2020 Market Preview

As harvest begins and progresses I'd like to start off by saying our hearts are with all of the farmers, processors, and ancillary businesses dealing with the west coast wildfires. We've been in the thick of it along with many of our distribution and processing partners. Big ups to all the companies that have taken initiative in helping neighbors. That is what it is all about.

We've been having a lot of conversations with our network of hemp industry professionals about what 2020 markets are looking like across the industry. Without further ado, I'll try to keep it short and sweet. Our numbers come from contracts we have in place for product, contracts we are currently negotiating, economic indicators, sales statistics for 2020, and input from several well established companies in the space.

Sungrown, Greenhouse/Light Deprivation, Indoor Flower

Amota has entered into agreements with a few farms we have worked with since harvest 2019 and into 2020. The farms vary from large industrial 100+ acres to smaller boutique farms that range from 2 to 20 acres.

All of our agreements to date have been on net terms with a deposit. We have been a cash in hand buyer (for the right material) all year long while still doing consignments/net terms, with the looming IFRs and instability of the industry's legal framework it doesn't make sense to tie up cash into inventory that can be deemed unsellable as soon as November 1st (we don't think this will happen, but we have to acknowledge it). For the sake of simplicity I'm only going to be speaking towards hand trimmed product because I feel that is what buyers seek out the most. Of all our sales this year, hand trimmed requests and purchases far exceeded everything else. The graph below shows differences between hand trim, machine trim, and smalls.

Sungrown

Larger farms (50+ acres) that have several years under their belts and have scaled their drying/processing in house will offer sub $200/lb pricing on nicely trimmed sungrown flower. They've automated much of their processing lines and can be very competitive on price. Farms that followed similar scalability have the capabilities to offer greenhouse flower at sub $400 prices and indoor at sub $700. I've yet to see any TRUE indoor sub $600/lb that has been worth my money. Seems like anything that low is very poorly grown, trimmed, or cured.

Mid size to small farms (1 - 20 acres) will effectively be slightly more expensive depending on the scale of their drying and processing capabilities. Labor and processing resources are the major driving forces behind any farms ability to move pricing. Newer farms, or farms that have not automated/integrated data into their processes, will likely be priced at $200 - $300 per pound to try and claw back costs. Their quality will need to be top notch to get the $300 price in the fall as they will be competing with the supply glut. For a wholesale/distribution company such as ourselves, this will begin to approach the apex of what we can pay. Don't get me wrong, I'm not saying that there isn't sungrown flower out there that could go for more. From a supply movement standpoint anything higher than $300/lb takes more time and resources to sell. Especially at volume. Pounds at the $300+ price will have to be completely or near completely seedless, high terpene content, and trimmed/sorted to perfection. I emphasize sorted to perfection. Farmers aren't realizing that if you give someone 10% smalls and shake in a pound you just took their COGS from $300 to $330/lb and left them short. This is a huge turn off and has warranted the implementation of a thicker sales agreement from us. In my mind farmers should by default include up to 5% of the quantity as a buffer for the buyer.

If you line up retail pricing with wholesale you'll quickly see that there is not a lot of room for a distributor to play with. Many farms have taken on the distribution and wholesale side of the industry themselves, but those same farms have expressed exhaustion in dealing with all of the misrepresentations that brokers bring to the table. We all know they are a plenty! The industry has not settled itself into a place where distributors are A) legally necessary or B) looked at as a huge benefit to a producer that is comfortable dealing with all the riff raff themselves. In many instances farmers have created a distribution arm to their company. This notion derives from the many false promises made and even worse, contracts broken, by bad actors within the industry. At Amota we feel this is one of our major value propositions as we have built an extensive and real buyer portfolio that spans the globe.

Greenhouse/Light Dep

Greenhouse/Light Dep flower draws a slightly higher price than sungrown for a few obvious reasons. The labor necessary to manually pull tarps for light deps adds to the cost. There is also a noticeable difference in quality that cannot be overlooked as the plant gets more powerful energy from the sun during summer flowering. Greenhouse is the same argument, minus the labor side. If we are being fair and quality wins out in this industry, then higher quality needs to demand a higher price. One thing I will mention is that because of the stress that light deps or greenhouse could potentially cause if done wrong, we sometimes see seeded crops or oddly structured buds. Automatic light deprivation greenhouses will likely produce the best in class product when used properly. Expect larger players to enter the market at around $300/lb with smaller outfits commanding slightly higher pricing.

Indoor

Indoor flower has begun to take center stage within the hemp industry. Consumer demand for seedless product and anything that looks as much like THC flower as possible has steered the producers in this direction. There are a healthy amount of indoor producers out there, but the reality is that the production isn't close to meeting the demand. When you look at the retail pricing on indoor ounces you begin to see where indoor flower will ultimately need to settle, and that is in the $600 - $1000 range to the vendor. There are producers selling for as low as $300/lb, but this product has been nowhere near the quality expected from a properly run indoor grow or a greenhouse with supplemental lighting. Retail consumers have made it known that $120+ for an ounce of CBD flower starts to turn them off. Most of those same consumers are buying between 3.5 grams and 28 grams (1 oz) per purchase. As will anything quality will always garner higher prices.

At this point in the game small to mid size farms should be nearing $100 - $125 per pound of COGS minimum for sungrown. Some farms report as low as $70 - $80. This begins to raise the argument of where everyone's margins fit into the equation from producer to distributor to retailer. $175 - $225 per pound from farmer to distributor/wholesaler in my mind is the sweet spot. $300 - $350 Greenhouse/Light Dep from producer to distributor is a good place to play as well. Indoor is a much different story as COGS can very tremendously. Overall I think this ebbs and flowers with consumer tolerance on pricing overall.

Biomass, Extracts, Concentrates

I think one of the big questions around extracts and concentrates is when will the retail side reflect the wholesale side of the equation. The wholesale market has dropped by as much as 80% in some cases and yet we still see retail products priced pretty high comparatively. This is a great thing for consumer facing brands and I hope it keeps up, but eventually consumer behavior and education will catch up and force downward pressure on price.

For everyone wondering what to do with your biomass this year I think the best answer is that you need to find a way to get it to a milled form for as little cost as possible. It is hard enough to sell biomass to begin with, it's even harder if the product isn't ready for extraction.

Last year Amota spent much of the summer buying biomass, milling it, and flipping it. Not long gone are the days where we were purchasing for $30/lb and reselling for as much as $50/lb! Now we have negotiations at $2/lb for the same potency. Yes you read that right.

Isolate had a small revival during the Delta-8 craze but that died down fairly quickly.

Wish I could give better advice here but the reality is that biomass is only going to be as useful as you can make it through processing channels and your own products. It is very rare to find split deals anymore as processors are in deep with equipment costs and investors are waiting. Tolling doesn't make a lot of sense if you don't have an outlet at a decent price. Sadly, this area of the industry has always been a numbers game that was skewed, even when biomass was being sold at $30+. I hate to say this because I almost always take the farmers side, but this is an area where they oftentimes weren't being rational.

Crude Price: $125 - $200

Distillate: $400 - $600

Isolate: $550 - $1000

Zero T: $1400 - $2000

If you have a consumer facing product that allows you to make money off the mg or ml of extracts/concentrates then you are in a good place. Keep pushing those products best you can. If you are still sitting on liters or kilos perhaps its time to consider selling these types of products, if not, contact as many companies as you can that do sell these products. Wholesaling these products as a farmer will prove difficult as most people will go to processors or distributors outright.

Conclusion

With the IFRs looming and a whole lot of flower from 2019 going unsold we are in for another roller coaster ride in 2020. The fun seemingly never ends. The good news is that it is very evident that the companies and farmers with best practices are emerging as the leaders in the industry. Those who are concentrating on customer service, clean products, and proper processing procedures continue to grab more market share. Those who entered as a get rich quick scheme have bowed out or fallen by the wayside.

What I would like to see more of that is hindered by bad actors, scammers, and flat out liars is cooperation between farms, processors, and distributors. Many of the aforementioned characters have left bad tastes in the mouths of their victims and as a result, kept the supply chain fractured. When the supply chain can standardize itself and more structure/regulation enters the space, we can all reap the benefits of staying in the game.

Be kind to your neighbors and continue to be pioneers in this burgeoning space. We have years to go before this starts to look like what its supposed to look like, and the best part is nobody knows for sure what that is!