Tobacco growers going to pot
For some tobacco farmers, the future may be in cannabis. Altria Group, the US maker of Marlboro cigarettes, last week made a US$1.8 billion ($2.6b) investment in Canadian cannabis company Cronos Group amid pressure to find new growth avenues as US smoking rates decline.
The partnership, which includes the option for Altria to take majority control in the future, may see the firm’s US tobacco suppliers switch to cannabis if the drug is legalised, says Mike Gorenstein, chief executive of Toronto-based Cronos. While several US states have legalised marijuana, it remains banned at the Federal level.
“It’s certainly helpful that Altria already has a relationship with local contract farmers,” says Gorenstein. “We can help those farmers transition immediately into cannabis cultivation.”
Altria outsources tobacco production to “several thousand” farmers, according to the company’s website.
“We work with thousands of tobacco farmers today and value those relationships,” says Altria spokesman Steven Callahan. “I can’t speculate on future decisions they may make.”
Cronos grows its own cannabis at a facility about 130km north of Toronto but it’s more focused on genetics and intellectual property than cultivation, says Gorenstein. Its shares surged 22 per cent to a market value of C$3b ($3.25b) on the Altria deal, making it the fourth-biggest pot company.
“It’s worth noting that Altria does not grow their own tobacco,” he says. “We think that model of growing your own plants is very difficult to scale and to execute well.”
The investment by Altria “propels Cronos in the top two of global cannabis companies in terms of financial resources and execution capabilities,” GMP Securities analyst Martin Landry said in a note published this week.
Farmers in parts of the US tobacco belt such as Kentucky have already been making the switch to hemp, a variety of cannabis that won’t get you high.
That shift is expected to continue if the US farm bill is passed this month, fully legalising hemp and its extracts.
Cannabis could also be an alternative for US soybean farmers who have been hit by Chinese tariffs, Bloomberg Intelligence analyst Alvin Tai said in a report this month. A US soybean farmer with an average 180 hectare farm and typical yield has lost an estimated US$43,500 in income from the trade war. That could be made up by the profit from 16kg of cannabis, which requires 28 square metres of planting area, he added.
Cronos isn’t the only Canadian pot company that is looking to reduce its reliance on cultivation in favour of higher-margin endeavours such as intellectual property and brands. CannTrust Holdings is in talks with farmers in the Niagara region of Ontario who want to switch crops to cannabis, chief executive Peter Aceto said in an interview last month.
“We have spoken to farmers who are absolutely willing to make that switch,” he said, adding that outsourcing to farmers should help CannTrust reach its goal of reducing its cost of production, with the goal of becoming one of the lowest cost producers in the Canadian cannabis industry.
Farmers in parts of the US tobacco belt . . . have already been making the switch to hemp, a variety of cannabis that won’t get you high.