Thinking of starting an extraction business? You’re not alone. 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.
However ripe a business opportunity extraction may be, building and maintaining momentum must involve a firm grasp and accurate calculation of operating costs. 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.
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.
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 and supercritical CO2 extraction. When formulating your operating costs, 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.
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.
Both extraction methods require testing by independent laboratories to ensure THC level compliance in CBD oil, and to ensure purity and consistency of product.
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.
Supercritical CO2 and ethanol extraction both require the cleaning and maintenance of extraction machines and all participatory equipment, Buchner funnels, etc.
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.
Costs vary greatly based on extraction method. 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. However, not all CO2 extractors are frugal in their power consumption. Our extraktLAB 140 model optimizes output and minimizes cost.
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.
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.
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.
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!