A Lesson in Microeconomics for Emerging Controlled-Environment Markets
Note: This article was written by Tom Blaine, Vida Wool by Owens Corning, Business Development Leader, Horticulture
While the market rules of supply and demand are essential to understanding “microeconomics 101,” no textbook is required to understand how these rules affect growers’ margins. This is especially true when considering conditions in start-up markets where a surge in demand is often followed by a plummet in prices.
Market insights from California, a state synonymous with start-up culture, show just how quickly profits from crops such as cannabis can plummet when supply floods the market and outstrips demand. Examples from the Golden State and other established growing markets show that a glut in supply may be followed by a dearth in profits.
Earlier this year, cannabis cultivators saw nearly a 50% drop in price per pound compared to pre-harvest price peaks in October 2020. And while indices reported price recovery in some established markets, steep price declines continued in other states.
Although pent-up demand often drives a price surge when new markets open, more growers typically rush into the market, leading to more supply and diminished margins. Start-up businesses must make it through a complex phase sometimes referred to as the “Valley of Death.” During this period, start-up capital resources can deplete more quickly than sales income flows into the business. As a drop in market prices exacerbates this challenge, the business must arrive at a cost structure that is low enough to ride out cratering prices and maintain operations.
While established markets point to inherent challenges in the start-up phase, they can be managed. Implementing and maintaining a disciplined focus on business basics can help start-ups keep their fiscal operations and harvest quality moving in the right direction. With an eye on avoiding unnecessary operational costs and achieving consistent, successful harvests, the following tips can help growers in emerging markets manage declines in market prices.
Target Consistency
Daniel Craveiro is the Director of R&D at Camaraderie Technology, headquartered in Colorado, which developed the DAGDA Fertigation System. The company provides technologies that prioritize precision and efficiency across multiple states supporting brands including Summit Concentrates, Summit Select, Mayflower Farms, and Sirona Cultivated. Craveiro notes that in a growing environment characterized by constant innovation, it can be tempting for cultivators to jump from one silver bullet solution to another. He’s also familiar with the production challenges that come from going off-script with production practices.
Cultivators should focus on achieving operational consistency and reproducibility as early as possible to withstand pressures as markets mature.
“Every grower needs some base level of consistency,” Craveiro says. “When you start a facility, especially in an emerging market, the number one thing you need to do is to figure out what you’re doing right and then hit repeat. There are a million different approaches to growing media, lighting, fertigation, and nutrients, and if you start adjusting all of them at once, you’ll never know what’s working.”
Steer Clear of the Rabbit Hole of Instability
A common stumbling block for start-ups is a tendency to deviate from the production playbook. When one modification shows promising results, it may sound like a good idea to start changing everything, and this can open the door to instability. As much as possible, cultivators should aim to replicate the production environment, including fertilizer regimens, and cultivars. Tweaking independent variables should only begin when sustained and consistent results are achieved. Pick a strategy and stick with it until a good production rhythm is established.
Automate to Drive Consistency and Repeatability
A master grower’s opinion is innately subjective, but automated systems bring objective, measurable data to guide processes such as fertilization and irrigation. Automation can boost efficiency and support consistency by supplying water and nutrients at the same time and at the same speed. No business is too small to leverage the benefits of consistency. If a cultivator can’t produce flower products consistently, then consumers may lose trust and move on to other brands. Substrate sensors in growing media can measure moisture content and trigger waterings based on a defined water content level. Installing automated systems can optimize water and fertilizer usage to reduce water and fertilizer consumption without sacrificing crop yield and quality.
Document Grow House Processes
As a business expands, changes in how decisions are made and processes are carried out in the greenhouse can lead to problems with consistency. Building a blueprint that documents operational processes from the very beginning is important. And while it’s acceptable to adapt processes, any change should be documented and shared with all team members.
Select Inputs Strategically
A strategy for selecting production inputs including fertilizers, growing media, and nutrients can support consistent, repeatable harvests. For example, replacing liquid fertilizers boasting extra nutrients with simple salt-based fertilizers can curb costs, while assuring plants receive necessary nutrients.
The growing media used to deliver water, air, and nutrients to the crop can also play a big role in consistent, repeatable harvests. Selecting an inorganic, sterile, and inert media can help save money by dialing in a specific formula to plant, grow, and repeat season after season. And because biosecurity in the greenhouse should always be safeguarded, selecting a sterile, inert media can help reduce the risk of introducing pathogens into the grow.
Considering the surface area of a growing media is also important.
“One of the benefits growers get out of mineral wool is an extremely high surface area,” Craveiro says. His company was involved in early trials for VidaWool, a mineral wool growing media from Owens Corning. “Most cultivators can grow a much larger plant in the same volume of mineral wool as compared to a pot of soil, as the tiny fibers in mineral wool are like cylinders that support a ton of surface area. That’s what root systems are looking for – a place to interact with water and fertilizer and air,” he says.
Labor is an oft-overlooked factor to consider when selecting inputs. How easy is a material to work with? Choosing growing materials that are lightweight and easy to handle in the grow house can reduce stress on employees, literally reducing part of their workload.
Start-ups maintaining a disciplined approach to cultivating that aims to minimize operational costs and derive the most benefit from input investments can make it through the Valley of Death and toward improved margins.
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