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Economy , Finance , Investing

Cannabis Growers Are About to Learn Economics

April 24, 2019
cannabis growers

“We can produce enough cannabis to serve the entire country of Canada,” he said. “Of course, we’re not going to be running at full production levels until we’re confident we can sell what we produce. But, we are certainly ready to become an industry leader.”

We all just looked at him silently while we stood in the massive greenhouse that once grew beefsteak tomatoes. The smell was overwhelming. So strong that neighbors up to 5 miles away complained, which led to the company installing charcoal filters and large scale air management systems.

This all happened this morning, where I toured a massive cannabis grow facility in Canada with a small group of investing insiders. We wore hair nets, lab coats, protective covers over our shoes, and had to register with our passports and give up our cell phones in order to view the facility. 

Inside this enormous operation were hundreds of workers and dozens of different offices, labs, processing rooms, and of course multiple different greenhouses. With over one million square feet of cultivation area in just one of the buildings, it took us well over an hour just to view everything. And we were walking quickly the entire time.

I pulled up an aerial view to show the scale of this cannabis grow:

For scale, you can’t even see the cars on the road. This facility is BIG.

So what company do you think this was? Canopy ($CGC)? Aurora ($ACB)? Aphria ($APHQF)? Tilray ($TLRY)?

No, no, no, and no. 

The company we toured was one you have probably never even heard of. In fact, they don’t even rank in the top 10 of the largest cannabis growers. 

And even though this company is relatively unknown, they currently have plans to triple their current production capacity, meaning they could provide triple the amount of cannabis that Canada consumes.

As many of you know, my company Explorer Equity Group invests in the cannabis space. From day one we have avoided cannabis growers as we believe that the marijuana plant will turn into a commodity just like corn, wheat, or soybeans. As more plants are grown, prices will go down. 

Simple supply and demand economics.

Instead, we have focused on brands and ancillary services. In other words, instead of investing in hops to brew beer, we have chosen to invest in the Budweisers and aluminum can manufacturers of the cannabis industry.

However, we still get emails almost everyday from investors who want to invest with us in the cannabis industry by targeting grow facilities. The first thing that comes to someone’s mind when they think of investing in marijuana is… invest in marijuana plants! 

(As a small caveat, there will always be a market for high-end boutique cannabis strains that certain buyers will stick with.)

This strategy of investing in the first thing that comes to mind could prove to be an enormous mistake. The reality is that there is a massive amount of supply coming to market that could make the price of cannabis plummet. 

In fact, the price could go down so low that we’ll see dozens, if not hundreds of companies go out of business. The big boys – those public companies with market caps in the billions of dollars – will survive and maybe even thrive as they swoop up all of those failed grow operations for pennies on the dollar. 

So, if you get a chance to invest in a startup cannabis grow, take a hard look at what you may be getting into. Because, as Donald Trump said, “Sometimes your best investments are the ones you don’t make.”