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Future-Proofing Your Cannabinoid Extraction Business

Extraction of cannabis and hemp indeed are growing businesses and, with more states expected to approve medical and/or adult use (recreational) of delta-9-tetrahydrocannabinol (THC) and cannabidiol (CBD) products, a bumper crop of opportunities to thrive await growers and processing operators.

The extreme market fluctuations during the past two years, however, have taught us that neither cannabis nor hemp is a sure thing.

Despite high consumer demand for smokable, edible, and topical products, THC and CBD extraction can be a volatile venture. So, operators need to be prepared with a thorough understanding of market trends and ever-changing laws and regulations. Moreover, they should build flexibility into their facilities to handle a wider range of processes and products to meet future consumer demands and market conditions.

 

Ensure Your Cannabis or Hemp Extraction Business Survives

The year 2020 will be remembered as one of the most challenging years because of the COVID-19 crisis and the worst economic contraction in nearly 100 years. These followed regulatory changes that drove a hemp boom in 2019 and a hemp bust in 2020.

Federal Farm Bill changes in 2018 encouraged farmers to grow more hemp. They did. However, the price of hemp biomass declined 79% —$38 to $8.10 per pound from April 2019 to April 2020, according to Hemp Benchmarks. Many growers had to plow under their crop because of overproduction across the United States.

Many extraction operators benefitted from the overabundance of cheaper raw material, but the industry also had built up what quickly became excess capacity. At Prospiant, our Delta and Apeks brands installed about half of all extraction equipment sold in 2019. Then the pandemic hit and the economy stalled.

Many operators had invested in facilities designed with only one type of extraction equipment. They were unable to easily switch production processes to handle either the available biomass or utilize the extraction method needed to produce new products that matched consumer demands.

Yet, in the midst of these unprecedented conditions, the cannabis and hemp retail markets are experiencing healthy growth and resilience.

More states are embracing adult-use legalization. Between the November 2020 election and April 2021, four states—New Mexico, New York, Vermont, and Virginia—approved launching recreational markets between 2022 and 2024. Combined markets for adult use and medical cannabis are estimated to grow from $20.0 billion in 2020 to $45.9 billion in 2025.

There’s equally good news for producers of CBD products extracted from hemp. Hemp product sales are expected to grow from $1.9 billion in 2020 to $46.9 billion in 2025. Hemp-derived CBD uses include edibles (food, beverages, candy, gum), over-the-counter supplements, pet care products, cosmetics, and inhalables for smoking or vaping.

 

How Do You Futureproof Your Extraction Business?

First, don’t be romantic about the extraction technology — ethanol, carbon dioxide (CO2), or butane. Operators who invest exclusively in one method may lose everything when the market shifts. No one wants to end up with a facility full of equipment that doesn’t produce what consumers want.

Second, don’t be too attached to the type of cannabis or hemp products you produce, whether that be the cannabinoid you’re chasing, a specific derivative form, or an end-product.

This lesson is illustrated by the huge CBD price drop in 2019. Over the course of 45 days in 2019, the average price fell 30%. In 2020, the price for CBD distillate dropped from $7,500 per liter to about $700 per liter. Too many producers lost everything by creating business models that focused on CBD alone.

To survive a massive shift like this, diversify your extraction production systems so you can shift from THC to CBD production and back again as needed. Develop secondary and tertiary revenue streams to protect your primary business plan against market fluctuations. In such a fast-moving industry, it pays to be agile and adaptable to ensure that your extraction business is in it for the long haul.

 

It’s Now All About Cannabinoid Manufacturing

Not too long ago, the talk of our industry was THC vs. CBD, or adult use (recreational) vs. medical use. Many extraction operators developed business plans as if these were either/or choices.

The new reality is far more complex. Operators must prepare for the evolution of technologies, legalization trends, and shifting consumer tastes to ensure that you can meet demand for a wide variety of cannabinoid derivative forms and end-products. It’s no longer about producing only vape cartridges or edibles. Extraction businesses now must be able to manufacture various cannabinoid derivatives to make various end-products and to support the development of new ones, especially foods and beverages.

Most manufacturers have focused on growing as large as possible in their THC and CBD spaces. Retailers, on the other hand, are finding that a more nuanced approach is required. So, extraction businesses should become much more like craft beer makers whose breweries distinguish themselves by experimenting with ingredients and tailoring their mix of ingredients and processes to match local consumer expectations. Focusing solely on THC and CBD could be a myopic approach as consumers ask for cutting-edge cannabinoids like cannabigerol (CBG), cannabinol (CBN) and delta-8-THC.

Lessons can be learned from multi-state operators (MSOs). They’re not overly attached to a specific technology, an extraction or refinement method, or even an end-product. Instead, they remain open-minded about methods and outputs.

We’ve been educating our team on this extraction-agnostic approach to help our customers really dial in on a CO2 platform, an ethanol extractor, a butane system, or any combination of these at a moment’s notice. This flexibility enables operators to manufacture multiple stock-keeping units (SKUs) and to create a truly distinct brand of THC or CBD products.

But you don’t have to be an MSO to achieve your business goals. Most of the big operators target large volumes of distillate and isolate. New opportunities abound in making smaller quantities of different concentrates like dabs, sauce, diamonds, and other derivatives. Manufacturing small batches of a high-quality connoisseur product is a lucrative niche.

Diversity will be the key, and that means constructing the capability to use multiple extraction techniques. If you choose ethanol extraction equipment, you’re in position to create large amounts of distillate quickly. But you should also have an alternative production technology such as a CO2 system or a butane (hydrocarbon) system. These utilize other solvents and slower extraction times or additional processes to manufacture a wider range of products and to enhance product quality.

 

Industry Trends That Will Definitely Impact You

We’re actually seeing a great deal of consolidation in the cannabis and hemp industry. MSOs are buying smaller operators to diversify both extraction capabilities and locations to serve a variety of markets.

If you’re in a state that has legalized recreational use of THC, operators tend to invest in bigger facilities with more industrial equipment and extraction processes at scale. In states where only medical use has been legalized, or in states that have only recently legalized adult use, the size of extraction operations and the volume of THC and CBD production is restricted. Operators construct smaller extraction facilities that match what the states will allow.

At the same time, they have to plan to expand production capabilities to be ready for the day that cannabis and hemp regulations are relaxed and/or regional consumer demand takes off in ways operators haven’t foreseen.

One last note about laws and regulations: be prepared for constant change.

At the time of this writing, 18 states and the District of Columbia have legalized cannabis for recreational use. There’s a patchwork of states that permit various medical uses. Only 14 states still prohibit usage of cannabis products. The trend has been to ease restrictions. Connecticut, New Mexico, New York, and Virginia legalized cannabis this year. As many as 15 states could legalize cannabis in 2022, including Delaware, Ohio, and Pennsylvania as adult use markets.

Congress is not likely to legalize cannabis or change banking regulations related to it any time soon, but lawmakers might raise the permissible level of THC content in CBD products from 0.3% to 3%.

In addition, the National Fire Code gets updated frequently; the latest revisions came in 2019. Another standard, UL 1389, established the first industry requirements for cannabis extraction in 2018. Revisions are already being considered.

There’s also a practical consideration. Some jurisdictions prefer one extraction method over another and write their regulations accordingly. California has well-developed alcohol distilling and wine-making industries. So, ethanol extraction is encouraged because fire departments are already trained and equipped to handle ethanol fires that could occur during THC or CBD processes.

 

Stay Agile and Extraction-Agnostic to Meet Market Changes

At Prospiant, we help extraction operators understand they can thrive by clearly identifying what their end-products will be and they should plan their extraction systems and processes to maximize these products. Regardless of whether you’re starting a small business or expanding a MSO, we recommend asking and answering these critical questions:

  • Have I done my market research? What are the popular SKUs in my market? What’s the best extraction method to produce those?
  • How am I going to build a small platform for each of these different extraction methods? Remember: you need to be agile so you can move with the market.
  • What are my state’s policies/regulations for hemp/cannabis extraction and processing today? What extraction methods are allowed, and which are not?
  • How likely is it that my state legalizes adult use in the near future?
  • What’s my niche? Is it full-spectrum extracts or isolated cannabinoids?
  • Should I launch my own business-to-consumer brand or am I satisfied with selling my product wholesale (white labelling)?
  • What is the anticipated biomass availability to ensure that I can meet demand?

As you’re planning your cannabinoid manufacturing business, it’s wise to focus on what you are legally allowed to make now, but also what you might be permitted to manufacture in the future. At the same time, you should ensure that you don’t overproduce THC or CBD derivatives to avoid the risk of end-products that won’t move due to market saturation.

About the author

Jim Moore, Prospiant

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