat in other areas of the facility. We can take it and use that heat to heat another area, to help dehumidify other areas, so there’s a lot of efficiency,” Mr. Flow said.

“We’re trying to reduce that carbon footprint.”

To lower production costs for plants destined for cannabinoid extraction, rather than dried bud or oils that Flowr prefers to grow indoors due to strict quality control during the growing process, the company is looking into greenhouse options.

“We really look at a controlled indoor cultivation as the only way to produce a really high quality craft cannabis,” Mr. Flow said.

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