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Canopy Growth (TSX:WEED) Doubles Down on Colombia: A Path to Success

Colombia’s appeal as a low cost jurisdiction in which to cultivate marijuana saw leading Canadian cultivator Canopy Growth (TSX:WEED)(NYSE:CGC) double down on its operations in the equatorial nation. 

Expanding operations in Latin America

In July 2018 Canopy had announced that it had acquired Spectrum Cannabis Colombia in a deal worth up to $96 million. Spectrum owns a 126-hectare farm in the south-central department of Huila, which is renowned for its agricultural industry including coffee and fruit growing as well as illegal marijuana and coca cropping.

Colombia, because of its ideal climatic conditions, has a large agricultural industry and a long history of cultivating cut flowers, orchids, fruits and coffee, which sees it ranked as the third-largest coffee producing nation globally.

It isn’t difficult to understand why agriculture is the dominant industry in Huila.  The department is endowed with rich volcanic soils, temperate climate zones, even hours of sunlight, generous rainfall and low labour costs.

Spectrum’s property has an available water supply from a natural fresh-water lagoon and now has 13.6 million square feet licensed to produce psychoactive and non-psychoactive cannabis compared to 4.5 million about a year ago. This makes Canopy’s permitted operation in Huila one of the largest in the world. Construction of the facility reportedly began in summer 2018, and Canopy anticipates that it will be operational after one year.

It is speculated by some analysts that cannabis cultivators in Colombia can produce dried flower for $0.50 per gram, which is less than a tenth of Canopy’s fiscal fourth quarter 2019’s cost of sales of $5.47 per gram. Leading Colombian cultivator PharmaCielo believes that it can cultivate dried flower for as little as $0.05 per gram which is a tenth of what analysts believe the industry average will be in the South American nation.

Colombia’s climate makes open air greenhouse cultivation feasible, meaning that compared to energy intensive climate-controlled greenhouses in North America, which in combination with significantly lower wages means operating expenses are considerably lower.

It is the massive consumption of electricity for 24-hour climate-controlled indoor greenhouses in Canada, which is the most significant cost.

According to U.S. government research, a 5,000 square foot indoor cultivation facility in Colorado uses 66-times more electricity than an average household and marijuana cropping uses 1% of all electricity consumed nationally. It has been estimated by industry insiders that electricity expense makes up over a quarter of all direct costs incurred to grow a gram of marijuana.

Those factors along with Canopy’s disappointing 2019 results, highlight why it needs to build its international presence and pivot its cultivation activities to lower cost jurisdictions such as Colombia.

Mid-last month, Canopy announced that it had entered into an agreement with Colombia-based pharmaceutical company Procaps for the preparation of a range of cannabis oil-based products. Procaps is an ideal distribution partner for Canopy because it already manufacturers a range of over-the-counter medications and nutritional supplements and exports to 50 markets globally, including those like the U.S. which are highly regulated.

It also provides Canopy with a processing and manufacturing capability in Colombia with a pharmaceutical company that has existing large-scale global distribution.

Foolish takeaway

If Canopy pivots its cultivation operations to Colombia, that will go a long way to reducing costs and potentially improving the quality of its product because of the Andean nation’s favourable climate, soil and legendary marijuana strains Colombia Golden and Punto Rojo.

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Fool contributor Matt Smith has no position in any of the stocks mentioned.

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