Greater Margins For Outdoor Cannabis Cultivators?

by Jenn Smith October 22, 2019

Every Canadian cannabis producer under the sun has frantically scrambled to increase production capacity over the last couple of years. That scramble typically involved investing in greenhouses or artificially lighted indoor facilities capable of harvesting sizable cannabis crops.

The two biggest cannabis producers by market cap, Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC), also rank at the top when it comes to production capacity thanks to the construction of enormous indoor facilities. Now, though, both Aurora and Canopy are betting on outdoor production. And it's a bet that could pay off nicely.

Heading outdoors

Aurora announced in July that it had secured licenses from Health Canada for two outdoor cultivation sites. Aurora Valley is a 207-acre outdoor cannabis facility located in Westwold, British Columbia. Aurora Eau is a smaller 21,000-square-foot outdoor facility in Lachute, Quebec. 

At the time of its announcement, Aurora stated that cannabis had already been planted at Aurora Eau with planting about to also begin at the Aurora Valley outdoor facility. Aurora provided a corporate update last week and said that the first harvests at both outdoor sites are underway.

Canopy Growth moved even more quickly to launch its outdoor cultivation effort. The company stated in June that it had received a license from Health Canada to grow cannabis outdoors in northern Saskatchewan. Canopy said that the outdoor site included 7 million square feet, or around 160 acres.

This wasn't Canopy's first outdoor excursion. The company claims a huge outdoor operation consisting of over 5,000 acres dedicated to growing hemp. Canopy plans to rely on the lessons that it has learned with its hemp cultivation to improve its approach to growing cannabis outdoors.

Why it's a smart move

Cannabis cultivated indoors or in greenhouses is usually viewed as having a higher quality than cannabis grown outdoors. That's mainly because outdoor cannabis crops must be treated more heavily with pesticides to combat insect infestation. 

Make no mistake about it, both Aurora and Canopy plan to continue focusing primarily on greenhouse and indoor cannabis cultivation. However, the shift to outdoor production is a smart move on the part of these companies for one key reason: anticipated growth from the soon-to-open Cannabis 2.0 market in Canada.

The Cannabis 2.0 market will allow sales of cannabis derivative products including beverages, foods, and vapes. These derivative products will be infused with cannabinoids, primarily CBD and THC. The cannabinoids are extracted from cannabis plants, so whether those plants are grown indoors, in a greenhouse, or outdoors doesn't really matter from a customer quality perspective.

What does matter, though, is the cost. Growing cannabis outdoors is significantly less expensive than cultivating crops in a greenhouse or in an indoor facility. Canopy Growth readily acknowledged this as an important factor in its decision to grow cannabis outdoors, noting that its outdoor facility would enable the company to obtain "higher margins than are achievable using inputs from indoor and greenhouse facilities, which are optimized to produce high-quality flower products."

In addition, outdoor cannabis cultivation is more environmentally friendly than other approaches. Aurora Chief Corporate Officer Cam Battley mentioned this aspect of the focus on outdoor growing in his comments during the company's fourth-quarter conference call last month. Battley stated that research at Aurora's new outdoor sites "is important work that needs to be done to ensure sustainable cannabis agricultural practices that are developed to safeguard both our environment and global consumers." 

Moving the needle?

Investing in marijuana stocks so far has tended to be more focused on revenue growth than profits. That's changing, though. Profitability, or at least a clear path to achieving profitability, has become much more important for marijuana stocks than in the past.

The management teams at Aurora and Canopy no doubt realize this changing dynamic. It was without question a top consideration for the companies in their decisions to grow cannabis outdoors. Don't be surprised if these efforts ultimately move the needle for both stocks as the Cannabis 2.0 market heats up next year. Higher margins translate to shorter waits to achieve profitability. 

Assuming Aurora and Canopy can deliver higher margins than rivals in the Cannabis 2.0 market, look for other companies to follow in their footsteps. It's possible that every Canadian cannabis producer under the sun will scramble to grow cannabis under the sun.  

Story re-posted from The Motley Fool. Written by Keith Speights

Jenn Smith
Jenn Smith