It might not be realized yet in Canada, but a trend has emerged in the US legal cannabis market that's putting a smile on cultivators' faces. The trend is this: consumers are buying more cannabis derivatives product than raw dried flower.
According to sales figures, cannabis flower sales across legal US states has fallen below 50%. This means marijuana edibles and other derivative products are now taking the lion's share. This, in turn, means greater margins and, therefore, greater profits for producers.
Cannabis Derivatives are Lucrative
But why? Well, the reason is this twofold.
1. Edibles and drinks command much higher price margins and prices per gram than dried flower. This offers producers a best-case scenario, as, essentially, they get greater return per gram of marijuana. This is especially true if this producer runs a vertically integrated business model and can take the marijuana from seed to flower to oil to infused-product.
2. Cannabis derivates allow producers to "maintain their revenue per gram" even if a supply glut happens and the wholesale price of dried flower falls.
The figures show that consumers are willing to pay a higher rate of $5 for a brownie, for example, over the traditional and cheaper dried cannabis that requires smoking or vaping. This is likely because derivatives offer an experience beyond flower; they can be a tasty treat; a thirst-quenching drink and all-the-while deliver the same effect as traditional smoking does.
For this reason, consumers seem willing to pay a higher price point for them. All-in-all, this decision to opt for the higher-priced goods in lieu of smoking spells a win-win for the industry.
Phase II Legalization in Canada
Phase II legalization in Canada is on the horizon. This will make the production and sale of cannabis derivatives legal from October of this year. In preparation for a market (that may easily mirror the US's), some of the biggest cannabis brands have buddied up with sizeable drink companies to create cannabis beverages, and sizeable food companies to create edibles. We're going to take a look at a few names that are maximizing the potential of this arm of the industry.
But first consider this:
Sales of dried flower in Canada's first year of adult-use have, thus far, been disappointing. Health Canada has reported a stagnated growth in sales from December 2018 to March 2019. Effectively, sales have flatlined with only approximately 6,000–7,000 kgs sold every month. However, the edibles market is not expected to do this.
For one thing, the market should entice regular smokers but also those who don't want to smoke or vape for consumption. As such, the cannabis derivatives market is potentially far bigger, and with larger margins, far more lucrative.
Here are some top names that are already showing prowess when it comes to oil and extraction facilities:
CannTrust Holdings (TSX:TRST) (NYSE:CTST)
According to Grizzle, CannTrust already gets 60% of its revenue from oil sales, and this is the highest in the industry. Shares of this company have hit highs of $13.45 CAD on the TSX but currently sell for $6.82 CAD.
Aurora Cannabis (TSX:ACB) (NYSE:ACB)
As the second largest cannabis company by market cap, it might not surprise that Aurora is also going to be a leader in terms of cannabis oil. The company expects to have 120,000 kg of oil extraction capacity in full operations by late 2019. This gives it the largest amount in the industry so far. ACB stock is currently selling for $7.49 USD, though shares hit a yearly high of $9.96 in March.
HEXO Corp (TSX:HEXO) (NYSE:HEXO)
HEXO recently signed a multi-year agreement with cannabis extractor Valens GroWork (CSE:VGW) (OTCQB:VGWCF) to derive cannabis oil from its dried flower. Initially, the pair will work together for two years. In the first year, HEXO will supply Valens with an annual minimum of 30,000 kg of cannabis and hemp biomass. In year two, that number increases to 50,000 kg. Further, the company has a massive deal with Molson Coors Brewing (NYSE:TAP) to develop cannabis-infused beverages. HEXO stock is currently selling for $8.25 CAD.
Canopy Growth Crop (TSX:WEED) (NYSE:CGC)
Industry leader by market cap, Canopy Growth is also the winner of the biggest investment deal in the industry. The company signed an agreement in late 2018 with major drinks maker Constellation Brands (NYSE:STZ). The deal put $4 billion in Canopy's back pocket and secured a partnership that sees the pair create a line of cannabis-infused drinks. CGC stock is currently selling for $41.08 USD.
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