What is craft cannabis and how will it fit into the legal market?

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, craft 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 produce 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.”

The rules

Under Health Canada regulations, a micro-cultivation licence will permit a company to have a plant canopy of 200 square metres. Security regulations will be lighter than those faced by licensed producers (LPs) currently authorized to grow for medical users, as well as future standard recreational licence holders. Both standard and micro-cultivators won’t be allowed to be able to sell directly to the public for recreational use. Cultivators will likely sell to firms with standard processing or micro-processing licences, which would then sell the finished product to provincial distribution boards.

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.

The product

Lisa Campbell, who recently joined Toronto-based wine distribution company Lifford Wine & Spirits to work with cannabis companies through the provincial distribution systems, 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 strains, grown in specific soil conditions, and use other methods to distinguish their cannabis. “A lot of people say hand-trimmed buds is craft, so the trim is really important,“ she says. Larger producers often trim the buds by machines. “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.”

The price

James Walsh, a Maple Ridge, B.C.-based cannabis consultant, 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 crowd-sourced 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.

The profits

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 a year 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.

The competition

Big players and micro-cultivators will face challenges building brands in the legal market, given the expected limits on marketing and packaging. While many hopeful craft producers say they will make efforts 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 scoping out potential partners 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.