Village Farms: Bringing 30 Years of Mega-Scale Agricultural Production to Cannabis
May 10th, 2018
Exclusive, News, Top Story
The Canadian cannabis industry is projected to reach C$9 billion or more in sales over the coming years, not counting ancillary products and services. With recreational legalization coming later this year, many analysts are projecting an initial — and potentially protracted — shortfall in supply, despite rising production, funded expansions, and yield improvements. The problem is that many licensed producers are struggling to effectively scale up their operations as they had originally projected, learning that there’s much more to it than building a greenhouse. The risks are great, as in many cases supply agreements have been signed and large amounts of cannabis have been promised.
Village Farms International Inc. (TSX: VFF) (OTCQX: VFFIF) has a 30-year history in large — some would say mega-scale — hydroponics, 750 years of combined master grower experience, and 10.5 million sq. ft. of greenhouse capacity, located in both Canada and the United States. In its new joint venture, the company will apply its years of experience to the rapidly growing cannabis industry in Canada with the potential to scale up to more than 300,000 kilograms of production per year. That production level could be reached by converting all of Village Farms’ existing 4.8 million square foot greenhouse complex in Delta, B.C., the largest single site greenhouse operation in Canada, to cannabis.
Village Farms’ Pure Sunfarms Cannabis Project
Village Farms is one of the largest producers of premium-quality, greenhouse-grown tomatoes, bell peppers, and cucumbers in North America — sold through the top grocers — and consumed by you and me and everyone reading this. These vegetables are grown hydroponically in a glass-enclosed high-tech environment using sophisticated computer systems to control irrigation, fertilizers, carbon dioxide, light, temperature, ventilation, humidity, and other climatic factors, which leads to superior taste, quality and consistency.
Now, with its deep history of success in large-scale greenhouse operations, Village Farms is ideally positioned to capitalize on the rapidly growing cannabis industry in Canada. The company has established a joint venture with Emerald Health Therapeutics (TSXV: EMH) (OTCQX: EMHTF), a licensed producer under the ACMPR. Under the agreement, Emerald contributed C$20 million in cash and Village Farms contributed an existing greenhouse with 1.1 million square feet of capacity to a new entity called Pure Sunfarms that will become a vertically-integrated, large-scale, low-cost supplier of high-quality cannabis. Leveraging Village Farms’ tremendous operational know-how and Emerald Health’s significant cannabis expertise, the Pure Sunfarms’ goal is to produce high quality cannabis for less than $1/gram at full production. Conservative estimates place full production levels at more than 75,000 kg/year for the initial 1.1 million square foot facility.
Pure Sunfarms’ Delta3 greenhouse
Pure Sunfarms received a cultivation license in March, 2018, for the initial 1.1 million square foot greenhouse. Until last November, the greenhouse was a fully operational tomato facility but it takes some retrofitting to make it optimized for year-round cannabis production and continuous harvesting. The first 250,000 square foot retrofit is substantially completed. The rest of the 1.1 million square feet will be finished in stages throughout 2018 and is anticipated to be fully complete and operational by the end of the year. Pure Sunfarms has agreed to sell 40% of its production in 2018 and 2019 at a fixed price to Emerald Health, accounting for about 21,000 to 24,000 kilograms using current and conservative production estimates.
“Pure Sunfarms’ agreement to supply Emerald with a portion of Pure Sunfarms’ projected production provides a strong initial revenue stream for our shared joint venture, while allowing flexibility to capitalize on other sales opportunities as we continue discussions with multiple parties including provincial governments and other licensed producers,” said Michael DeGiglio , Director, Pure Sunfarms, and CEO, Village Farms.
Village Farms’ Institutional Advantage
It is not easy to grow plants on a massive scale, and it’s just as difficult to run a company that does so. Village Farms has been doing this for decades and has learned many difficult lessons that other licensed producers are only beginning to encounter.
One major challenge — and Village Farms’ CEO Mike DeGiglio would argue, the most important — that is easy to overlook is that of staffing and managing the labor for such a large operation where the task is to grow living things that are susceptible to disease, stress and pests. To be sure, greenhouses are not widget factories with automated production lines. All kinds of headaches can arise as a producer ramps up from small-scale to large-scale production, and finding and training a reliable, knowledgeable workforce — and keeping them — is chief among them. When Village Farms built its most recent greenhouse in Texas a few years ago, the company went through literally thousands of workers to establish a stable workforce, highlighting the difficulty of finding the right employees. The Pure Sunfarms facility comes stocked with just such an experienced, reliable workforce already in place, which should avoid some of the growing pains that other producers are likely to experience.
Another underestimated challenge is that of regulatory compliance and safety — always of critical importance for any product ingested by people. Considering some of the widely documented pesticide related recalls in the cannabis industry, the fact that Village Farms has been safely producing food plants for 30 years without incident is reassuring. The company’s VP of Food Safety and Regulatory Affairs, Dr. Michael Bledsoe, is a renowned expert and advocate for the research and registration of safe pesticides, sitting on the USDA’s IR-4 Governing Board and often providing his expertise to Canada’s counterpart, the PMC. He has also begun discussions with Canada’s Pest Management Regulatory Agency to register Canada’s first conventional fungicide for cannabis.
As the recreational marketing in Canada looms, the big question is how successful licensed producers will be at actually meeting their cultivation targets. It’s easy to throw money at building a high-tech cultivation facility, but hiring employees, managing them effectively, and continuously harvesting massive quantities of high quality cannabis in full regulatory compliance is another matter. Many licensed producers have run small-scale operations, but haven’t proven their ability to efficiently scale up much larger.
Village Farms has a proven track record in this regard which could serve to de-risk its production and expansion plans. Factor in the likely commoditization of cannabis flower as the market matures and supply meets demand, and the company’s long experience in producing high quality, low cost agricultural products looks even more attractive.
Possibilities Beyond Canada
Village Farms International Inc. (TSX: VFF) (OTCQX: VFFIF) represents a compelling investment opportunity in Canada’s rapidly growing cannabis industry, offering more experience in large-scale agricultural production than any current competitor. There is also the potential for expansion into other markets as the global wave of legalization progresses.
In Texas, for instance, the company owns four facilities with a total of 5.7 million sq. ft. of growing space on 130 acres. If the U.S. legalizes cannabis on a federal level, the company is well positioned to expand into the U.S. market in a big way and generate additional value. Importantly, Village Farms’ U.S. properties are not part of the Canadian joint venture agreement and are free to be developed independently should the opportunity arise. To be clear, the company is not pursuing any U.S. cannabis business while the plant remains federally illegal.
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