Since legalization in October 2018, Health Canada has designated a variety of licences that facilities can obtain to cultivate and process cannabis. Among these licences, we find the unique class of micro-licences, specifically constructed with the craft producer in mind. Under these regulations, small-business owners are able to focus on niche markets and premium-quality cannabis, without the pressures of mass production and scalability.
In our booming industry, the chance to slow down and get back to quality cannabis is a breath of fresh air. Or it seemed to be, until extended wait times kept facilities from being properly licensed.
Production has been brought to a halt for most of the industry’s micro-dreamers. To date, there is only one micro-cultivation licence issued in Canada, and approximately 150 applicants waiting for their time to shine.
So why the barriers? In this article, we will look into the designation of micro-licences and what sets them apart from other licenses in the industry. We will gain insight from a similar shift in alcohol, from a macro to micro market, and discuss the benefits of this from an economical and quality standpoint.
Lastly, we will dive into the state of micro-licensing in our country, investigating the process and why we appear to be advancing so slowly in this area. Just this past month we saw some big changes in the licence application process in Canada. Let’s explore how these changes affect our industry, and how BlueSky Organics can help your craft business grow.
What are Cannabis Micro-Licenses?
Prior to the cannabis act, small businesses were expected to meet the operational and security requirements of large-scale facilities. Though this standardization made licensing more straightforward, it became almost impossible for smaller facilities to legally make a profit.
To keep small-scale companies out of the black market, the licences were split into processing and cultivation classes, with standard, micro, nursery, and hemp subclasses. This categorization allowed for greater control in production facilities, and gave licence-holders of all sizes a place in the industry.
So what is meant by Micro? Under Health Canada regulations, a maximum 200 square-metre cultivation area. This is equivalent to a half of the center section of a hockey rink, producing a maximum 600kg of dried cannabis annually.
Micro-licences are also unique in their security standards, as these facilities often operate with a minimum number of employees. Here, cannabis storage monitoring is much less stringent than that of standard licences.
Minified Costs for Micro Licences
Reduced facility size and operations are also reflected in the fee per licensed site. Under standard licenses, the minimum regulatory fee is $23,000. This is drastically reduced in micro-licensing, where the minimum fee is $2,500 per license. Though this reduction does make cultivation and processing more economical for micro-licenses, the total cost is still not to be underestimated.
The minimum license fee is only one factor in the cost of operations for a micro-licensed facility. Land and building costs can add up to an extra $500,000. Once the business is up and running, a percentage of revenue (1% of $1,000,000, at the very least) must be allocated to regulatory fees. And this is not factoring in consultant fees for the application process.
With over a hundred pages of meticulous paperwork, most business owners opt to hire a consultant to process their applications. For both micro-license applications, an additional $65,000-$115,000 can be tacked on to the total. Not to mention the municipality fees that vary by location.
If you’re keeping track, this adds up to a significant amount of money. The cost of a micro-licensed facility can reach $1.5 million, and that’s just in the startup. Though this may seem like an impossible amount, it’s not far off from the craft cousin of cannabis production, the microbrewery.
Craft Brews to Craft Bud
The investment to set up a micro-cannabis production facility is not far off from what is required for craft brewing. Setting up a microbrewery involves a solid business plan, a ton of restrictive licenses and permits, and a huge capital investment. Oh, and also a lot of patience.
Similar to the cannabis industry, licenses may take years to approve, resulting in an expensive waiting game. Commercial leases and equipment bills remain active, in addition to property taxes and building improvements or construction. On top of this, interest begins to accumulate on the costs sunk into the business, all before ever making a dime.
This may seem daunting, but the sheer number of craft breweries popping up each year is a sign that there is profit to be made. For those able to invest and wait-out the incubation period, it is possible for a passion-project to turn into something hugely successful.
Quality Over Quantity
Microbreweries have a one-up on their larger competitors in their ability to focus on small-batch products. By investing in quality over quantity, craft brewers are able to appeal to customers searching for product experiences along with their beverages.
The craft customer craves unique flavours and local ingredients. They want to be able to chat with the owners of the brewery and see firsthand where their products are made. They are searching for variety, and the ability to sample before buying. They live for one-of-a-kind batches, and when they’ve found ‘their brewery’, they are a customer for life.
This customer is very similar to the craft cannabis customer, to whom quality is also the main appeal. Craft cannabis users are searching for something special, and are willing to pay a bit extra to get it. Premium product has been shown to be profitable in a variety of industries, but may have a harder start in craft cannabis with the current marketing and distribution limitations.
Craft Cannabis Limitations
In the craft brewing market, producing high-quality beverages is only a part of the business. Marketing their product in a unique, distinguishable way that attracts customers is the significant other.
Take the Craft Beer Market’s across Canada for example. Each location has over 100 beers on tap, eliminating even the packaging from the consumer’s decision-making process.
When your products are sold alongside a large variety of your competitors’, you have to set yourself apart with catchy names and intriguing product descriptions. Being able to represent the uniqueness of your brand is essential for getting your product into the hands of consumers.
This is one large area of difference for craft beverages and cannabis. Though craft cannabis has essentially the same needs, federal regulations prevent any unique packaging from entering the market. In Canada, packaging must be compliant with federal standards, and retailers are not allowed to re-package products to reflect their brand.
In addition, retailers are not allowed to communicate prices or services. They cannot use testimonials or endorsements, or promote their products in any way that evokes emotion or entices consumers. And if not followed, these regulations can cost millions of dollars in fines and potential jail time. A punishment that would most likely end their craft business.
Another area of marketing craft beverages ties into the distribution of the product. Craft producers must also have a brewery license to manufacture, which allows them to have a sampling area, provide guided tours, and apply for an on-site retail store.
Many craft facilities run their entire business on-site, making their products in one section of their facility and selling them in another. This allows for a complete brand experience, as consumers are able to interact with the product and see exactly how it’s made.
This is another large difference for craft cannabis, where retail is completely controlled by the Liquor and Cannabis Regulation Branch (LCRB). A licensed cultivator of any size cannot sell to the public directly, and also can’t sell to any cannabis store, even those with a non-medical cannabis retail license. Licensed stores must purchase their cannabis directly from the Liquor Distribution branch, which receives its cannabis from licensed producers.This extra step of government regulation through the LCRB is designed to promote consumer health and safety. It is also a conservative measure, giving the government time to address problems as they arise in this new space of legalization. The unfortunate side-effect lies in limiting producers from interacting with consumers, as it prevents the farmers market mentality that is the beauty of craft cannabis.
Changes to All License Applications
We believe that as the industry progresses, the regulations surrounding cannabis will move to favour the craft producer. We saw this trend with alcohol, and we see the same benefits following this direction with cannabis. The future is bright, but only for determined and adaptable growers.
Just this past month, Health Canada released additional license application requirements that place another hurdle in front of growers. Now, as a prerequisite to being licensed on any scale, a production-ready facility must be built before the application process is even started. This change is effective immediately, affecting new applicants and those with applications withstanding.
The reason for this change is to streamline the application process and ensure that committed applicants are successful. Before this change, producers could submit the application as their first step in business development. This has led to countless applications being processed for facilities that would never become established – approximately 70% according to Health Canada.
Why the Delay in Micro License Processing?
There are currently over 700 applications under review in the standard and micro license classifications. Before these new requirements, application submissions greatly outnumbered the successful applicants. A bottleneck was created, leaving determined growers waiting in the crowd with the hobbyists and the unprepared.
The application process was being delayed by applicants trying to ready themselves for business, during the application process. These new regulation changes hope to weed-out the dreamers and level the playing field.
“This is a game changer, we go from a situation where if you wanted to submit an application, you submit your paperwork and you sit and wait to hear back from Health Canada. Now you’re asked to build a $30-million to $40-million facility before you even submit your application.” – Matt Maurer, cannabis lawyer
The NEW Application Process
Under these new regulations, new and existing applicants must submit a Site Evidence Package within ten days of their application. This package used to be one of the final steps in proving a facility as operationally ready, but now becomes one of the first. And as expected, many applicants are not happy about the changes:
“You did not even need a shovel in the ground to begin the application process, which can sometimes take years. Now you have to raise tens of millions and convince investors that you will get a Health Canada license, when you have no physical proof of it.” – Trina Fraser, Law Partner
After the application and evidence package is received, Health Canada determines if the application is complete within a 30-day service standard. If the application is deemed complete, it is then moved to the in-depth application and security clearance review.
There is currently no time limit set on processing, and the application process is still far from easy. However, with this new requirement, the pack of applicants will be quickly thinned out. For those able to financially invest from the start, these changes will help to speed up the process.
The Current State of Micro License Applications
In an April 2019 Cannabis Symposium, Health Canada’s Director of Licensing and Security, Controlled Substances and Cannabis Branch provided numbers on the state of micro-licensing in Canada. To date, there were 190 micro-license applications being processed in Canada. The staff processing these changes has tripled, but only about 25% have passed the completion review process.
Of these applicants, 8 have received their “confirmation of readiness” letter and have been moved to the final stages of processing. To date, only one unnamed applicant from British Columbia has succeeded.
“The more licenses get approved, the more comfortable people will be with taking that leap of faith, especially now that applicants are required to have the sites built out.” – Sherry Boodram, CannDelta Law
Are Micro License Applications Worth the Investment?
The current barriers to obtaining a micro license are substantial. There is a huge financial investment, without any promise of success. There are significant wait times and an entire facility to get production-ready prior to your application. There are also limitations on what you can do with your cannabis, once you are finally licensed to grow.
However, for those committed and able to invest in this new craft space, these barriers create the chance to be first to market. It’s no surprise that consumers are searching for craft cannabis, and as we’ve seen with craft alcohol, there are great profits to be made.
We’ve also seen a lot of collaboration in the cannabis space, between large operations and micro-producers. Large companies know that consumers are searching for quality, and by teaming up with smaller-scale operations, they are able to add premium cannabis to their offering. As a craft collective, it’s our time to shine!
How BlueSky Can HelpThere are great advancements to be made in the cannabis space, as consumers search out high-quality, sustainably-sourced cannabis. Now that facilities have to be production ready prior to submitting an application, it’s even more essential that proper growing practices are established right from the start.
At BlueSky Organics, we believe that organic growing is the only option for producing premium craft cannabis. There is no comparison in quality, flavour, and aroma, and it’s the only option for keeping cannabis green in this ever-changing industry. With our award-winning growing systems, we’ve got your craft needs covered.
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