For some tobacco farmers, the future may be in cannabis.
Altria Group Inc., the U.S. maker of Marlboro cigarettes, made a $1.8bn investment in Cronos Group Inc. on Friday amid pressure to find new growth avenues as U.S. smoking rates decline.
The partnership, which includes the option for Altria to take majority control in the future, may see the firm’s U.S. tobacco suppliers switch to cannabis if the drug is legalized, said Mike Gorenstein, chief executive officer of Toronto-based Cronos. While several states have legalized marijuana, it remains banned at the federal level.
“It’s certainly helpful that Altria already has a relationship with local contract farmers,” Gorenstein said in a phone interview Friday. “We can help those farmers transition immediately into cannabis cultivation.”
Altria outsources tobacco production to “several thousand” farmers, according to the company’s website.
Focused on Genetics
“We work with thousands of tobacco farmers today and value those relationships,” said Altria spokesman Steven Callahan. “I can’t speculate on future decisions they may make.”
Cronos grows its own cannabis at a facility about 130 kilometers (80 miles) north of Toronto but it’s more focused on genetics and intellectual property than cultivation, Gorenstein said on a conference call with analysts Friday. Its shares surged 22 percent to a market value of C$3bn ($2.3bn) on the Altria deal, making it the fourth-biggest pot company.
“It’s worth noting that Altria does not grow their own tobacco,” he said. “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 Monday.
Farmers in parts of the U.S. 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 U.S. farm bill is passed this month, fully legalizing hemp and its extracts.
Cannabis could also be an alternative for U.S. soybean farmers who have been hit by Chinese tariffs, Bloomberg Intelligence analyst Alvin Tai said in a Dec. 4 report. A U.S. soybean farmer with an average 444-acre farm and yield of 49 bushels has lost an estimated $43,500 in income from the trade war. That could be made up by the profit from 16 kilograms of cannabis, which requires 300 square feet of planting area, he added.
Cronos isn’t the only Canadian pot company that’s looking to reduce its reliance on cultivation in favor of higher-margin endeavors like intellectual property and brands. CannTrust Holdings Inc. is in talks with farmers in the Niagara region of Ontario who want to switch crops to cannabis, CEO 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 to below 30 cents a gram from its current level of 83 cents a gram. That would make it one of the lowest cost producers in the Canadian pot industry.
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