Cannabis in Colorado / Cannabis Genetics

presented with data, experience, and considered opinion

How big is the Colorado market, and what is the wholesale gram cost?

Sales of legal Cannabis (in all forms) continued to grow annually, rising from just under a billion in 2015 to 1.2 billion in 2016. 2017 sales surpassed 1.5 billion.

While Cannabis sales estimates on the black market are thought to be between 50% and 100% of legal sales resulting in total CO market somewhere between 2.2 billion and 3 billion for 2017. 

The resultant price of legal recreational flower dropped to 900 dollars per pound (453.6 grams in a pound, or a price point of around 2 dollars per gram wholesale) in 2017.  In 2018, as suppliers continue to expand, pound prices can be found as low as 600 dollars... $1.32 per gram wholesale.

Colorado Department of Revenue Report to Colorado General Assembly (4/1/2017 excerpt:

The Retail Marijuana market saw an overall increase in demand from CY2015 to CY 2016.  Specifically, 175,642pounds of raw Retail Marijuana Flower were sold in CY 2016 (an increase of 64% from 106,932 pounds sold in CY 2015).  In addition, 7,250,936 individual units of edible Retail Marijuana Products were sold in CY 2016 (an increase of 37% from 5,280,297 units sold in CY 2015).  Finally, in CY 2016, Retail Marijuana Stores sold 761,764 individual units of non-edible Retail Marijuana Products (a decrease of 5% from 801,215 units sold in CY 2015).

What does business survivability for both Medical and Recreational grows look like in Colorado?

There appears to be some consolidation in certain licensed growers, as indicated by survey of CO licenses, but this likely represents very few of total licenses lost in the market.  We only have data from three years of recreational operation.  This data indicates a consistent loss of 20% plus of total licenses for all reasons by the end of the first year of a rec growers operation.  Total licenses lost for all reasons approaches 37% by the end of the second year of business.

All losses in Medical grow licenses by the end of the first year also approaches 20%, with around 30% of licenses lost by the end of the second year of business.

What scaling obstacles exist in the Colorado market?

Clients starting new recreational grows begin competition against larger growers with 15k plants indoors and/or outdoor grows with 5-10 acres.  And scaling up to parity in competitive edge is not straightforward.

First, for some perspective, let’s say each individual “mature” plant requires an average of 6.5 sf of lighted canopy space in an indoor grow.  10K “mature” plants then require 65K sf of lighted canopy grow area.  Logistically, this resolves into 100K sf plus indoor grow facility with perhaps 25k to 30k total plants in various stages of size and growth from seedling to mature plant, 10k of which are of a mature size at any given time.   And every plant over 6” requires a unique, permitted identifying tag.   With this in mind, let’s examine scaling challenges.

State law outlines and enforces a tiered growth model (each jurisdiction is different and may impose additional restrictions). Licensed growers must sell at least 85% of their product for six months to move from the lowest tier (1800 plants permitted) to tier 2 (3600 plants permitted). Then growers must demonstrate another six months of selling 85% of their product to get to tier 3 (6000 plants permitted).  Then growers must demonstrate another six months of selling 85% of their product to reach tier 4 (11020 plants permitted). Finally, growers must again demonstrate another 6 months of selling 85% of their product for six months to reach tier 5 (13800 plants permitted)…. followed by increased plant counts at increments of 3600.

Assuming production and sales targets are met, and everything goes smoothly, ramping up to a Tier 5 facility requires at least 2 years.

This is a long time to be undercut by the economies of scale enjoyed by the biggest growers.  Assume unscheduled delays imposed by regulators, and that time frame might take much longer. Any miscalculation in sales or administrative oversight and the streamlined growth agenda gets offset by months or even years.  

How big are Colorado's commercial indoor grows?

On average indoor grows in Colorado are between 5 and 15k sf. 1000sf grow is not unheard of but the "big boys" start with at least 50k sf.  The largest growers in the state operate in facilities over 100k sf.

Can Colorado's small indoor grow operators compete with the larger ones?

Small grows do find ways to compete, but as wholesale gram costs decrease, the smaller wholesalers find it increasingly difficult to break even. A good deal of the decrease in gram costs comes from ever increasing numbers of producers competing in the bounded market that is Colorado. This circumstance created the reasoning for the graduated permitting of plants (scaling of production dependent on sales) that was recently invoked by the State legislature.

Aggravating matters, some venture operations established in the Colorado market are not immediately concerned with profit. Instead, their business models look to future growth and expansion into novel markets… or future profitable actions. Such operations undercut market rates in order to achieve sales for State-mandated scaling goals with little concern for profits. Their primary goal?  To establish systems, strains, and protocols in this incubation market to apply and exploit in novel markets… as more geographic areas decriminalize.

Are Colorado's indoor cultivators facing massive waves of future consolidation?

Perhaps… based on current trends in the industry. 

The big boys (defined loosely herein as grows above 50k sf) are employing exclusionary tactics (see the new Denver restrictions as evidence of "cartel" action), and the acquisitions and mergers in and amongst the big players of the industry are accelerating.  These actions will only accelerate after Jan 1, 2017 when direct, out of state investment will be permitted legislatively.

Right now, we have 2 distinct groups of growers... those pursuing the factory farm scale production and then the small batch producers. Both have their own strains they breed and develop for a whole variety of reasons and goals.  And both will likely continue to maintain some market share.  But the industry will eventually produce the Coors and Budweiser(s) of MJ.  Then the question becomes will they fully displace small batch producers?  And if not, what strategies will small batch producers employ to survive?

We are currently seeing the first wave of small-batch wholesale growers leaving the business.  They are selling established small grows (under 10k sf) to novel interests as the wholesale price per gram of product has decreased to a point where once very profitable operations manage only to break even. 

What is the impact of the Colorado home grower on commercial enterprise?

If anything, a hobbyist Cannabis grower gains appreciation for commercial variety after having tried his or her own hand at home production. View the maturing Cannabis market then along the lines of the alcoholic beverage market. You can make beer at home if you like, but the ease, convenience, and product variety that a liquor store offers relegates home-brewing to hobbyists and/or niche connoisseurs.

What is the biggest single cost in Colorado's indoor grows?

Labor. For scale, a 100k sf operation with 70k sf of canopy employs 150 to 180 people, 30% of which are compliance officers. The majority are laborers. Assume a single master grower and a number of master grower assistants as these operations run 24/7;  multiple growers are needed to take pressure off the master grower.

How do I patent my Cannabis strains?

Most likely, you don't. For perspective, brewers all over the world develop particular strains of yeast... each strain covetously guarded... but NEVER patented. Anyone can access their yeast genetics simply by isolating yeast cells from the beer these brewers sell.  Does this deter or effect the beer business to any noted degree?

An analogous situation exists with the coveted genetics of Cannabis breeders. If you want access to a growers genetics, just extract and sequence the DNA in their products. Even if you still wanted to, you can’t patent naturally occurring DNA. You can patent cDNA as with insulin. You can also make artificial modifications to the DNA of a strain and use that for patent leverage. The caveat here is patentability only when a strain has been actively, and provably genetically modified through lab processes.

In order to effectively patent-protect proprietary strains then, a genetic engineer must place a unique sequence identifier in the heritable genetic code of the resultant strain. This "artificial" sequence becomes legal leverage for protection as all descendant lineages can accurately be traced. For most breeders however, this sort of effort will never make good business sense.

Can breeders attain designer terpenoid profiles and tailored cannabinoid levels in their products?

This is generally an attainable goal, and will increasingly be so in the future with the proper study and application of molecular genetics. Right now though, this level of sophistication is not the norm.

More often than one might imagine, growers peddle mislabeled strains…Indica, Sativa, Hybrid, Hemp, etc... basing labels on word of mouth, subjective observation, and misleading claims of seed sellers. The entire industry is fraught with these labeling errors as demonstrated by genetic survey.  

Budtenders inadvertently perpetuate inaccuracies and confuse the issue, telling clients that Sativa is a mental high and Indica is a body high. These two general subjective descriptors may apply, but then they sell Sativa as Indica, or vice versa. Hybrid claims, saying this strain 70% sativa or 30% indica, etc, are also exceedingly misleading. The false marketing confuses everything and patrons are left to find a product they like, regardless of what it’s called or how its marketed.

How can genetic labs improve product development without altering underlying genetic code?

By reducing overhead in traditional breeding programs. Traditionally, strains are grown to maturity and crossbred with other select strains. Then the offspring of that cross are grown to maturity and selected for the desired phenotypes. It takes 90 days on average to get a plant to the flowering/ breeding stage. Using genetic markers, geneticists can determine which plants carry desired phenotypes (including plant sex) at the plantlet stage. Early phenotype identification then streamlines the total number of plants that will ever be grown to sexual maturity. Thus reducing costs.

How can genetic editing improve product development?

Traditional breeders find a plant that by random mutation carries some new, interesting, or otherwise desirable phenotype. Employing this method may require a lifetime of breeding and random mutation to discover an interesting trait, much less a desirable or profitable one.

On the other hand, gene editing is not random. Geneticists precisely target their high-throughput screening and editing efforts to create mutants that carry desired phenotypes. They reduce what would be a massive generational screening and selection effort to a single generation.

Will genetic editing inherently increase the value of the product?

Genetic editing can be used to pursue value-added products. For example geneticists may target traits to increase bud yield, or decrease flowering times, or decrease lighting needs (ie, autoflowering).

Geneticists can also engineer entire production systems. As an example, consider a 100k sf grow that has maximized floor space and cannot produce higher volumes. But they have 30 foot ceilings... so theoretically they might expand upwards. However, as they stack production onto shelves, they require plants that only grow 3 or 4 feet tall.  

Large grows may maintain 60 different strains in house... and they grow maybe 5 strains at any given time. Lets say 8 of the 60 strains grow 3 feet tall max, and the rest grow bigger. Well, if they want to turn 100sf of grow into 150k sf of grow with racks, they need all proprietary strains to grow no higher than 3 feet. The operation might spend lots of money and decades with selective breeding efforts to achieve this goal. Or it could use genetic markers and genetic editing to accelerate plant-height uniformity, saving both time and money.

Can genetic editing of strains increase THC yields?

To some degree, yes.  For instance, CBD and THC both utilize the same precursor molecule.  By genetically disabling one or another enzyme in the common chemical production pathway, all precursor molecules can be freed up for utilization as either THC or CBD thus increasing targeted yields.  

However, the highest THC yielding plants produce around 30% by flower weight.  That upper limit is not likely ever to be breached for a variety of reasons. Among these, THC is toxic to the plant and is therefore produced in glands and excreted onto the surface of the flower. More THC by flower weight therefore may not be compatible with plant life.