The Make or Break Thing Indoor Growers Ignore

The most common phrase we hear in the cannabis industry is “I’m barely breaking even.”

Due to complex overregulation and overtaxation we are seeing the collapse of legacy, equity and small owner-operated cannabis businesses. Restricted retail outlets and slim margins put operators in positions where overlooked expenses can mean closing their doors.

There is also the trend of people buying up licenses, setting up businesses as fast as possible, and selling them to large, well funded companies or new, naive optimistic entrepreneurs. This is not sustainable long-term.

In licensed cannabis cultivation, how you manage your business is everything, especially for indoor growers. While growing indoors yields more control for quality and consistency, the costs to operate are among the highest in the industry. To cut costs without sacrificing quality, developing a process to capture, track, and analyze production costs is a valuable and necessary investment to your company’s long-term success.

What Costs Should You Track? 

Ciclo is one of only a few cannabis supply chain companies in the country that allow substantial cost of production tracking. Unfortunately, there is a severe lack of information on the subject due to the informal nature of cannabis operations in the traditional market. We believe cost tracking should be a standard practice for companies of all sizes. Typically, companies graduate to a certain size before they start monitoring their costs. The truth is, the earlier a cultivator starts tracking expenses, the better.

There are two types of costs to consider: overhead and direct.

Overhead costs include:

– Licensing
– Facility build-out
– Rent
– Taxes
– Insurance
– Security

Direct costs are all the inputs and resources healthy plants require. These include:

– Pest control 
– Raw materials like seeds or clones
– Grow equipment, housing shelves, hoses, and tools
– Lighting, for both flowering plants and nurseries
– Environmental controls like humidity and ventilation
– Environmental sensors
– Nutrients like soil and fertilizers 
– Water and irrigation
– Pest control
– Maintenance on equipment and environmental controls
– Labor, including hourly or salary compensation and benefits
– Harvesting and clean-up costs to prepare the room for the next grow

For the average indoor cultivator, labor and electricity are the two most substantial and recurring costs.

Ultimately, the goal is to calculate the cost of goods sold. From there, it will be much easier to see where and how you can cut expenses.

How Collecting Data Cuts Costs

Once you’ve identified all your expenses, it’s time to start gathering data and making sense of it all. This is a diligent, detail-oriented task. Considering all the complexities in cannabis, like taxes and regulations, it’s understandable that managing production costs gets put on the back burner.  

Fortunately, cannabis is nascent and can more easily adopt the latest technology to perform advanced analytics unlike companies in established industries rooted in their ways.  

Technologies like IoT and AI can track and analyze data collected from environmental sensors. Most cultivation facilities are equipped with environmental sensors to detect temperature and humidity, but there are sensors capable of doing much more. Some can monitor utility use or CO2 levels, while others can even measure plant fluorescence to detect early signs of stress. 

Software platforms like Chaski offer live Cost of Goods Sold (COGS) calculations. Cultivators can track their expenses for each production and calculate the unit of costs sold for each item. Furthermore, it can integrate with scales, scanners, and instantly sync compliance data into METRC.

The point of tracking is to recognize all the small details that can affect production. Then, you can see where you might be operating at a deficiency, make future predictions, and discover ways to increase yield quality or quantity for higher profits. 

There are several ways to lower production costs without cutting corners. For example, you could set up multiple production rooms and experiment with factors like light schedules and soil mediums to see where you can increase quality or quantity. Some growers have started using automation to reduce labor costs, growing vertically to increase production yield, or making their own fertilizers from recycled materials.

Invest Now to Save Later 

The money is always in the math. Understanding and managing your costs of production is the most efficient way to maximize profits and become more competitive in the market. 

While indoor flower has been less impacted by the current price crashes in California than sungrown, that doesn’t mean it is immune to it. Outdoor and light deprivation cultivation are catching up in consistency and quality with every iteration. 

Managing production costs will require time, dedication, diligence, iterations, and training. But with the right tools and knowledgeable counsel, it will become a significant long-term investment into your company.

At Ciclo, we are a team of data scientists with years of experience in finance and technology. We are on a mission to establish transparency standards in the industry and help cultivators perform their best while worrying less about expenses, taxes, and compliance regulations. Contact us today to optimize your grow.

Lessons from CA’s Social Equity Program: An Operator Perspective

As Californians, we pride ourselves on our cannabis and progressive social justice laws. Yet where we’ve mastered the art of growing, many counties have dropped the ball on crafting social equity programs that honor legacy growers and the discrimination they endured.

Each county is responsible for creating its own program. Eligibility is generally determined by meeting two of three qualifications: low income, residence in a disproportionately impacted area, or a cannabis conviction. Some programs, like Oakland, guide best practices across the country, while others, like Los Angeles, are a prime example of what not to do. 

Overall, the sentiment is that programs have not done enough. Getting a license is hard for anyone, and even those with money and resources act from a place of scarcity. Considering how licenses merely guarantee admission into the market, turning social equity into a license type has not leveled the playing field at all.

For Eliza Espinoza, co-founder and COO of Seventh Wave LLC, a social equity manufacturing, distribution, and delivery company in Northern California, it was the community around her who provided the resources and support she needed. 

Community involvement is, in essence, what most social equity programs lack.

From an Operator’s Perspective  

“There’s a perception that having social equity status gives you this hall pass,” Espinoza said, “but for us, that was not our experience.”

Espinoza and her husband and co-founder, Timo Espinoza, were hopeful their social equity qualifications would mean additional resources and support. 

Eliza Espinoza is a first-generation Latina whose parents came to San Francisco as war refugees. When she and Timo married, they sold topicals and hash in the legacy market after inheriting Timo’s father’s network. Timo started working in the industry when he was 13 and had various citations, misdemeanors, and detainments with the police. They also qualified for low income and for having lived in zones heavily affected by the war on drugs in San Francisco.

However, after applying for a permit in San Francisco in 2018, they realized they couldn’t afford the city’s expensive real estate requirement.

Fortunately, they found a farmer through their network in Humboldt County who wanted to transition out of the industry and hand off the business to someone who would continue the legacy and culture. Seventh Wave LLC is now permitted in both Humboldt County and San Francisco.

Humboldt County is cheaper to operate in than San Francisco. Still, Espinoza reports having no significant resources or help extended to them in favor of being social equity.

“We were just seen as like anybody else who was just applying for a license,” she said.

Instead, their network and the community around Seventh Wave LLC that helped them through services like discounted consulting fees. 

Where Do Social Equity Programs Fail? 

Getting licensed and permitted is just one piece of the puzzle. There is still rent, mortgages, and fees that equity programs don’t cover. And with little capital and no access to loans, paying for additional costs before approval has been the demise of far too many applicants. 

Another significant challenge is how long it takes counties to roll out their programs or approve licenses. Humboldt County only began issuing social equity licenses six months ago and is just now asking how to serve the operators best.

“It’s a little late, you know?” Espinoza said. “And fortunately for us, we’ve been able to hold on by a thread and are trying to make our way through. But for many, they could have used that money a long time ago and probably would have still had a shot.”

People in LA also feel that it’s a little too late. The city took over a year to process applications, leaving many out to dry and causing their investors to back out because they couldn’t get a timeline from the city. 

LA has since had to rewrite the laws after vague criteria also allowed predatory investors to come in and push equity owners out of their own companies.  

Traits of a Successful Social Equity Program 

A successful social equity program takes a holistic approach through low-cost financing, education, and training. Ultimately, this requires involving the people it seeks to serve from the start.

One of the best examples in California and the country is Oakland. The Bay Area city offers a wide range of financial and logistical support including loan programs, technical assistance, and legal programs. The goal is to help operators build the business acumen needed to sustain themselves long-term.

Oakland also has a Cannabis Equity Property Purchase Program where multiple applicants can purchase real estate together. This is a critical resource for areas where high real estate prices pose substantial barriers to entry. 

Creating more diversity and opportunity in cannabis doesn’t just happen through ownership, either. Oakland focuses on training employees and providing secure, well-paying jobs for everyone who has been adversely affected by cannabis prohibition. 

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From Espinoza’s perspective, there needs to be more capital and education.

More money helps in any business. For equity brands without capital, opening more access to banking and financial resources would enable them to operate more independently without seeking private investments. 

Redirecting taxes directly to people or into services like consulting fees from qualified advisors would also have a significant impact. So far, Espinoza hasn’t seen any tax money come back to her company or others. 

“If the government was able to restructure the taxes that would be such a huge benefit to us to be able to continue operating,” she said. “Because I feel like a lot of us are getting eaten up by these taxes.”

Increasing economic improvement, justice, and diversity in cannabis require more than what’s written into the law. Dispensaries and consumers can make a difference, too.

For instance, brands can pay anywhere from $500 – $15,000 for shelf space in a dispensary. Almost half of all retailers charge a slotting fee, but only 2% allocate space to minority brands.

Considering how 70% of consumers support brands that align with their social beliefs, retailers should seriously consider their impact. Fortunately, Espinoza sees more dispensaries moving in that direction as more consumers want to know where their product comes from and who makes it.

“It’s our job,” she said, “as any brand or operator in the industry to educate not only the dispensary and the budtenders but also to figure out how we can educate the consumers and the larger, general audience.”

Until counties take more systemic action, increasing education and support from ancillary cannabis companies is the most effective way to support social equity operators.

At Ciclo, we offer discounted social equity rates for our supply chain support software that gives operators more transparency and control. Contact us to learn more.

4 Challenges Crypto Solves for Cannabis

Despite all its hoops and hurdles, cannabis has an advantage over other established industries: it can more easily adopt the most cutting-edge technology to position itself for the future. Cryptocurrency, or digital currencies like Bitcoin, are one of these tools.

What makes cryptocurrencies valuable is the underlying framework that supports them: blockchain. Blockchain is an algorithmic system of recording information. It is a digital ledger of transactions that is duplicated and distributed across an entire network. 

Big financial institutions and traditional supply chain companies already recognize the added efficiency and affordability blockchain offers. However, they cannot easily transition because of their archaic, monolithic, and centralized model. 

Cannabis is so nascent that it can implement blockchain and cryptocurrency to solve the industry’s biggest financial and compliance challenges. 

Trust Issues Blockchain Solves

To understand how blockchain works, we need to look at the issues that exist in traditional banking.

Traditional banking is a paradox. We trust it and distrust it for the same reason: it is managed by a centralized institution entirely in charge of maintaining the system and protecting our money. That’s a lot to ask of any central body, since whenever anything is centralized, corruption can occur. And since the 2008 financial crisis, there has been increasing distrust in banking institutions. 

Blockchain was designed out of this crisis. It solves the issue of centralization by decentralizing all transactions and making them accessible, transparent, and traceable. For example, the recent Colonial Pipeline ransom was partially recovered because the hackers demanded payment in cryptocurrency. 

While we could say blockchain eliminates the need for trust, a more positive way to phrase it is that blockchain increases confidence

Trust implies risk and vulnerability, whereas confidence rests on assurance from predictability. And while it is exceedingly difficult to ensure transparency in social or political institutions, this is easily accomplished in open-source software.

Blockchain increases confidence because it’s not about trust, it’s about verifying. It is the technology itself that is inherently “trustworthy,” not those taking part in it. The algorithm is mathematically verified, and its integrity is maintained through the socioeconomics of game-theoretical mechanisms: it cannot be corrupted because that would ruin it for the corruptor. 

It’s also important to note that Bitcoin is not the only cryptocurrency. There are thousands of coins, or tokens, many of which are more stable than Bitcoin. There are coins backed by the US dollar, gold, silver – even the arts, or cannabis. 

The Challenges Crypto Solves for Cannabis

Some of the most significant challenges facing the cannabis industry can be solved through blockchain technology, cryptocurrency, and software platforms like Ciclo. 

1. Banking  

Because cannabis companies cannot get traditional bank accounts, they must either deal in cash or find a Californian credit union that will work with them. Securing an account with a credit is time-consuming, expensive, and intrusive. Overall, the company will overpay for a poor-quality service.  

With blockchain, there is no need for a credit union. Companies can trade in the coin of their choice and enjoy significantly cheaper fees, faster transactions, and peace of mind knowing there is no central authority monitoring their every move. 

2. Fair Competition

Blockchain transactions allow companies to see true market prices. 

California is dealing with a major oversupply and price instability that has put many farmers out of business. It’s difficult for them to compete because they can’t see what their products or their competitors’ products sold for, or when they get paid. Blockchain technology can help solve this by showing all transactions that occur.

This transparency is available on software platforms like Ciclo. When all cultivators, distributors, and retailers participate, everyone can see when everyone has been paid and how much which products sold for, allowing prices to be adjusted accordingly. 

3. Paying Taxes

The government collects tax revenue from cannabis in two ways: cultivation taxes and excise (sales) taxes. All excise transactions are reported to the state from the retailer, but there is confusion around who is liable to pay the cultivation tax: cultivators or distributors? 

Legally, distributors are required to pay and report all cultivation taxes, but the cultivator needs to know the rate to calculate the expense out of their cut of the sale. 

With the Ciclo platform, we can calculate the cultivation tax based on weight and category and give the cultivators a breakdown. We then can track when all taxes have been paid. Cryptocurrency makes this all easier because of its digital traceability that everyone can see.

4. Proving Compliance 

Cannabis companies are required to report all their taxes to the government to stay in compliance. This can be accomplished much quicker and painlessly in cryptocurrency. Since it is already digital and in a convenient ledger, all transactions can be reported seamlessly, regardless of the coin.

The Future of Cannabis and Crypto

Technology solves problems creatively, giving companies more transparency, control, and ease while maintaining –and improving – compliance. 

There have been coins designed specifically for cannabis before, but they never took off because the concept was never proved to the market. Before the industry can make the switch, there must be real data and education around blockchain’s design pattern to prove how cannabis companies can operate with more transparency and confidence through decentralization. 

The Forgotten Value of Outdoor California Cannabis

Few industries have a unique and culturally rich background as cannabis, and it all started in California’s idyllic Emerald Triangle region.

The area has highly favorable growing conditions and reflects the resiliency of the farmers who stood up against countless raids, intimidations, and POWs from the war on drugs. But now, adult-use legalization poses a new set of challenges, and cultivators from the region are getting overlooked as they struggle with intense price instability from structural oversupply in the market.

Our last article explored solutions to solve this issue, like moving outdoor farmers up the value chain. A value chain represents all the parts that go into a product to make it worth more, like transforming biomass into a concentrate.

With flower, the value is artificially defined by strain, THC percentage, and grow method. But in today’s oversaturated cannabis industry, stories are what add that extra value. For Emerald Triangle farmers, that story comprises geography, genetics, history, and culture.

Cannabis’ Roots in the Emerald Triangle 

Two serendipitous movements occurred between the late 1950s and the early 1970s that enabled cannabis in the Emerald Triangle to bloom.

One was the “Back-to-Land” movement when progressives in San Francisco migrated north in search of a simple life. They lived in communes and grew their own food, cannabis included. The other was the “Hippie Trail,” spanning from Turkey to Thailand, that attracted Westerners and brought back exotic cannabis seeds and genetics.

Over the years, the communes in Humboldt, Trinity, and Mendocino Counties became very tight-knit as the war on drugs shaped their lifestyles. They depended on each other for alerts about government raids and became more remote and self-sustainable.

If you visit the area today, it’s like going into a time capsule of the Summer of Love. The rural communities are deeply connected to the Earth in a way not very common among non-indigenous populations. The generations and their families still carry the raids, arrests, and prices they paid to uphold civil disobedience against immoral laws on a plant that provides medicine and livelihood with them.

California’s Ideal Climate

Having good genetics is just part of growing quality cannabis. It’s the terroir that influences the genes and shapes them into full expression. Terroir is all the area’s growing conditions, including soil, weather, altitude, and climate. These factors all play a role in creating unique, robust profiles and a well-balanced experience, specifically with sungrown flowers.

Cannabis grown outdoors doesn’t yield the highest THC percentages, but those who know it love it, prefer it and know Emerald Triangle to be the best. The quality is largely due to the region’s terroir that boasts high elevation, a warm and dry Mediterranean climate, and rich, loamy volcanic soil.

These characteristics helped farmers cultivate exotic seeds into unique expressions of the place, and that has not gone unnoticed. California is currently crafting an Emerald Triangle appellation pilot program that could be substantial in moving outdoor craft cannabis up the value chain.

An appellation is a legally defined and protected geographical area used to identify where a crop was grown and recognizes unique features of the area. Some examples of appellations include wine from Bordeaux, champagne from Champagne, Bourbon from Kentucky, and Tequila from Jalisco.

Keeping the Legacy Alive

The Emerald Triangle is a region with a story unlike anywhere else in the country. The environment expresses the best of the seed’s genetics, just as the miserable failure of the war on drugs expressed the farmers’ resiliency to turn a counterculture movement into a booming capitalist enterprise.

If we push them out of the market, we lose a part of our history that has kept an iconic way of life alive– not just in California but also for the entire industry.

Establishing the appellation program will help legitimize and protect the value Emerald Triangle cannabis has by promoting regional goods and local businesses, preventing misrepresentation, and supporting consumer confidence in the area’s characteristics. But until that happens, giving Emerald Triangle farmers the value they deserve depends on celebrating and sharing their story.

Californian Cannabis Price Instability: Broken Promises and the Way Forward

California’s Emerald Triangle is famous for its high-quality, sun-grown cannabis. Farmers in the region have been growing since the 1960s and were integral to launching the cannabis movement around the world, making California famous for counter-culture. They are also part of a generation where kids grew up in tucked-away communities on farms that embodied the ideologies of the 1960s.

But since California legalized adult-use in 2018, sun-grown craft cannabis farmers have faced increasing challenges with oversupply and price insecurity. In 2020, a pound cost $600-$800 wholesale. Only one year later, that same pound costs $200-$500. For some, that means a 60% price drop.

While this is the nature of markets, several factors affect the severity of cannabis price crashes and oversupply and why small, outdoor farmers are getting burnt the worst.

What Causes Oversupply in Cannabis? 

Before California legalized adult-use cannabis in 2018, farmers in the Emerald Triangle were limited to 10,000 square feet of growing space. Before Proposition 64 passed, the state had promised they’d make industrial farmers wait five years before they could grow more than an acre. This promise was broken months into legalization, and now the market is flooded. 

Legalization also added more opacity, hoops to jump through, and took away the farmers’ negotiating power. Now, the farmers don’t know fair market prices for their product and must accept what the distributors say because they can’t see what it’s being sold for. 

This situation is not unique to cannabis. All other agricultural industries follow it, like coffee, cocoa, or corn. Lawmakers crafted cannabis regulations this way without adequately consulting the growing community, thinking the model would translate. Unfortunately, it doesn’t work for any crop, as small farmers in all agricultural industries are struggling.

Overall, regulators completely missed an opportunity to address a widely understood reality for small farmers worldwide. 

The Challenges for Outdoor Growers

With large, indoor farms in southern California, light deprivation grows, outdoor cannabis farmers can hardly keep up with the oversupply. Combined with far fewer retail licenses than cultivation licenses, counties and towns that banned cannabis sales before adult-use legalization passed, and no interstate commerce, there is now two times more product than Californians can consume. 

Oversupply forces farmers to revert to the traditional market to offload product and keep their operations financially afloat. This puts farmers at an incredible risk, and the state misses out on tax revenue. It also devalues the history and regenerative methods of cannabis in the Emerald Triangle.

Solutions for Outdoor Cannabis Farmers

When we go visit small-batch farmers in the Emerald Triangle and ask how their relationship is with their distributor, we hear the same thing over and over:

  • They haven’t gotten paid and don’t know when they’re getting paid.
  • Their products are sitting on shelves.
  • They aren’t getting any feedback.

We believe there will always be a market for craft, outdoor flowers, just as there are ways to help sun-grown farmers get their negotiating power back. 

Allowing interstate commerce would help the situation significantly. But, until federal laws change, California can allow more retail licenses, and small-batch farmers can also organize and represent themselves as a co-op or an association like the Trinity County Agriculture Alliance, Humboldt Growers Alliance, or the Covelo Cannabis Advocacy Group.

The market can also move outdoor farmers up the value chain by sharing the story of why their flower should be valued more than it currently is. Outdoor flower is more environmentally sustainable, has a full-term plant expression that makes for a more balanced experience, and reflects the rich history and culture of Californian cannabis. 

Finally, the most significant thing farmers can do today by themselves is to utilize processes and technology that will give them more transparency. 

Why Technology is Key

Technology can give small cannabis farmers the tools they need. It allows them to see what distributors are selling their product for, negotiate, and track operations. 

At Ciclo, we provide this type of technology. When cultivators, distributors, and retailers use the Ciclo platform, farmers can see when they have been paid, when their product reaches the shelves, which strains perform best, and more. While everyone in the supply chain is valuable, this value increases with more transparency and communication. 

Sun-grown cannabis has a cornucopia of benefits and reflects a regenerative, sustainable way of farming all agriculture should embrace. That’s why we offer free versions of our technology for cash-strapped farmers and are here to help ensure their legacy.