By Stephen “Marsh” Schoenhard
Over the next several months, I will be contributing articles that describes the options available to licensed cultivators, dispensaries and edible and infused manufacturers when it comes to processing their trim to extract the more profitable concentrate.
There are two options available, Vertical Integration or Outsourcing.
Vertical Integration: There are substantial start-up costs to incur when going this route. The initial cost of the equipment includes:
- A CO2 extraction machine will cost approximately $135,000 to $150,000.
- A rotary evaporator and centrifuge will cost $20,000 to $35,000.
Additional costs include but aren’t limited to buildings, licensing, or the infrastructure and hourly wages for technicians that will be needed to operate that equipment. And, if you are not growing your own product of course you must factor in the cost of the raw materials (trim) that varies by state.
Depending on your accountant’s interpretation of the 280e tax law, you may or may not be able to write off the cost of that equipment.
If your product requires more post processing, such as winterization, decarboxylation, or reintroducing terpenes into the concentrates, you may want to only integrate those, so that you have some opportunity to protect your product recipes and trade secrets.
Keep in mind that expansion into additional regulated states will require all of the above costs and considerations.
Outsourcing: There are a couple of options available that involve having an extraction company process and extract the concentrate from the trim you supply.
Option 1: The most common option currently available in the marketplace is to supply the trim that you would like to process and have the outsource partner extract the concentrate for you.
Under this scenario, you avoid the cost of plant and equipment, labor and other infrastructure costs associated with vertical integration and negotiate a fee that typically involves a 50%/50% split of the extracted concentrates.
For example if you supply 10 pounds of trim and you calculate a typical industry yield of 10% concentrate (1 pound), the supplier will receive a half pound of concentrate and the processor will get a half of pound of concentrate.
The cost per gram of the concentrate is determined by the market value of the finished product. Under this scenario, the better your material, the more you pay to have it extracted. The benefit is you don’t have to invest any capital to have your material processed.
Option 2: A second outsource option involves paying a flat fee to have your material processed and you get all of the extracted concentrate.
For example, if you pay $200 per pound to process your trim and you have a 10 percent concentrate yield, the cost per gram yielded is $4.41.
If the supplied trim yields 12 percent the cost per gram is $3.68 dollars per gram. So the better the trim supplied the cheaper the cost of extraction under this option.
Typically, it makes sense to use the first option for material that is inexpensive and has lower yields and the second option for material that yields a higher return.
Another advantage to outsourcing your extraction is the access the outsourcing partner has to other suppliers of raw materials or trim or a wholesale source of concentrates from their other clients.
A good rule of thumb when considering whether to vertically integrate (do it yourself) or outsource is that in the long run, It will always be more cost effective to acquire material and have it processed, or process your material in-house.
Outsourcing to an extraction company allows you to use the working capital saved at start-up towards other priorities.
I hope this information is useful when evaluating vertically integrating extraction into your operation or outsourcing your extraction needs. In future articles, I will talk about the methods and importance of proper material storage, the basic extraction process, and the difference between CO2 extraction and other forms of extraction.
Stephen”Marsh”Schoenhard is a San Francisco based consultant who specializes in CO2 extraction. His clients include Critical Separations, Truly Pure, Sacred Serum, Oregon Alternative Resources, Sensi Skin Care, and Honey Buzz. Marsh can be reached 503-866-8502 or [email protected]