CBD Surge Puts Pressure on Cultivation Supplies

DENVER, May 28, 2019 /PRNewswire/ -- Growing demand for CBD is increasing pressure on companies that provide key cultivation equipment and industry supplies.

As part of its commitment to build a large and well-supplied sales channel, hydroponic supplier Sugarmade Inc. (OTC:SGMD) (SGMD Profile) is in the process of making acquisition of companies that supply the hemp industry. An increasing need for supplies is coming from companies such as Canopy Growth Corporation (NYSE:CGC) (TSX:WEED), a major cultivator and processor making moves on the CBD drinks and well-being markets. Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON) has entered into a supply agreement with another provider to ensure the materials it needs for its products. Global efforts by companies such as New Age Beverages Corporation (NASDAQ:NBEV) and Aphria (NYSE:APHA) (TSX:APHA) may further strain U.S. supply chains, due to greater cultivation restrictions in other parts of the world.

• Many hemp growers use hydroponic techniques for indoor propagation.
• These techniques allow greater control over genetics and produce higher quality plants.
• The extraordinary rise in the North American cannabis sector is creating unprecedented demand.
• Suppliers are responding with growth and mergers.

To view an infographic of this editorial, click here.

CBD Popularity Pushes Agricultural Supply and Demand

The popularity of CBD is creating new trends in the agricultural supply sector. Thanks to legal changes in Canada and the United States, farmers and agricultural companies are rushing to increase production of hemp and other CBD-bearing plants. For some, this involves a shift from growing other crops to hemp, as struggling farmers chase the profits promised by the sector. For others, it means expanding existing hemp production to make the most of the staggering rise in demand.

This concentrated movement is fueling demand for equipment, in particular the specialist equipment used for indoor growing. The agricultural supplies industry faces the possibility of real shortages, and companies that act to solve that problem by meeting the need could seize upon a chance to make this moment work for them.

Hydroponic Agriculture — Is a Supply Shortage Looming?

Growing hemp is a sophisticated business. Aside from the legal, licensing and security issues surrounding the process, growers need specialist equipment and seeds or clones from which to grow crops. It's on the equipment side that companies such as Sugarmade Inc. (OTC:SGMD) are getting involved.

Sugarmade has moved into hemp equipment from another support sector — restaurant supplies and packaging. As with its more recent work, the company didn't make its mark in the restaurant world by providing products directly to customers, but rather by providing businesses with the materials they needed to get their products out into the world. It may not be as glamorous or high profile as producing the end product itself, but the supporting the backend of the business is vital to keeping those industries going.

With the dramatic expansion of interest in CBD over the past few years, Sugarmade has taken the opportunity to diversify its work. Still focused on growth through brand expansion and acquisition, the company is now making those expansion and acquisition moves in the Hemp sector, where it provides cultivation equipment and supplies.

There are two approaches to growing hemp: outdoor cultivation using soil and indoor cultivation using hydroponic equipment. The choice often means the difference between quantity and quality of plants, with the latter increasingly dominant because of the improved reliability of supplies.

Providers of hydroponic equipment such as Sugarmade have therefore seen a surge in business from hemp growers. As cultivators look to increase their hemp harvest, they also need to increase the size and effectiveness of their growing spaces, and that means a higher demand for equipment.

The Benefits of Hydroponics

Hydroponics is a catch-all term for a number of indoor growing techniques. Sometimes the plants are grown in an inert layer that substitutes for soil, providing something for the roots to grow through. In other approaches, such as deep-water culture and nutrient-film techniques, plants that would naturally grow in soil are instead grown in liquid settings, with their roots floating free. Aeroponics goes a step beyond this, with the roots exposed and fed by sprays of artificial mist.

What each of these approaches have in common is that food for the crop is provided in the form of nutrient solutions direct available to the plants' roots, instead of those plants having to take nutrition from the soil. This technique gives growers more control over what goes into their plants. Because hydroponic cultivating takes place indoors, farmers also gain greater control over the conditions in which the plants live, including temperatures and quantity and quality of light. Together, this allows for more consistent, higher quality growth, which can also be tailored to increase the quantity of CBD in a plant. It's that quality and consistency that drives demand for the products offered by companies such as Sugarmade.

Sugarmade provides a wide range of products. These include equipment needed for setup, nutrients used to feed the plants, lighting systems and tools for testing the quality of the environment, which are essential to getting the desired results. The surge in demand caused by rising interest in CBD has put serious pressure on hydroponic suppliers. There have been reports of extensive back ordering and customers having to wait for supplies to come in. In a fast-growing industry where new or expanding cultivators are rushing to establish their positions, that could become a serious problem.

So what are supply companies doing to prevent an equipment shortage?

Ensuring Flow of Hydroponic Supplies

It might sound obvious, but one of the answers is larger businesses. Companies such as Sugarmade are dramatically expanding their operations, thus seeing an increased level of power over their supply chains and the capacity to both stock and sell greater volumes of agricultural equipment. The efficiencies and reach of larger companies, along with their financial capacity to order supplies in larger volumes, will invigorate the hydroponic supply chain and ensure that growers' needs are met.

To support this goal, companies have been undertaking mergers and acquisitions. Sugarmade has made two such moves — and the company isn't stopping there. As CEO Jimmy Chan said, "Sugarmade is expecting to realize exceptional revenue growth this year from all of our hydroponic-related market sectors. . . . We continue to seek additional acquisitions to further boost our already-expected robust revenue growth rate."

Scale brings advantages beyond efficiency. Larger companies can provide a wider range of products, and so cater to the needs of cultivators trying out different hydroponic techniques. This supports innovation in hemp cultivation, as equipment from a single supplier can be used to experiment with best practices, from inert beds and water flows to aeroponics. Variety of resources also allows growers to experiment with their nutrient mix, thus obtaining the best possible results from their plants.

By providing a large supply base and a wide range of products, Sugarmade is helping to tackle equipment shortages and get hemp growers up and running.

Relying on Hydroponics

Hydroponics are now feeding into a huge sector growing hemp and other CBD-bearing plants.

One of the biggest companies in the space is Canopy Growth Corporation (NYSE:CGC) (TSX:WEED). Already a major player, the company's purchasing power has been further expanded over the past two years by billions in investment from drinks giant Constellation Brands. This is seen as part of a wider trend of companies looking to produce CBD drinks, which could create yet another surge in demand for hemp and the equipment to cultivate it. Canopy Growth is currently pushing forward with a multifaceted hemp and CBD strategy and, as part of that focus, has acquired skincare and well-being company This Works.

The equipment needed by the CBD industry isn't just about agriculture. The founding of a new R&D facility by Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON) appears to be good news for companies equipping biotech researchers. In addition, Cronos has also entered a supply agreement to ensure a steady flow of concentrates needed for its products, ahead of changes in rules on foodstuffs that will expand the market in Canada later this year.

While much attention is on North America, New Age Beverages Corporation (NASDAQ:NBEV) announced in April its push to become a global brand. Selling CBD products including oils, creams and lotions, as well as its specialist beverages, the company is targeting an international customer base increasingly interested in the potential of CBD. Only three years old, New Age Beverages is already making a splash with its vibrant brand and growing product range.

Aphria (NYSE:APHA) (TSX:APHA) is also expanding globally, with the introduction of CannRelief, a CBD product line targeting Germany. The emergence of a European market is likely to increase demand for CBD from North America, at least in the short term, as many European countries have not yet seen legal changes to ease the production of CBD.

With CBD demand growing around the world, demand for cultivation supplies is also increasing. Companies that put in the work to expand their supply channels may establish profitable ongoing relationships with a new generation of hemp cultivators.

For more information about Sugarmade, please visit Sugarmade Inc. (OTC:SGMD).

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