Cannabis has a rich history symbolizing counter-culture. In recent decades, public awareness of its medicinal benefits has significantly evolved, shifting public opinion. However, longtime cannabis enthusiasts worry that increasing private investment may lead to a corporate takeover of the industry. Yet, businesses must be profitable to thrive, raising the question: how lucrative is cannabis cultivation?
At present, cannabis cultivation is profitable but entails significant risks. It is a complex endeavor requiring careful consideration before starting a mid-sized operation, not suitable for backyard growing. This article will focus on mid-sized marijuana cultivation. The profitability of your grow will hinge on three key factors:
- The Size of the Grow Room
- The State the Grow is Located and
- The Lighting System
For the purpose of this exercise, we will simplify the financial aspects related to capital investment, revenue, and operational expenses to provide ballpark estimates. This will give readers a general overview of the financial dynamics involved in running a marijuana grow operation. Specific details such as whether higher wattage correlates with better product quality or how labor requirements vary with grow space size will be addressed in future articles.
Our initial capital outlay will include:
- Initial Lease and License Fees: Costs vary by state and are typically based on the square footage of the grow area.
- Initial Lighting System, Growing Equipment, and Warehouse Preparation: This constitutes our investment in fixed assets.
- Initial Alarm and Security Setup, and Other Administrative Fees: These are expenses that cannot be capitalized.
Regarding revenue, we will use a total yield per watt model. Different lighting systems yield different amounts. While the skill level of your staff influences this figure in reality, it is not factored into this model. Wholesale prices per pound will vary by state, assuming no interstate commerce of marijuana for this organization.
When assessing Year 1 Returns, our revenue calculation will be based on yield and wholesale price per pound. We will also factor in significant annual expenses that can vary year over year:
- Annual lease expense (with escalation)
- Annual license expense (with escalation)
- Annual electricity costs
- Direct labor costs
- Other miscellaneous expenses that are inevitable
Below is a simplified model where you can influence returns by adjusting three key factors: size of the operation, state regulations, and choice of lighting system. This serves as a useful reference before delving into the specific details of why these factors are crucial for profitability.
The size of the grow space
The size of your grow space is the primary factor influencing the profitability of a new growing opportunity. Consider all essential elements of initial capital outlay: leasing a new space, obtaining a cannabis operating license, acquiring growing equipment, and preparing the space for cultivation—all costs directly tied to the size of the grow area.
From a financial perspective, the largest initial cost is typically the lease. Leasing a smaller warehouse may offer room for negotiation, but lease costs are generally determined by square footage. Similarly, in many states, license application fees scale with the planned size of the grow, which impacts tax and accounting considerations, particularly in calculating cost of goods sold.
Other costs indirectly influenced by grow size include initial investments in lighting systems, growing equipment, and warehouse preparation, constrained by available space.
In terms of revenue, yield per square foot is paramount. Strategic planning involves maximizing plant density without compromising product quality, where larger spaces generally yield higher outputs. The grow space also sets the upper limit on potential revenue generation.
Year-over-year operating expenses are significantly impacted by size, particularly lease and license costs that often include annual escalators. While not directly affecting electricity costs, larger grow spaces naturally increase the maximum scale of this expense. Direct labor is also size-dependent—while a small grow might be managed single-handedly, larger operations require increased staffing to manage workload.
In summary, the size of the grow space fundamentally shapes both initial investment requirements and ongoing operational costs, directly influencing the financial viability of a cannabis cultivation venture.
The state where the grow is located
The location of your cannabis grow significantly impacts its potential profitability in three key ways: license expenses, revenue from wholesale prices per pound, and operational electricity costs.
Acquiring a license from state and local governments is notoriously challenging in the cannabis industry, often accompanied by substantial costs. These expenses vary widely from state to state—some base fees on the square footage of the grow area, while others impose hefty upfront application fees regardless of size. Given the lack of standardized processes nationwide, choosing a state for your grow operation requires careful consideration of its licensing procedures and associated costs, which can heavily impact initial capital investment.
From a revenue perspective, understanding historical trends in wholesale prices per pound is crucial. Over the past few years, a clear pattern has emerged post-legalization: prices typically spike in the first year of adult-use legalization, driven by high demand and limited supply. However, as the market stabilizes and supply increases, prices tend to decline significantly over subsequent years. This trend underscores the importance of local market dynamics, as interstate trade of cannabis products remains legally restricted.
Electricity expenses represent a significant year-over-year operational cost for cannabis growers. While the choice of equipment and lighting systems influences these costs, the state determines the price per kilowatt hour (kWh). States like Louisiana may offer rates as low as 9.37¢ per kWh, whereas Hawaii sees rates exceeding 32.76¢ per kWh—more than triple the cost. Given that optimal grow operations require continuous lighting and climate control, the state’s electricity rates directly impact operational profitability.
In conclusion, when evaluating profitability in cannabis cultivation, the state of operation plays a critical role due to its influence on upfront licensing expenses, potential revenue generation from wholesale prices, and ongoing electricity costs. These factors underscore the importance of strategic location selection for maximizing profitability in the cannabis industry.
The lighting system
The ideal lighting system setup to grow quality cannabis is a hotly contested topic, far above the scope of this article. Nevertheless, in most grows, the lighting system is very important from an accounting and financial perspective as it is among the only fixed assets. The lighting system impacts the financial viability of a new grow in three primary ways.
First, the initial upfront cost of equipment is typically a material cost and some lighting systems will be cheaper than others. Secondly, the total yield of the grow can be reliant.
How many watts your lighting system is comprised of meaning your lighting system makes a direct impact on revenue figures. you will pay for additional wattage through the electric bill in your year over year expenses.
When it comes to dealing with lighting systems in cannabis, price typically increases linearly with wattage. As we noted, there are a wide variety of opinions when it comes to the optimal setup when growing cannabis.
The lighting system is an important consideration for a new cannabis grows both financially and operationally. For a medium size grow however, we can assume in most cases a higher wattage setup is generally more sophisticated and increases the costs relating to materials. Many small to medium size grows simply don’t have the capital to install and maintain the most advanced lighting systems.
