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A Practical Guide to Determining the Cost of Extraction for the Cannabis Business Plan

Written by John MacKay

Spoiler Alert: Cannabis and products with cannabis ingredients are being sold worldwide. It is a challenge for consumers to consider what products meet their needs. Examining the ingredients on the label can be confusing if you are not familiar with natural versus processed cannabis. There are different dose levels (milligrams per milliliter) and formulations (liquids, solids, infused). It seems like I cannot go down a street without passing someone advertising a cannabidiol (CBD)-containing product.

Based on the popularity of the products and the headlines about the market’s future, how could you not want to enter with your unique product? Daily, I hear many people comment that everyone must be getting fabulously rich in the cannabis industry. I’m sure some people in the market are making a living from the cannabis growth, but let’s examine the reality of the market today.

 

Two Common Misconceptions

Ray Kinsella hears a strange whisper in the movie A Field of Dreams: “If you build it, he will come.” Just make a CBD product on the label, and people will purchase it. Think about this scenario, and it falls apart quickly. The consumer has so many products, suppliers, and means to purchase them that it is challenging to be unique.

In the article “Value of Good Work,” by Ralph Waldo Emerson, Emerson says: “If a man can write a better book, preach a better sermon, or make a better mouse trap than his neighbors, though he builds his house in the woods, the world will make a beaten path to his door.” [1] This is the second misconception regarding plants, lights, extraction equipment, ingredients, and means of getting the products into your body. Disruptive technology does not always win over entrenched technology already in place at a facility. It might be “too early” for the market needs to understand or believe it is necessary to their bottom line.

These are two great ideas for a poster. I envision the beauty of a mountain summit during a winter storm on a poster. But, the reality of severe headwinds at -42.0°F is far more harsh and unforgiving to the ill-prepared.

Start with a study of the Strengths, Weaknesses, Opportunities, and Threats (SWOT). Look at the harsh realities of your business. There are plenty of niches in the market available to have a sustainable business model.

 

Three Steps to Prepare for a Success Plan

Formulation Centric Processing (FCP) is an essential initial step. After conducting a detailed SWOT analysis, you have found a business that can be pursued. Next, you need to start at the end and move back to the beginning. What part of the market are you considering making products for with cannabis ingredients? Knowing what you will manufacture is the beginning of a successful business. Predicting the number of dose amounts and the number of each to be purchased is critical. This, then, brings you to the number of ingredients needed for the formulations. These ingredients are essential to understand the concentrations of the active and inactive compounds needed to make the formulation. Identifying this will aid in the nomination of the appropriate extraction mode or the purchase of compounds made with the extraction mode.

 

There are Three Ways to Make Money. You can increase revenue, decrease costs, or optimize asset utilization. The economics of cannabis is not exempt from all three choices. The economy of scale is true whether considering a boutique cannabis company or a multistate business with a totally self-contained business from seed to sale. Each of these needs to be part of the initial and sustainable plan.

There is a market for craft beer as well as craft cannabis. However, besides word of mouth, the number of people genuinely purchasing these craft cannabis products is based on sophisticated plant knowledge. If your budget cannot support the bottom line, it is time to accept the reality of the mountain summit during a snow storm.

There is a market analogous to mass beer production for people who want to purchase basic cannabis products or ingredients for others to make boutique, craft products.

 

There are Three S’s to Remember: Speed, Scale, and Selectivity. The economies of scale are sound practices for cannabis processing. I could add the fourth, $pending, as my four S’s to consider.

You have determined the products and ingredients needed to make the products in the business plan.  The next step is to determine the processes and tools. “Extraction of Cannabinoids from Cannabis sativa L. (Hemp)—Review” is a recent review of the extraction choices. [2]

What is the process to use? This step is essential for the success of a business plan. If you are just entering the market, you need to explore what others use as a process. A detailed spreadsheet of manufacturing costs, the acquisition of raw materials, the labor, and the capital expense should be generated after (or during) the acquiring of a license and the building you’ll use. The line that is not known is the cost of alerting the people about your product offering.

You now need to assess the SWOT with the processes available to make the ingredients. From these assessments, the process will consider the future of the market. One of the facets to consider is the future of regulations and customer preference for process control, whether it is a move toward organic products or more outstanding components.

 

Conclusion

The cannabis market has plenty of room for businesses – whether addressing a new or an established one. The extraction step is an essential process to choose correctly from the beginning. There are times to purchase and make the ingredients needed for a product. There is no favorite process or an ONLY way to consider. The choice is based on the cost of manufacturing (COM) and the ability to pivot as the market pivots.

 

References

[1] Emerson, RW. Current Comment: The Value of Good Work. The Atlanta Constitution. Atlanta, Ga. -2001. May 11, 1882. Page 4, Column 4.

 

[2] Valizadehderakhshan M, Shahbazi A, Kazem-Rostami M, Todd MS, Bhowmik A, Wang L. Extraction of Cannabinoids from Cannabis sativa L. (Hemp)—Review. Agriculture. 2021; 11(5):384.

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John MacKay

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