OPERATIONAL COSTS OF A COMMERCIAL CANNABIS GROW
Building a new indoor or greenhouse cultivation facility can cost millions. Depending on the quality of the infrastructure and the capacity of the systems an indoor grow of 10,000sf can easily cost $2,000,000. And that is just the build out (retrofit), not considering the land.
So turning a profit in the cannabis industry can be challenging, especially in the competitive environment many states (like Colorado and California) are experiencing. Thus, the importance of understanding the economics of both setting up a grow facility (CapeX) and running it (opeX).
CREATE A TIMELINE
First start with the timeline, because time is money. Assuming the most typical scenario where you are buying or renting a building:
- Purchase/Lease the property: 2-3 months after zoning checks, financing, contracts and closing.
- Design: Hiring an Architect, Mechanical, Electrical, Plumbing and Structural engineers is a key process that will last 1 month, then actual design is around 3 months (depending on the size and complexity of the project)
- Business license: this is the process to get the permits from local and state authorities to operate the business in that location.
- Construction Permit: Reviewing design by the local building department can take 1-2 months with back and forth comments.
- Construction: This varies greatly depending on the complexity and size of the project, but also, depending on the quality of the builder. 8-12 months is typical.
- Certificate of Occupancy: this process of construction inspections can last up to a month (and many people neglect it).
- Pre-revenue Operations: Typically plants will take 5 months from clones or seeds to harvest and then another 15-30 days to dry, trim, cure, test and package for sale.
Although some of these activities overlap, knowing that it will take about 18-24 months until revenue starts coming in is essential for a financial plan. In some cases, people are able to purchase an existing grow which will accelerate these timing but it also comes at a cost.
PLAN FOR OPERATIONAL EXPENSES
Now, running a cannabis cultivation operation has several cost components including: cultivation labor, trimming labor, packaging labor, administrative staff, management team, sales and marketing teams, nutrients, soil, packaging, cultivation and trimming tools, rent, utilities, insurance, legal, accounting, banking fees, maintenance, shipping, testing and let’s not forget about TAXES!
All of these operational costs ultimately will determine your all-in cost per pound and then your margins and profitability.
Therefore it is essential that you create a thorough budget and track your expenses to accurately project your performance. To do that you must understand key performance indicators (KPI’s). Knowing the average productivity of employees for each task will allow you to size your teams and knowing the rate of supplies required to produce at capacity will determine your other operational costs.
But why is this information not readily available for us?
First, because commercial cultivation operations are fairly new, there is not enough data (unless you have operated your own facility--lucky us!) but also it is because these KPI’s are very dependent on your cultivation and post-harvest methodologies. The level of automation some mass-market growers achieve using an automated fertigation system and a trimming machine allows them to cut on labor costs and therefore cut on overall operational costs but that comes at expense of the quality (and that's reflected on the price per pound).
So here are the main KPI’s to focus on:
- Growers per sf: knowing how much canopy can the average grower can take care of will allow you to size your cultivation crew, which can be up to 20% of your opeX. In my experience, a grower can cover about 1,500sf of gross living soil canopy.
- Trimmers per pound: If you harvest by hand to make truly craft cannabis then you should consider the productivity of your trimmers. They typically will trim about 1.5-2lb of flower per day (at $15/hr that means about $68 per lb).
- Packagers per pound: This depends heavily on whether you are pre-packing, selling pounds, or making pre-rolls. For wholesale flower a person can package 10-20 lb per day and with a Knockbox machine one packager can roll up to 1,000 pre-rolls per day.
- Sales team size: This is very dependent on the business strategy and the experience level of the sales people. Repetitive business allows for a smaller team and that pays off. A good rule of thumb is 100 pounds per each sales person per month.
- Utilities: Growing indoors takes a lot of electricity. Those costs vary greatly depending on the types of lights and Air Conditioning equipment (HVAC) you have, but a decent estimate for a 1,000w hps light system in flower and T5/315W lights in the vegitative stage is $2/sf/month of gross canopy.
- Cultivation supplies: each cultivation method is different, some people reuse their soil and others replace it every other cycle. Some use liquid nutrients, others use brewing probiotic teas and granular amendments. Therefore this is a KPI that you will need to determine based on your method. In my method we spend about $2/flowering sf/cycle.
Other costs like rent and excise tax are fixed and important to consider!
Finally here is a breakdown of the operational expenses (opeX) of an indoor living-soil cultivation facility:
Ultimately, all of these costs (fixed and variable) will determine the all-in cost of goods sold of your cannabis flower pound. Your yields will play a significant role on this calculation, as you need to divide the total cost of operations for a period of time (say 1 month) by the number of pounds you produced in that same time-period.
It is important to make sure your productivity levels (yields) and your costs of operation are consistent month over month. If they are not, it is best to use averages or a longer period of months for this calculation. Therefore, say you harvested 300 pounds of flower over 2 months and your costs were $150,000 per month then your cost per pound is $150,000/month x 2 months divided by 300 pounds in those 2 months = $1,000/pound
While these numbers are super useful as averages in the planning phase, the more granular analysis comes when considering specific yields per strain to determine cost per pound for each strain. With the more detailed analysis you can consider margins and plan production levels accordingly.