(This story has been updated with Health Canada comment.)
Some of Canada’s largest cannabis cultivators are turning to vegetables, fruits and orchids to bolster their bottom line as macroeconomic fundamentals continue to challenge the struggling industry.
The latest licensed producer to enter the food business is Leamington, Ontario-based Tilray Brands, which recently said it was converting part of its sprawling facility in Gatineau, Quebec, to grow fruits and vegetables.
Tilray joins Alberta-based Aurora Cannabis and British Columbia-headquartered Village Farms International in diversifying their main business at a time when a glut of marijuana has sent wholesale prices tumbling.
Last year, Aurora branched into the vegetable propagation and ornamental flowers business with its acquisition of Bevo Agtech, one of North America’s largest suppliers of flowers and vegetable seedlings, for 45 million Canadian dollars ($35 million).
“Everybody’s trying to figure out what to do with (the greenhouses), and you’re never going to get all your money back,” Aurora CEO Miguel Martin told MJBizDaily in a phone interview.
“However, I think it’s important to keep them viable, and it’s been great to see the Edmonton facility full again right next to the airport.”
Health Canada, the federal agency that oversees the cannabis sector, noted one key requirement for any licensed producer seeking to diversify.
“It would be a requirement that the individual or organization undertaking the growing of vegetables, fruit or flowers is the same as the individual or organization who holds the cultivation (license),” the agency said in response to an MJBizDaily query.
Vancouver-based Village Farms already had produce operations in B.C., Texas and Mexico before expanding into cannabis via its Pure Sunfarms subsidiary.
Pure Sunfarms is one of the largest cannabis producers in Canada by market share.
The diversification comes as Canada’s cannabis producers confront stark economic realities facing the recreational and medical marijuana sectors.
The industry, overall, still faces an oversupply situation in almost every product category.
As of last winter, packaged and unpackaged inventory of dried cannabis jumped to an all-time high of 1.47 billion grams (3.2 million pounds).
Health Canada won’t release data until next spring accounting for this fall’s “croptober” – when most of the outdoor harvest comes in – but the situation is unlikely to have improved notably.
The supply-demand mismatch in Canada is one of the main factors – in addition to fierce competition – driving prices lower, which adds to the woes of businesses already battling rising input costs because of general inflationary pressures.
“As a result of the oversupply, pricing fell (about) 50% from CA$13 per gram equivalent in (2019), to CA$6 per gram in (2023),” Aaron Grey, analyst at New York-based Alliance Global Partners, wrote in a note to investors this week.
A preliminary report by a government-appointed panel of experts analyzing Canada’s adult-use legalization law also painted a troubling picture of the industry.
“A main message from industry representatives was that, despite the growth of the legal cannabis market, companies across the supply chain are struggling to realize profits and maintain financial viability,” the report noted.
Several factors are driving Aurora to diversify beyond its main business – medical cannabis.
Aurora CEO Martin said the large greenhouse known as Sky – at one point slated to be among the largest in the world for cannabis – “wasn’t working for us.”
“It was just not producing competitive cannabis, and it was so wildly expensive to have that facility and that excess,” he said.
“I think investors got comfortable with the idea we were going to be profitable first and of a certain size second.”
Aurora shuttered Sky in early 2022.
The company wanted to expand into an adjacent, and profitable, agricultural business.
But Martin said he knew Aurora was never going to be an expert in non-cannabis propagation.
So Aurora set out to find someone who was.
“First and foremost, we decided we wanted to acquire a profitable, sustainable – Canadian if possible – agricultural company,” Martin told MJBizDaily.
That led Aurora to acquire a controlling interest in Bevo last year as part of a deal in which Bevo bought the Sky greenhouse complex at Edmonton International Airport for up to CA$25 million.
This past July, Aurora sold its other enormous greenhouse, Sun, in Medicine Hat, Alberta, to Bevo for undisclosed terms.
Part of Aurora’s thesis is that the highly technical and automated nature of cannabis greenhouses makes them suitable for tropical plants such as orchids.
“They’re so unique because of the amount of engineering that went into them, because of cannabis having to be consistently at a certain temperature and humidity, and some of the automation,” Martin said.
Orchid production is only at Sky, whereas Sun is transitioning to become a plant-propagation site for Bevo.
“The core difference between a cannabis and non-cannabis greenhouse is the sustainability of a consistent temperature and humidity,” Martin said.
“Cannabis requires those and they’re purpose built for that. Most greenhouses have a lot of variability depending on the season.”
Martin said Bevo’s orchid business has been “wildly successful” so far.
“To be honest, I don’t know a lot of people who thought you would grow a tropical plant in Edmonton and Medicine Hat, of all places, but because those facilities are purpose-built for that type of plant, it’s been wildly successful,” he said.
“We just sold our first batch. There’ll be millions and millions of orchids in there. That’s a really well-run business.”
Tilray, the largest cannabis company in Canada by adult-use market share, has long been a proponent of diversification.
In 2021, Tilray bought Colorado-based Breckenridge Distillery, which makes bourbon whiskey.
Since then, Tilray bought enough beer companies to make it one of the biggest craft beer businesses in the United States.
Now Tilray is getting into the cucumber business.
“With regard to our Masson facility in Quebec, we’ve invested in making the necessary changes to convert and optimize the facility to grow cannabis and fruits and vegetables for the Quebec marketplace,” Tilray CEO Irwin Simon said in a conference call with analysts this month.
“This work is on track, and we will begin planting cucumbers this year.”
Martin has a similar approach to Simon regarding underutilized cannabis greenhouses. suggesting it would be better to convert them for other agriculture than letting them sit in the dark – provided the new business line is profitable.
“There is better margin (in vegetables) than just keeping the place dark or (growing) cannabis that you can’t sell,” Simon told analysts.
“We think, and we’ve been asked by multiple retailers in Quebec, there’s a major shortage, and they want vegetables growing in Quebec,” he said.
Tilray did not respond to an MJBizDaily request for an interview.
But at least one of the analysts who covers the company is skeptical.
“We believe achieving the right level of industry capacity is important, but believe selling facilities to produce growers is likely more appropriate than growing produce itself,” Michael Lavery, an equities analyst for Minneapolis-based investment bank Piper Sandler, wrote in a note to investors.
Village Farms’ approach
Village Farms International, a specialized agricultural company headquartered in Delta, British Columbia, took a different approach.
Unlike the company’s competitors, produce came before cannabis for Village Farms.
The company has a produce division called VF Fresh.
The cannabis subsidiaries of Village Farms include Pure Sunfarms as well as Rose LifeScience, a licensed producer based in Quebec.
Part of the Village Farms strategy involved not overbuilding cannabis greenhouse capacity – a pitfall a number of its marijuana rivals, including Tilray and Aurora, fell into.
“A key point of differentiation is that we understood the nature of a commoditized product in agriculture,” Ann Lefever Gillin, executive vice president of corporate affairs at Village Farms International, told MJBizDaily.
“From Day One, we structured our (cannabis) operations and costs to anticipate this lower-price environment.
“The team looked at the (Canadian cannabis) market and said the legacy market is really the (price) floor. We’ve got to price all of our production and costs (relative) to the floor, not to the lofty ceiling goals.”
That strategy involved putting a lot fewer investments into cannabis growing operations.
Instead, the company focused on fine-tuning.
“We were very mindful of a return on capital, based on a business model that said the price per gram would not stay at that level,” Gillin said.
“That allowed us to be EDIBTA-positive for 19 consecutive quarters.”
Gillin added the company has a reverence for plants internally, and being an agriculture company first and foremost gives it an advantage over competitors who might not have the same degree of focus.
“We understood the growing climate and growing environment under glass,” she said.
“That gave us a real advantage to creating a perfect environment for growing high-quality cannabis plants consistently.”
Gillin noted that Village Farms “had years of growing data, climate data, to support what to expect in terms of what plants respond to. That was a huge advantage.
“We don’t have a secret sauce, but we’ve made all the mistakes and we’ve learned from them,” she said.
“We have a culture of learning and improvement. That’s what you need in agriculture.
“It throws a lot of curveballs your way.”
Matt Lamers can be reached at email@example.com.