Operating Costs of Starting A Cannabis Extraction Business

Extraction

Thinking of starting an extraction business?You’re not alone. Check this article for CBD extraction machine cost that you need to know. With the passing of the 2018 Farm Bill legalizing hemp production, the extraction industry has seen a boom in the last six months. There’s never been a more exciting or lucrative time to work in extraction, but there are a few things you need to keep in mind before jumping in feet first.

Consider the Operating Costs First

However ripe a business opportunity extraction may be, building and maintaining momentum must involve a firm grasp and accurate calculation of operating costs and cannabis extraction equipment cost. For example, let’s say that a home brewer makes a new stout beer in his garage, and after selling a few batches to friends, decides to use his passion to launch a formal business.

After calculating his operating expenses, he determines that his operating cost to produce a pint of beer is about $2. This is a powerful piece of knowledge, as it can be used to calculate margin, project future revenue, and build a plan to scale up operations. Realistic calculations of operating expenses can mean the difference between expanding or closing your doors in the first six months.

Thinking of starting an extraction business?You’re not alone. Check this article for CBD extraction machine cost that you need to know. With the passing of the 2018 Farm Bill legalizing hemp production, the extraction industry has seen a boom in the last six months. There’s never been a more exciting or lucrative time to work in extraction, but there are a few things you need to keep in mind before jumping in feet first.

Calculate Your Cannabis Business Operating Cost

Starting a Cannabis Business? Check out our Calculators and to analyse costs, estimated revenue, yield, initial investments and important metrics for your extraction business. 

Why Your Operating Costs Matter

Louis Mosca writes in Forbes, “Understanding your true operating costs will allow you to set realistic pricing in your bids/estimates/quotes. Without it, you could be seriously underbidding your products and services, with disastrous results.” It is powerful knowledge precisely because there is so much promise in doing it right, and so much risk in doing it wrong. Guesstimates aren’t going to cut it.

As the cannabis industry grows, the margins are going to become thinner. It is inevitable that large multinational corporations are going to enter the cannabis economy and try to claim a piece of it. When big players compete in the marketplace and consumers have real choices, the players with the lowest operating expenses can offer their products at more competitive prices, while still making a profit.

Comparing Costs: Supercritical CO2 Extraction vs. Ethanol Extraction

What factors contribute to a cannabis extraction lab’s operating expenses? There are several extraction methods that are popular, and some of the larger businesses use more than one method, depending on what they are manufacturing. But here we will consider only two: ethanol extraction systems and supercritical CO2 extraction. When formulating your operating costs which includes CBD extraction equipment cost, this list is a good place to start. Remember you want to calculate the cost to produce, for example, a gram of winterized crude CBD oil.

ethanol co2 comparison

Similarities Between Supercritical CO2 and Ethanol Extraction

Input Biomass (Plant Material)

Unless you have a grow contract with a cannabis cultivator, surprisingly, this may be the most difficult thing to predict, as the fluctuation in prices could be caused by anything from government regulation to the weather. If you don’t purchase biomass, you’ll probably be looking to set up toll processing (flat fee for a set amount of processing) or split contracts (whatever product is produced is divided up) with the grower of the biomass. This is basically the same whether you are extracting with ethanol or CO2.

Outside Testing

Both extraction methods require testing by independent laboratories to ensure THC level compliance in CBD oil, and to ensure purity and consistency of product.

Packaging Materials

This list will vary based on the products you offer, but may include materials such as vape pens, cartridges, bottles, boxes, labels, packaging supplies, etc.

Maintenance

Supercritical CO2 and ethanol extraction both require the cleaning and maintenance of extraction machines and all participatory equipment, Buchner funnels, etc.

Differences Between the Two Extraction Methods

Labor costs

Wages, benefits, taxes, workman’s comp, insurance, training, and turnover are calculations found in any business’s operating expense calculation, regardless of extraction method. However, you should consider how many employees you’ll need to run the type of extraction equipment you utilize in your facility–as well as the education level required for operation.

Supercritical Extraction Machine

We have the perfect machine for small, medium and large producers. Our model line makes it easy for you to scale your operations while keeping your operating costs at a minimum.

CBD Extraction Equipment and Utilities

Costs vary greatly based on CBD extraction equipment and methods. Supercritical CO2 extraction is vastly more efficient than ethanol, requiring a single cycle to achieve efficiencies of 99%. This means CO2 extraction consumes less power, using only 67 amps to run an extraction cycle.

Both the extraction method and the CBD extraction equipment used will have a cost impact on overall production. While ethanolic CBD extraction equipment tends to be generally cheaper in immediate costs, supercrititcal CO2 CBD extraction equipment is often more cost effective long-term due to the drastically reduced processing cost of CO2. That being said, not all CO2 extractors are frugal in their power consumption. Our extraktLAB 140 model optimizes output and minimizes cost and considered as top performing CBD extraction equipment in the industry.

Rent/Lease Space

The cost of the facility will vary greatly depending on extraction method. Supercritical CO2 extraction machines have a very small footprint and are easy to scale up, as they need no special infrastructure. However, ethanol extraction requires storing large amounts of ethanol. As it is highly combustible, special licensing and infrastructure are required in the form of a blast-proof, C1D1 storage facility.

It is common for scaling up considerations to include discussion of trading in a machine for another with a larger extraction vessel capacity, but this doesn’t apply to extraktLAB extractors. If you want to move from a single 140 model extractor to a facility that processes one ton of hemp per day, we recommend you buy 5 more units–all of which roll in on casters. Scaling up extraktLAB extractors is modular, easy, and maintains a small footprint.

Choice of Solvent

CO2 is an extremely effective and inexpensive solvent, and you’ll only spend about $1.32 to complete a full cycle of extraction. Ethanol extraction requires a large supply of food-grade ethanol – and again, stored on site in a blast-proof, C1D1 storage space. Running a full cycle of food-grade ethanol extraction will run you around $83.15.

Waste Removal

Both extraction methods may require proper disposal of raffinate and fats and waxes from the dewaxing process to stay compliant with state regulations. That said, you need to consider the additional (high) costs for ethanol recycling/waste removal. While many new investors are drawn to the relatively low start-up costs of ethanol extraction, the costs of facilities, utilities, choice of solvent, and licensing all lead up to ethanol having significantly higher operating expenses. The increased cost of ethanol extraction is especially pronounced as you scale up.

Questions? Contact extraktLAB Today

We’d love to help you pursue the exciting and most cost-effective opportunities available in cannabis extraction today! Please call us at 651-600-0036 or submit an online form for more information. Interested in learning how to master the extraction lab startup? Read more here! Check information here about how to make CBD distillate.

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Frequently Asked Questions

Can ethanol become contaminated during ethanol extraction?

Yes, ethanol can become contaminated during ethanol extraction. It is important that you address the contamination with testing and reuse protocols. guidance for solvent reviews have been published by the FDA in 2010. Please refer to the many articles in this blog for more information on cross-contamination with extraction.

What is the electrical cost of ethanol extraction vs. Co2 extraction?

Processing a ton of hemp per day into extracts  can be an energy-intensive process depending on how the hemp is extracted. The following table compares the energy expense for ethanol extraction versus the energy expense for CO2 extraction:

Energy cost for Ethanol Extraction for 1 ton per day at 1 gallon ethanol per 1 lb of hemp
18711 litres to cool from 25 to -20
16840 litres to heat and evaporate after ethanol loss
454 kwhr to Cool from 25 to -20
481 kwhr to heat to boiling point
3105 kwhr to evaporate
4040 kwhr total @ 100% Efficiency
75% Efficiency
5387 kwhr Total
$           0.09 per kwhr
$          506.36 per day

 

Energy cost for CO2 Extraction at 1 ton per day including winterization
636 litres to cool from 25 to -20
636 litres to heat and evaporate after ethanol loss
15 kwhr to Cool from 25 to -20
18 kwhr to heat to boiling point
117 kwhr to evaporate
151 kwhr total @ 100% Efficiency
75% Efficiency
201 kwhr Total
$           0.09 per kwhr
$        18.92 per day for winterization
43.20 Kwhr per day for Co2 extractors
$         3.88 Per day for Co2 extractors

Would you recommend ethanol extracted oils for Vape products?

Due to the risk of chemical contaminants that are found in 25 to 30% of  ethanol extracted oils, we recommend that CO2 oils be used for Vapor Products.

Is it possible to make a solventless extract with CO2?

It is absolutely possible to make a solventless extract with CO2. Solventless extracts are typically made with subcritical CO2 extraction methods.

Does ethanol extraction have a greater throughput than CO2 extraction?

Hemp processing equipment can be scaled for 1 to 5 tons of extracted hemp per day. It’s generally not a fair comparison to compare the throughput on an instrument from two different companies. What is fair is to specify the throughput At the tonnage process per day and then look at the operating cost for that process. You can also look at the equipment and Facilities cost to accommodate that level of Production. after you have all of your costs accounted for including the hidden costs, then you can calculate the net present value for each investment.

What are the most common denaturants in ethanol?

Denatured ethanol is a mixture of denaturants and pure ethanol. Chemical companies add the denaturant to Pure ethanol so that they will not be consumed as a food.
Denatured recipes are published by the ttb that is administered by the National Bureau of Alcohol Tobacco and Firearms. There are many different recipes. one of the most common denaturants used in ethanol extraction is heptane. However there are other substances that may be used including acetone, isopropyl alcohol, methanol and other longer chain alcohols.
Is very limited data on the safety of heptane over the long term exposure. In fact the limit that the FDA has placed on the amount of heptane in a tincture for example was established in the 1990s on the basis of a single study published in 1981. That study the effect of heptane on Sprague dawley rats. That is why there are many disclaimers and the general guidance from the FDA is to limit the amount of solvent in any drug that is consumed.

Doesn’t ethanol extraction equipment remove all the ethanol from the biomass after extraction?

No. Approximately 5 to 10% of the ethanol is left in the biomass and is counted as a solvent loss. These solvent losses add up to operating costs. This is especially true if organic ethanol is used or food grade ethanol is utilized as the extraction solvent.

If you had an ethanol extraction facility, would you ever use CO2 just for stripping terpenes?

Ethanol extraction typically destroys the terpenes when the ethanol is removed from the extract or is distilled from the winterized oil. Many ethanol extractors are seeking a way to preserve the terpene profile of the plant in the output oil. To this end people have tried techniques such as Steam distillation, CO2 stripping, and vacuum distillation.
Certainly, CO2 can be used to strip terpenes from Hemp biomass Prior to ethanol extraction. However, vacuum distillation is by far the most gentle and effective way to harvest the terpene profile prior to ethanol extraction.

How do I model and compare the financial return of ethanol extraction vs Co2 extraction?

There are many inputs that need to be defined when creating a financial model comparing two different extraction methods. The first decision to be made is to decide what the financial metric will be used to make a decision on the superiority of one method over the other. 

In this case, we recommend the use of the Net Present Value as the way to model the return of each extraction technique because it accounts for the cash flow associated with the operation. Many ethanol extraction companies try to make the argument that ethanol extraction is lower cost because the equipment cost is less. However, the equipment cost will have very little impact on the overall profitability of the operation at the same throughput.

The best way to compare the two techniques is to fix the throughput so that an apples-to-apples comparison can be made. Comparisons such are payback time and return on investment can mislead someone into making a bad investment decision. 

So if we fix the throughput at one ton per day the cost of the hemp is equal between the techniques and operating cost variance is the only contributing factor.     

Here are the twelve key questions that need to be defined in order to do a comparison:

  1. What is the direct labor to process?
  2. What is the energy to process?
  3. What are the solvent losses? 
  4. What are the direct material startup costs including solvent startup costs?
  5. What are the cannabinoid recovery rates?
  6. How much solvent do I use, reuse, and when do I need to replace the solvent with fresh solvent?  and at what interval?
  7. What is the insurance cost for each option?
  8. What is the cost of hazardous waste disposal?
  9. What is the cost of solvent removal?
  10.  What is the cost of reuse of the solvent?
  11.  WHat is the cost of HAP emissions?
  12. What is the depreciation for each option including building costs for H2 vs F2 occupancy?

Once these questions are answered you will be able to build a pro forma income statement. 

Revenue

  • Standard labor
  • Standard materials
  • Overhead

Gross margin

  • SGA
  • R&D

Net Margin

You can then hold SG&A and R&D constant for both techniques and account for the difference in depreciation to get to a net margin number.  

A cash flow statement can then be generated from net margin. One thing to note is that depreciation must be added back to net margin as it is a non-cash expense on the income statement.  

Cash flows are then added up for 5 consecutive periods (years) including the initial outlay of cash for startup working capital.  Those cash flows are then discounted at a discount rate (Weighted average cost of capital estimate at 13-17%).  

If you do this analysis, you will find that CO2 extraction will absolutely crush ethanol extraction in terms of net present value.  

Does it cost less to process hemp with Co2 compared with Ethanol?

Yes.
In fact the operating cost for CO2 extraction is dramatically less than the operating costs associated with ethanol.

Extraction with Ethanol is a process that is typically run at low temperatures. First the ethanol is cooled to below -20oC before it is introduced to the hemp. Cooling the ethanol reduces the amount of extracted chlorophyll and waxes. If you account for the energy required to chill the ethanol down to those low temperatures and then also evaporate after use, the energy bill for extracting ethanol is approximately 3-6x the cost of extracting with CO2. However, the energy cost is really not the key driver in the overall operating costs.
Ethanol extraction requires a significant amount of ethanol to be used per pound of hemp. In fact, about 1 to 1.5 gallons of ethanol must be used per pound of dry hemp in order to extract. Hemp is a very absorbent biomass material and the ethanol must fully saturate the hemp plant before any extraction can take place. For this reason a large volume of ethanol is needed to extract cbd from hemp.
The key cost driver or ethanol extraction is recovery of that solvent from the biomass. Even though many ethanol extraction equipment companies provide centrifuges and or presses to eliminate the amount of ethanol left over in the biomass, The best equipment will provide only a 90 to 95% recovery of the ethanol. This 5 to 10% loss in ethanol is a huge cost driver for extracting ethanol.
For example, suppose you wanted to process 1000 lb of hemp. You would need 1000 gallons of ethanol to start out at a cost of $16-33 per gallon for food grade ethanol for a total cost of $16,000 to $33,000. If you recovered 90% of the ethanol the ethanol loss would be $1,600 – $3,300 per 1000 lbs. Furthermore if you process 1000 pounds per day, this would be your daily loss.
In contrast, you will lose the equivalent of about $70 per day for CO2 extractions for the exact same process.
Besides energy and solvent usage, there are many other hidden costs related to extraction with ethanol including solvent reuse costs, insurance cost, increased facilities cost, and testing costs.

Is CO2 cheaper than ethanol?

Yes.
A pound of food grade ethanol when purchased in bulk is $4.71/lb at current price.
A pound of food grade CO2 when purchased in bulk is about $0.04/lb at current price.

What’s the purity of the CO2 used in CO2 extraction?

There are many grades of CO2 including industrial and food grade and medical grade. We typically use food grade but medical grade is also highly desirable. the specifications for each of these grades are published by the Compressed Gas Association or by your gas supplier.

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Meet Our CEO and Founder Dr. Jon Thompson, Ph.D

Dr. Jon Thompson

Dr. Thompson is a separations scientist, entrepreneur, and inventor. As a scientist, he has a strong technical background and industry experience in analytical instrumentation, in-vitro diagnostics, biotech, mining, and homeland security markets.

During his cannabis industry career, Dr. Thompson has earned a strong track record of winning and implementing medical cannabis licenses in well-regulated, medically-modeled states.

Dr. Thompson has assisted numerous companies to attain their goals in cannabis and hemp manufacturing, as well as market development, strategic marketing, and worldwide business-to-business alliance formation (including international markets).

Dr. Thompson has a track record of writing winning cannabis licenses and has implemented hundreds of start-up operations in Canada, Europe and throughout the US for various clients. Dr. Thompson received a Bachelor of Science degree in Biochemistry, Chemistry and a Doctor of Chemistry degree from the University of Minnesota.

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