In the midst of the post-pandemic recession, governments argue the cannabis industry could diversify regional economies, add value to the flower at source and improve local wages. Their thesis? To increase the number of small businesses involved in cannabis production and incorporate technology into this process.
Although the cannabis market is growing faster than that of wine, beer, tobacco combined, the development of the industry and its economy is held back by the burden of anachronistic regulations and the lack of coherent political reforms.
The federal prohibition of marijuana affects in particular the efficiency of the cannabis supply chain. That is the network of suppliers, producers, traders, goods, services, and information that make legal cannabis production possible at scale.
As with other products such as oil, meat, corn, dairy products, or medicines, an incomplete supply chain generates price increases, reduces the quality of the product available to local consumers, reduces technological progress, and stimulates illegal trade.
Although there are no recipes to create an efficient and equitable cannabis supply chain, there are some key factors such as technology and organic certifications that must be taken into account when regulating this industry from scratch.
Cannabis supply chain and production (in)efficiency
Jesús Burrola has a degree in Supply Chain Management from Arizona State University and is the CEO of POSIBL, an innovative cannabis farm and engine of several major California brands. Prior to POSIBL, Jesús worked for 15 years in sales, management, and operations for the largest distributor of building materials in North America.
“The cannabis supply chain is still in its infancy and there is a lot of inefficiency in general. Because it is not a free market, it is a market that has to adapt to all the laws and regulations of different places. So those laws make the chain much more complex and much more inefficient as well,” Burrola said in an exclusive interview with El Planteo.
The CEO explains that in the US, cannabis producers can’t design a coherent business plan to supply the entire country. The lack of comprehensive regulations means that each company has to set up its own Supply Chain in each state.
“If you’re Budweiser you might think ‘what’s the best area to grow? Where is the best place to manufacture? What is the best place to distribute?’ In cannabis that does not exist, yet.”
Cannabis supply chain integration: Vertical or horizontal?
Burrola explains the two main models of cannabis supply chain integration, the vertical model and the horizontal model. He argues that this last configuration is the most efficient since it allows the specialization of producers, technological innovation, and cost savings.
A vertically integrated cannabis industry implies a regulatory framework that forces companies to produce cannabis entirely within the same company. An old model of serialized production that reduces the complexity of governmental controls and simplifies the collection of taxes from a few large companies.
It is characterized by subjecting cannabis firms to licensing processes that are complex and costly, often limiting access for small cannabis businesses. In addition, they are inefficient, as it is impossible for a company in the twenty-first century to operate efficiently an entire supply chain. Thus, the vertical model predominates where there is no federal regulation of cannabis.
Burrola explains that, without a coherent regulation of cannabis, companies have to create supply chains under different laws adding that “there are two theses on how this business should evolve, which are quite different.”
“One is that all companies have to be vertically integrated. Which is a bit inefficient (wanting to run, wanting to start 6 or 7 businesses at the same time within a business is quite complex) and requires a lot of capital, which is quite difficult to obtain in cannabis. The other idea or the other thesis is where we are operating: horizontal integration. We are a supply chain COP for many of the larger brands that do not grow cannabis.”
A COP or “customer order point” is a node, at which the supply chain processes are decoupled. It guarantees brands (cannabis brands in this case) the standardized management of their production and packaging, and the sending of personalized purchase orders to retail distributors.
“We are growers of many of the biggest brands in California. The idea is to make the supply chain and industry more efficient. If you are a cannabis brand, you should be dedicated to that. Don’t buy a farm. You would be highly inefficient because the learning curve in agriculture is enormous, very technical.”
Burrola points out that there are opportunities for each company to focus on its know-how and add value with its expertise. “We receive packages from 15 brands in California and we create a business plan, we forecast the monthly volumes and how much product they will require. The price varies according to the specifications of the product containing THC”.
“We work with brands that do not have all the licenses. They work with distributors, growers, and packers who are licensed. They are dedicated to creating their brand and demand, while the product flows through pure licensed channels, which saves them money. It allows them to focus on what they know, creating demand and renown for their cannabis brand.”
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Organic certifications: Adding value to cannabis
Organics are sometimes thought of as niche economics. But, are these certifications more profitable than current extractivist/intensivists agribusiness models?
“I believe that the value of cannabis lies in its transparency, in the scientific information that you provide to the consumer about your product. Basically, how strict are the rules for legal growers. Why are they so strict? Because it is not a tomato, cannabis is a medicine,” explains Burrola from his office in Salinas, California.
“The cannabis that we sell is accompanied by a laboratory certificate. Although there is no federal organic certification, in California, we apply organic products. We use a mixture of 50% coconut and 50% Redwood, a very common tree here, as a propagation medium and some regulated salts, which we will stop using when there is a national organic certification.”
“We also have a greenhouse that allows us to monitor pests. We use colonies of beneficial insects to combat pests such as thrips and aphids, for example”.
Precision greenhouses: Controlled agriculture technology and supply chain efficiency
Regarding the technology needed to make cannabis chains more efficient, Burrola highlights the importance of considering operating costs (mainly in energy and labor), infrastructure automation, and remote monitoring, through technologies such as the internet of things (IoT).
“Our greenhouses have sensors inside and outside to measure the temperature. Those sensors talk to an algorithm that we have programmed. We decide the temperature, humidity, and sun intensity in the greenhouse?” explains the CEO.
Likewise, Burrola highlights the importance of cooperation with other industries in the sector to achieve greater efficiency.
In conjunction with a Colombian company, POSIBL is testing an IoT system, to detect pests and diseases, through a camera and a robot (before the human eye can even see it).
In addition, the firm is working on new greenhouses with an energy cogeneration plant through the recovery of gases emitted by the installation.
“Everything is automated, including hydroponic irrigation, fans, windows, etc,” adds Burrola. “The idea is to try to automate and reduce the risk of human error. Not everyone enters the greenhouse. We treat it like a hospital.”
Focused on automation
Regarding infrastructure, Burrola adds that there are leading global companies dedicated to precision agriculture such as Priva or Argos, “which are focused on automation.”
—Are there already integrated companies that can ‘sell you a combo’?
Yes of course. They design a greenhouse for you from start to finish. This requires a lot of engineering. It is very difficult to add components to a greenhouse after the infrastructure has been set up.
—How many companies orbit the construction and administration of a precision greenhouse?
More than 30. They are companies with extensive experience. It is nothing new. Specifically, Dutch companies are leaders in greenhouse technology.
—Faced with potential federal legalization of cannabis, what would be the sectors that could be reconverted to produce legal cannabis efficiently?
Ornamental flower growers, no doubt. This whole area of Salinas and Santa Barbara, the largest greenhouse region in California, before NAFTA, was a great flower-producing area. In fact, right here, chrysanthemums were produced.
And he concludes: “Mexico also has an installed capacity to produce organics and export. There are many greenhouses already installed in Mexico and the cost curve is much lower than in the US. In addition, the favorable climate. For example, the cost of tomato production in Mexico is a third of the cost of production in the US.”