A Primer on Tetrahydrocannabinol (THC) and Cannabidiol (CBD)
CBD and THC are two main active compounds found in the cannabis plant:
THC – the compound that has defined cannabis for decades, producing the psychoactive ‘high’ consumers are most familiar with.
CBD – also binds to the same receptors in the body that THC targets, but does not produce the same body high. CBD relieves pain, stops seizures, protects cells from degenerative diseases like Alzheimers and even has an anti-tumour effect.
Scientists are deeply studying CBD and are finding new medical uses at a rapid pace.
The Legal Cannabis Industry is Focused on THC
In the past few years, as legalization worked its way through Canadian courts, legal growers focused almost all of their capital on constructing greenhouses and building brands focused on providing ‘high THC’ cannabis to consumers.
Government regulations have also spent far more resources on regulating how THC-rich cannabis is grown, processed, and sold than on CBD-rich hemp.
The reason for the focus on THC was that historically it has been the only cannabis compound consumers demanded and they were willing to go outside legal channels to get it.
The medical benefits of CBD were historically not well understood and with anti-drug regulations lumping both hemp and cannabis together, few consumers were willing to risk arrest just to experiment with an untested herbal health remedy.
As a result of overregulation and a lack of research, the recreational ‘high THC’ market flourished and is now the target of both licensed producers and regulators.
The THC Market will Ultimately be Less Than Half the Size of the CBD Market
The THC market may be the first target for licensed producers because demand is more easily defined, but longer term the CBD market is where the real money is.
According to Canadian government estimates, recreational and medical cannabis demand could reach $10 billion in the first year of legalization.
But according to cannabis industry analysts The Brightfield Group, the hemp CBD market could be generating $22 billion a year by 2022.
Grizzle thinks this number is conservative.
In only four years the medically driven CBD market will be at least twice the size of the market for recreational cannabis.
CBD Pricing Compares Favourably to THC
To truly understand the economics of cannabis vs. hemp we have to compare the pure active ingredients only and exclude the parts of the flower that have no health or psychoactive qualities.
Consumption of cannabis flower is decreasing rapidly in favour of oils and vapes and the industry will soon be pricing cannabis products based on weight of active ingredient only, excluding the rest of the cannabis plant.
For example, when you’re quoted $10 per gram for flower at a legal dispensary, the flower by weight only contains 20% pure THC, so you are actually paying $50 per gram of THC.
| Growing Costs /gram | Wholesale /Gram | Retail /Gram | |
| Pure CBD Concentrate | $0.08 | $6.50 | $97 |
| Pure THC Concentrate | $16.00 | $40.00 | $100 |
| Dried CBD Flower | $0.002 | $0.16 | $1.40 |
| Dried THC Flower | $2.00 | $4.00 | $7.50 |
Retail
Medically licensed cannabis oil from the 6 largest licensed producers sells for $100 per gram of THC on average.
CBD oil sells for a very similar price at $97 per gram of pure CBD.
In the US, Charlotte’s Web, a Colorado-based hemp grower, cultivates their own proprietary strain of hemp from which they extract, process, and distribute CBD-based products.
Their isolates sell for as high as $220 per gram of CBD but most products range from $32-$111, slightly lower than prices in Canada.
Wholesale
If we look at wholesale prices there is more of a difference. 100% pure THC cannabis oil sells for $40,000 per kg while CBD hemp oil only sells for $6,500 per kg.
The difference in market prices are at least partially explained by the big differences in growing costs which we explore below.
Growing Costs for CBD from Hemp are Far Lower than for THC
Based on extensive data from farms in Alberta, the cost of growing hemp is $400-$500 per acre or less than a cent per gram of hemp.
The cost of producing 100% pure CBD oil, which is much more concentrated, only increases growing costs to $0.07 per gram.
In contrast, licensed producers grow THC-rich flower for $1.00-$3.00 per dry gram with the extra flower required to produce a gram of pure THC pushing the cost up to $16.00, 200x more costly than growing hemp.
Hemp Growing Costs per Acre
Source: Alberta Agriculture and Forestry
CBD Demand Per Person Could be 3x-10x Higher Than THC
A powerful driver of CBD profitability is the increased consumption per person compared to psychoactive THC.
CBD lacks the intoxicating effects of THC allowing a much higher dose to be taken with no serious side effects.
According to Yasmin Hurd, an experienced CBD researcher, doses of 200mg of CBD or more are needed to achieve real health benefits, compared to 5mg to achieve a satisfactory effect for THC.
Product labels and online medical marijuana resources such as Greenrelief.ca and CanniMed Therapeutics confirm the difference in dosing, with a starting dose for CBD at 10-25 milligrams while a starting dose of THC is only 1-5 milligrams.
The average medical marijuana user in Canada spends $3-$6 a day on cannabis flower or oil according to Health Canada data, which means the average CBD user could be spending 3x-7x more, or up to $10,000 a year at current prices.
CBD oil could be a very lucrative new segment for the legal market.
Potential Revenue Opportunity 7x Higher with CBD
| THC Oil | CBD Oil | |
| mg Consumed per Day | 56 | 200 |
| Grams per Year | 20 | 73 |
| Retail Price per Gram | $50 | $97 |
| Yearly Revenue Per Person | $1,018 | $7,060 |
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Three Best Ways to Invest in CBD
Charlotte’s Web (CSE: CWEB)
Charlotte’s Web is North America’s largest CBD processor and seller, with a 14% market share in the US.
The company sells its products through 2,700 retail locations in legal states and online.
CWEB generated $40 million of revenue in 2017, expects to grow 100% in 2018 to $80 million and will be generating up to $170 million by 2019.
With a market cap of $1.6 billion, CWEB trades for 32x cashflow in 2019.
The stock is far from cheap but if CBD demand continues to spike and the company can keep doubling revenue, the multiple will hit 13x by 2020, a reasonable valuation.
Livewell Canada (TSXV: LVWL)
Livewell is not yet a licensed producer, but is in the final stages of the application process and has financial backing from Canopy Growth, the largest cannabis producer in the world.
Livewell is heavily focused on CBD production and recently signed a contract to buy enough hemp to produce 25,000 kg of pure CBD a year with the option to double this capacity by the end of 2018.
25,000 kg of CBD extract is enough to supply around 500,000 Canadians annually if CBD consumption is double THC consumption.
Livewell is also in the process of building about 30,000 kg of high THC cannabis growing capacity which will be operational by early 2019 assuming they are awarded licenses.
The company sports a market cap of $200 million and has not yet generated revenue from sales of cannabis making it a more speculative play on exploding CBD demand in North America and Europe.
Aurora Cannabis (TSX:ACB)
Aurora is on track to be the largest cultivator of high THC cannabis in the world, so is not a pure play on CBD-rich hemp.
However, Aurora just recently diversified into CBD hemp in a big way, giving investors a diversified way to play demand for both CBD and THC.
Aurora recently bought ICC labs, the largest CBD grower in South America and also purchased a hemp grower and processor in Europe.
Between hemp fields in Uruguay and Europe, Aurora will have 8,000 potential acres of hemp capable of producing 50,000 kg of pure CBD extract.
50,000 kg would generate $5 billion of revenue at today’s retail prices, providing huge earnings upside to Aurora.
With a market cap of $11.3 billion, Aurora is the most expensive way to invest in CBD as it trades at 100x cashflow in 2020, but it is also the most diversified and most financially secure.
The Future For CBD is Bright
Through this report we’ve learned that CBD sells for similar prices to THC at retail, costs cents to grow and can be taken by consumers in much higher daily quantities than THC.
What this tells us here at Grizzle is the revenue potential for CBD as a pharmaceutical, health and wellness and beauty product could easily be far larger than estimates of a $20 billion market.
The legal cannabis industry is just starting to wake up to the potential of CBD-derived products, and the flurry of recent deals for global hemp biomass is just beginning.
Planted Hemp Acreage Increasing Rapidly
Source: US state agencies for cultivated acres, nova-Institute and EIHA for EU cultivation, Health Canada for Canadian licensed acreage
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