The legalization of cannabis last October has led to a huge surge in secondary markets arising from the process of producing cannabis for specific uses. While everyone is focused on the major players in the cannabis market such as Canopy Growth and Aurora, which cultivate and distribute cannabis products, it's easy to forget about some of the smaller industries that have sprung up as a result. One of these industries that's worth keeping an eye on is the business of cannabis extraction.
What is Cannabis Extraction?
A cannabis extract is any oil-like substance with a high concentration of the chemical compounds in cannabis that create the effects of weed. There are approximately 113 different cannabinoids, all with different effects on the brain and body, but tetrahydrocannabinol (THC) and cannabidiol (CBD) are the two most well-known. A lot of techniques exist for separating the chemical from the cannabis, and these methods are what we call cannabis extraction.
What are the Methods of Cannabis Extraction?
The most popular methods involve the use of a solvent such as ethanol, CO2, or even water to separate the desired compound from the plant matrix. Simply put, the cannabis flower is soaked in the solvent until the concentrate has been separated from the plant. A method of filtration, usually evaporation, is then used to separate the solvent from the concentrate until all that is left is the concentrate and voila, you have a cannabis extract.
While that may sound relatively simple, there are more complexities to the process to target specific compounds at specific levels of concentration, particularly when it comes to the use of CO2 or Butane, which is the process used to make shatter. While we'll talk about some companies that use these processes, we don't really need to get into the scientific technicalities.
What are Cannabis Extract Products?
There are a whole host of cannabis extraction products that you've most likely come across before. For example, the kief at the bottom of a grinder is a pretty basic form of cannabis extract as the THC compound has been separated from the flower via a sieve. Other popular cannabis extracts include tinctures, which are orally ingested liquids, vaporizers, a hugely popular alternative to smoking, and dabs, a very highly concentrated wax-like substance that is vaporized when held against a heated surface. Edibles are also considered a cannabis extract.
What are the Benefits of Cannabis Extraction?
Many people choose to consume cannabis extracts rather than the traditional method of smoking cannabis for a variety of reasons. The first reason is that they offer a healthier alternative to smoking, of which the effects on the lungs are very well known. However, most people enjoy cannabis extracts as they're an effective manner of tailoring the effects of weed because the extraction process allows the user to identify specific compounds that all have different effects.
Another reason people consume extracts is that you can get a significantly higher concentration compared with just smoking cannabis flower, which increases the effects of cannabis.
Why is Cannabis Extraction a Good Investment?
Investing in a cannabis extraction company could represent a very good opportunity right now because of their surging popularity as a result of the benefits mentioned above. More and more people are leaving behind the traditional method of smoking in favor of these trendy new means of consumption. In 2018, the global cannabis extract market was estimated at $5.3 billion USD, and it's growing at such a rate that it should be worth nearly $25 billion USD by 2025—huge growth in just five years.
Beau Whitney, a senior economist at cannabis research firm New Frontier, said, "[in the US] it was not uncommon to see 75 percent of the market consuming cannabis flower years ago but as product offerings became more differentiated, we saw the market for flower drop to around 40 percent, and the market for oils surge to over 60 percent."
With the second wave of cannabis legalization coming into effect in Canada on October 17, paving the way for a legal market for cannabis derivatives and extracts, the companies that offer extraction services are about to get a whole lot busier. So, let's take a look at some of the companies that could benefit the most:
Medipharm Labs Corp (TSX:LABS) (OTCQX:MEDIF) is a leader in the cannabis extraction services with over 20 supply agreements in Canada and Australia and was the first company in Canada to receive approval exclusively for cannabis oil extraction. The company acts as a kind of middle man in the cannabis supply chain by buying up cannabis flower, extracting the concentrate, and selling it right back to the same cultivators. In 2018, Medipharm was named Cannabis Start-Up of the Year at the Canadian Cannabis Awards.
Currently valued at $3.68, Medipharm stock is up over 116% since last October, and this growth doesn't look like it's slowing down any time soon.
Valens GroWorks Corp (TSXV:VGW) (OTCQX:VGWCF) is probably Medipharm's closest competitor, and it definitely offers some stiff competition. The company uses five different methods of extraction and so is getting around a 90% yield, which is perhaps the highest in the field. Valens also has supply agreements with some of the biggest names in the market, such as Tilray (NASDAQ:TLRY), OrganiGram (TSX:OGI) (NASDAQ:OGI), Canopy Growth (TSX:WEED) (NYSE:CGC), and The Green Organic Dutchman (TSX:TGOD) (OTCQX:TGODF), which means it has no shortage of buyers.
Like Medipharm, Valens stock has made significant gains in the last year, climbing a whopping 220% since last November. Valens stock is currently valued at just $2.798, and again, it looks like it can only benefit in the months to come.
So, that's our guide to cannabis extraction and why it looks like a good investment. With stocks valued as low as they are in this sector, and with demand only set to grow, the only question that remains now is—will you get involved?
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