By Eli McVey
Typical startup costs for wholesale cannabis cultivation businesses launched in the last three years amount to $42 per square foot, according to data in the newly released Marijuana Business Factbook 2017.
Cultivators with indoor grow operations reported significantly higher startup costs per square foot relative to that of greenhouse, outdoor and combination cultivation types – a reflection of the large upfront expenditures required of those businesses before growing can even begin.
Because indoor cultivators need to artificially control all aspects of the growing environment, they must bear steep costs for equipment like temperature and humidity control systems and artificial lighting sources. Many states with heavily regulated MMJ programs – such as Illinois and Connecticut – mandate indoor cultivation, which further drives up startup costs for this type of operation.
It’s important to note, however, that this data includes startup costs for cultivators across many states and markets – where unique regulatory environments can have a big impact on the amount of funding needed to get a business off the ground. In unregulated markets like California – where cultivators operate under a patchwork of local rules or, in some cases, none at all – startup costs are less than half that of growers operating in regulated medical or recreational markets. This, in turn, drives down startup costs for the industry as a whole.
Traditionally, indoor growers have offset steep startup costs through their ability to produce superior flower – which fetches a higher price at retail – multiple times a year.
However, greenhouse facilities have become more sophisticated technologically, allowing for multiple harvests per year and a degree of environmental control similar to that of indoor grows – resulting in high-quality flower that can be produced more cheaply and at much higher volumes.
Both new market entrants and existing businesses seeking to expand are increasingly turning to greenhouse operations, building out sprawling facilities that cost more than the typical indoor facility in terms of total startup expenditures but, on a square-footage basis, are more economical.
The expansive size of outdoor grows and their reliance on natural soil, lighting and weather conditions means outdoor cultivators have relatively few infrastructure needs. They are able to get off the ground quickly and with minimal upfront expenditures.
Revenue per square foot, however, is much lower for outdoor cultivators because the price of “sun-grown” marijuana tends to fall below that of indoor or greenhouse-grown flower, according to the Factbook. The cultivation data is based on a survey of executives in the industry.
With the falling price of wholesale cannabis, cultivators of all types are seeking better, more efficient ways to produce quality marijuana on a consistent basis. And that will undoubtedly have an effect on startup costs moving forward as businesses adapt to the rapidly changing dynamics of the cannabis industry.
Eli McVey can be reached at elim@mjbizdaily.com
