How Secure Is Your Off-take?

HOW SECURE IS YOUR OFF-TAKE?

Photo Credit: Cristina Gottardi

Bryan Verpoort

When applying for a SAHPRA License, SAHPRA requires the applicant to demonstrate their ability to “produce a quality and safe product for a specific market per off-take agreements”.

While this makes perfect sense, the dynamics of the commercial cannabis market are changing rapidly so is the legislation surrounding the importation of product for a specific market.

So while a cultivator may have an “in principle” or “subject to” offtake agreement to secure their license, the reality is that the market may have moved from the time of the issuing of the license to the harvesting of their first commercial crop.

Using an internal risks / external risks identification methodology; a Cultivator can identify risks that are manageable and within their sphere of control (internal risks) and those that are beyond their control (external risks).

Internal Risks

Internal risks are typically relating to the ongoing operation of the business, for example: (i) natural perils such as fire or flood, (ii) business continuity following a major incident, (iii) loss of key staff or employees, (iv) power cuts and (v) lack of water. These risks can be managed through contingency planning and traditional insurance.

External Risks

These risks can have significant and detrimental impact on a Cultivator (or any other business in the cannabis commercial value chain). A “force majeure” immediately springs to mind (e.g. lockdown following the COV-19 pandemic) another example is a major price shock or movement (e.g. CBD oils market price collapse).

However there are even greater risks which are largely regulatory – a change in the local cannabis regulations or foreign regulators changing import license requirements for the off-taker.

A change in the import requirements for cannabis and related products could render your offtake agreement null and void.

Future Proof Your Business

So how do you ensure that your business survives a market shock or regulatory change or both? Unfortunately there is no silver bullet - markets do move (rather quickly), so do country regulators wanting to protect local in-country growers.
The best course of action is to be prepared…

Reduce your cost of production to ensure a sustainable operational model. Can your business survive at a market price of $1.00/g?
Off-grid preparedness to ensure continuity
Quality of seeds – you need to choose specific strains and produce a product of consistent quality and yield (if you are growing medicinal >20% on a consistent basis)
Build your facility to meet with your off-takers regulatory requirements (GACP / CUMCS certified)
Grow for a specific target market and ensure you meet their standards

While providing day-to-day consulting and insurance services to clients, we see many SAHPRA certificates. Some certificates refer to GAP, GACP, EU-GMP equivalent compliance – while these are always good to have, they are not a license to export.

They merely meet local regulatory requirements in terms of local benchmarking and SOPs. The off-taker in the specific country needs to comply with their local regulatory requirements. For example, one of the latest requirements is product stability testing over a period of 6 months. This means that a product needs to be tested (CoA) once dried, cured & packaged and then again re-tested after 6 months to determine the stability of the product in terms of THC%, mold, weight and general deterioration of the plant matter. This has a significant impact of growers: a 6-month delay in much needed cash-flow!

New license applications should ensure that they have sufficient operational cash flow for at least 12 months (when considering seasonality and product testing). In addition, allowance should be made up-front for GACP / CUMCS compliance. Often cultivators say they will upgrade their facilities after the first grow, while this may have been a practical solution in the early years of cultivation (e.g. Lesotho) it is no longer an option as no off-taker is going to buy sub-standard flower and if they do it will be used for other purposes such as milling or THC biomass at a much lower price.

It is therefore critical to correctly scope your business. Bear in mind it is easier to scale your business once your operation is certified than to retrofit your propagation facilities.

Bryan Verpoort
Managing Director at Berkley Risk & Berkley Consult

Berkley provides Insurance and Consultancy services to licensed Cannabis growers in South Africa, Lesotho and Zimbabwe. For assistance in terms of insurance can off-takes please contact us at www.berkley-risk.com

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