The Cannabis Supply Chain Explained (From Seed to Sale)
If you’re thinking about joining the Cannabis industry, you’re not alone.
It’s no secret that this rapidly growing (and highly lucrative) field is drawing in scores of new investors and entrepreneurs as more and more states approve its recreational and medicinal use.
The Associated Press reported that investors put $10 billion into North American cannabis in 2018 (twice than the previous three years altogether). That same year, legal cannabis earned $10.4 billion (with ¼ million jobs centered on the mere handling of the plants themselves) across the continent. There are even predictions that US cannabis sales could triple to $30 billion by 2023.
Keep in mind that such high demand goes way beyond its potential psychoactive properties. The hemp plant (cannabis’ botanical cousin) is used in a loads of CBD products that claim to relieve aches, pains, hypertension, insomnia, and anxiety.
With all of this excitement and buzz, many people wind up diving into this emerging, multi-billion dollar industry before fully understanding the structure and dynamics of the supply chain. There are also problems, challenges, and hurdles to climb within the inner workings of the supply chain itself.
Needless to say, this can quickly create major problems for uninformed (or misinformed) up-and-comers.
That’s why we created this list. Consider it a roadmap of the cannabis supply chain, from “seed to sale.”
1) Cultivation & Growth
As you might guess, the cannabis supply chain starts on the farm. Based on their genetics, seeds are chosen, planted, cultivated, and harvested either outdoors and indoors. For obvious reasons, indoor growing is a more expensive process, so many smaller and independent farmers grow outdoors.
At this stage, the goal of each company is to grow the most stable, high-quality seeds possible. It is also crammed with the most competition. If you introduce a new, attractive strain into the market, then the seeds themselves can be commoditized. So, if your goal is to become a grower, be aware that you will be entering a saturated market with stiff competition from both independent growers and much larger companies.
Of course, properly and efficiently growing cannabis to (especially at high volumes) is an involved, complex process. Common problems include nutrient deficiencies, temperature/humidity fluctuations, pH imbalances, pests, over/under watering, and hemp cross-pollination.
Thankfully, there are many resources available on best growing techniques and how to get the most out of your yield, including first-hand grower testimonials.
Meanwhile, as widespread legalization continues to push forward, cannabis growing procedures are becoming more professionalized - much like any other mainstream agricultural crop. In turn, cannabis companies are incorporating horticultural procedures and technologies spearheaded by other sectors.
2) Harvest & Processing
After the plants are grown and harvested, they are trimmed, shucked, dried, and cured. While some farmers process their flowers themselves, others transfer their crops to wholesalers who perform this step for them.
The drying and curing process is an extremely important step - especially if the buds are meant to be smoked or vaporized. Buds can become moldy if they’re not dried enough. Or, if they’re too dry, they can seem older with weaker aromas, worse taste, and harsher smoke.
With that in mind, make sure you follow best practices when harvesting and processing your plants and beware of common mistakes that can be made harvesting and drying cannabis.
Extraction procedures consist of separating and isolating various cannabis compounds from the plant. Cannabis is known to contain more than 113 cannabinoids, including the two most well-known: THC and CBD.
Well-known extraction techniques (such as alcohol, carbon dioxide, and butane methods) remove undesired ingredients like fats, lipids, sugards, and chlorophyll. This also allows the extracts to be winterized or stored properly.
Levels of extraction vary depending upon the makeup of each plant and its desired use. For instance, in the hemp market, full spectrum CBD oil is typically extracted from the raw plant material.
From there, a refinement procedure begins in which the psychoactive THC levels are reduced to meet total federal THC compliance (under 0.3%). This refinement process can be broken down even further to form CBD distillates and isolates - to the point where only certain individual cannabinoids remain.
One difficulty in the extraction phase is the sheer complexity (and resinous nature) of the plant itself. This can make it harder to isolate certain compounds from cannabis than other plants. Techniques must be perfected and performed both accurately and efficiently with the right technology.
These days, all cannabis products on sale at a licensed facility are first subjected to a set of tests by state-certified labs. Most of these labs are third-party companies that have gone through accreditation programs and employ thoroughly trained chemists and microbiologists who specialize in analytical chromatography.
Before any harvest can be sold, every single batch is given an ID and submitted to labs for in-depth regulatory testing procedures. Specific standards vary from state to state, so the testing industry typically revolves around whether or not the products meet state compliance.
The process generally involves gauging the following factors:
Cannabinoid Potency/Terpene Profiling - Exact potency calculation is crucial. This is used to clarify the amount (and ratios ) of THC, CBD, or other cannabinoids in each product.
Contamination - A variety of foreign contaminants that may have penetrated the plants in any of the earlier stages. These can include chemical, microbial, physical, and heavy metal contaminants.
Click here for a full breakdown of the cannabis testing process.
Cannabis testing is becoming a big business on its own, with High Times referencing an estimation that North American labs would be worth $1.4 billion by 2021.
However, the testing field still faces obstacles. Testing is costly and far from fool-proof. There have been calls for the complete unification of cannabis testing standards, clarification of the many variables inherent in the testing process, and greater collaboration among separate labs - which tend to instead develop their own methods to meet state requirements.
At this stage, companies mold core ingredients into ready-to-use products, which can vary greatly depending upon the source material and target audience. These include standalone dried flowers, pre-rolled joints, extracts, oils, concentrates, edible cookies, gummies, gel capsules, and many more.
While some businesses that manage production also package, design, and brand their own products, many others sell their unbranded goods to other companies who implement their own forms of branding and packaging. Much like other industries, plays a huge role in the success and popularity of certain products in such a crowded marketplace.
Supply and Demand
An ongoing issue in the cannabis production phase is supply failing to meet demand - particularly when new states approve legalization.
Just take a look at Illinois, which legalized recreational cannabis sales at the beginning of 2020. In the first five days alone, dispensaries across the state sold more than $10.8 million worth of cannabis with customers making over 271,000 purchases.
While this may seem like good news, such massive sales came with drawbacks. Such high demand resulted in long lines, massive product shortages, and store closures. Looking ahead, these problems are expected to continue throughout the rest of the year.
Why did this happen? Because Illinois only authorized 21 cultivation warehouses - much less than most other states that legalized cannabis. This was largely the result of successful political lobbying efforts that limited the number of growers statewide.
But that’s just one example. The entire country of Canada is having its own ongoing supply issues. It just goes to show that there are - and will continue to be - “growing” pains in production as this “budding” industry shifts from the black market to mainstream society.
While plenty of companies choose to sell their products to retailers and consumers themselves, there is still plenty of demand for third party cannabis distribution channels - especially as the industry continues to expand.
While distribution models largely vary depending upon the state and brand, distributors can be utilized in a number of ways, including warehousing and shipping products, and serving as liaisons between wholesalers and retailers.
It’s important to note that under federal law, cannabis cannot be shipped and used outside of the state in which it was originally grown. Each state has its own set of regulations that govern each step of the supply chain process, which means that all cannabis operations must first obtain a state license to conduct business in their respective state.
This also creates some logistical issues. FDIC insured banks can’t transact with cannabis companies, and Department of Transportation freight trucks aren’t authorized to transport cannabis. Without resources like these, it’s tough to move cash and product securely.
That doesn’t mean people haven’t found viable alternatives. Many cannabis movers use armored vans - complete with bulletproof glass - to move the product. Also, in certain states like Colorado that jumped into the cannabis game early, dispensaries usually place orders of 10 pounds or less - allowing for smaller vehicles that aren’t DOT regulated.
In fact, there is an entire branch of cannabis tech organizations that solely focus on how cannabis products shift across their state’s supply chain. Known as “seed to sale” technology, it serves to pinpoint every single product all the way back to its origin seed.
Packaged and branded products are finally placed in the hands of consumers via retailers. While many CBD and hemp products can be found at a wide range of vendors (including large chains and gas stations) recreational/medicinal cannabis products containing THC must be purchased from officially licensed retailers - also known as dispensaries.
Whether they are brick-and-mortar stores, online sellers, or both, these dispensaries are required to conform to a rigorous set of standards set by their respective states.
This includes reviewing the licensing and regulatory compliance of each brand they choose to sell to their customer base.
If you’re thinking about applying for, opening, and running a dispensary is an expensive and lengthy process that comes with its own set of challenges.
What about the possibility of cannabis home delivery? With such strict regulations placed upon dispensaries themselves, this possibility appears pretty far off.
Still, looking down the road, it actually seems more probable than not - especially if more states gravitate towards legalization and incite a true reaction from the federal government.
Think about it. Consumers today can order food and drinks (including alcohol) straight to their doors with just a few clicks. Plus, many cannabis delivery services already exist on the black market - mainly in large cities. While there are plenty of hurdles to climb and kinks to be worked out, it’s absolutely something to keep an eye on.
In an industry that’s constantly evolving, a clear picture of the cannabis supply chain’s structure is instrumental to identifying the right investment and business opportunities.
Plus, each step has its own set of issues and challenges as the industry as a whole continues to grow and assimilate.
Now that you know the basic structure of the Cannabis supply chain, be sure to listen to Conquering Cannabis Podcast Episode 1: “Mastering the Cannabis Supply Chain” with special guest Charlie Cipriani, Founder/CEO of Fathom Processing Inc.
Specializing in Supply Chain Risk Management and Trade Financing, Fathom’s mission is to unify the largely unregulated and fragmented nature of the current Cannabis supply chain. The result is a simplified, streamlined, transparent process for all levels of cannabis cultivation, production, and distribution.