Keith Coursin’s customers knew it before he did. The growing legal marijuana industry is a big business opportunity for Germantown-based Desert Aire.
The manufacturer of dehumidifiers is an expert in dealing with moisture in indoor spaces. As more states and countries make marijuana legal for medical and recreational purposes, grow operations are changing from a few plants hidden in a basement or closet to professionalized operations with a need to control costs and produce a consistent product.
As the engineers and contractors Desert Aire worked with became involved in the construction of new cannabis operations, those customers turned to Desert Aire. One of the company’s strengths is determining the right size equipment to use for a given space.
“It was more of our customer base in the United States and Canada seeking us out rather than us being so brilliant that we identified this marketplace,” said Coursin, president of Desert Aire.
A number of companies are seeing the opportunities to cash in on the burgeoning new industry. The Canadian subsidiary of MillerCoors parent company Molson Coors Brewing Co., for example, announced a joint venture with cannabis producer The Hydropothecary Corp. to explore non-alcoholic, cannabis-infused beverages for sale in Canada, where regulators are expected to approve edible marijuana products next year. Molson Coors had previously highlighted shifts in discretionary income caused by the emergence of legal cannabis as a potential risk to its business.
New York-based Constellation Brands, which produces alcoholic beverages including Corona beer, Robert Mondavi wine and Svedka vodka, recently made a roughly $4 billion investment in Canadian cannabis company Canopy Growth Corp.
Constellation estimates that in 15 years the retail sales market for medical and recreational marijuana will be around $100 billion in the U.S., $11 billion in Canada and $120 billion in the rest of the world.
Closer to home, Milwaukee-based industrial automation firm Rockwell Automation Inc. landed work with Burlington, Canada-based medicinal cannabis company Maricann Group Inc. in 2017. Maricann is in the process of expanding its production facility and plans to use Rockwell’s hardware and software for everything from process control functions to building automation and material handling.
Legality of marijuana in the U.S.
Maricann expects a 65 to 75 percent efficiency improvement by using an automated system to stage plants for harvesting instead of having employees retrieve each plant.
Saukville-based Pope Scientific Inc., which makes distillation and evaporation equipment for a variety of industries, has also seen business grow because of the budding cannabis industry. The company has gone as far as creating a separate website to address the specific questions and concerns of potential customers from the cannabis market.
Sheboygan-based iHemp Alliance Medical LLC is seeking to raise $12 million to build a nearly 50,000-square-foot industrial hemp growhouse and laboratory, according to an SEC filing earlier this year.
Desert Aire first got involved in the cannabis industry in late 2015. The company spent six to eight months researching how best to size the equipment to the room, while also accounting for things like room temperature and moisture levels. It wasn’t until 2017 that Coursin and his team felt like they had a model they could trust.
The result is a more than 50 percent increase in sales for the company, according to Coursin, who declined to share specific revenue figures.
While his friends at chamber of commerce meetings will give him a hard time for his newfound industry, Coursin said there is also interest among other businesses looking for similar opportunities.
“I think the business community is fascinated by it,” he said.
Coursin never thought he would find himself in the pot business and the company debated internally if customers would take issue with Desert Aire’s support for the industry.
“The only complaint we’ve had is our lead times have gone out too far,” he said.
Legal weed is creating an opportunity for businesses like Desert Aire as production that was hidden from view is now out in the open and being professionalized. Coursin said his early visits to grow operations made clear to him just how many square feet grow operations occupy. Lots of space means lots of energy is required to maintain the proper conditions.
Of course, plenty of people see opportunity in the cannabis industry. The first few states to legalize it in some way saw a rush of people interested in production. Things are complicated, however, by federal regulations that limit the number of banks willing to do business with cannabis producers. Banks are allowed to do business with producers, but they are also required to file “suspicious activity reports” if they believe funds in a transaction are related to illegal activity, including money laundering.
“Imagine if you were a bank compliance officer, fearful of potential fines and criminal charges for failing to file, and looking over at Attorney General Jeff Sessions,” Aaron Klein, policy director for the Brookings Center on Regulation and Markets, wrote in an April 2018 report. “Even if there is no logical reason to continually dump paperwork and filings in the government’s lap, it may be the rational thing to do.”
A 2013 memo from the Obama administration Justice Department indicated the agency would not enforce the federal prohibition in states that legalized the drug and had enforcement systems in place. Sessions rescinded that memo early this year, leaving it to individual U.S. attorneys to make decisions on which marijuana crimes to prosecute.
In Illinois, Bank of Springfield, a main bank for the state’s medical marijuana industry, decided to close cannabis companies’ accounts after the reversal, according to a Chicago Tribune report.
The number of banks and credit unions doing business with the marijuana industry, however, has increased – up from 340 in January 2017 to 441 in June 2018 – but the number of suspicious activity reports has grown even faster. According to data from the Treasury Department’s Financial Crimes Enforcement Network, about 42 percent of the 57,801 suspicious activity reports since 2014 were made from June 2017 to June 2018. Out of all the reports, about 70 percent included a designation suggesting the bank believed the operation was complying with state laws.
With challenges in getting bank financing, those interested in marijuana production have to find other investment sources for their building and operating costs before moving ahead.
“The early people rushing to get into it took a lot of shortcuts,” Coursin said, adding people who grew six plants in their basement often thought they could manage a grow operation with 600 plants. “It didn’t scale up.”
Desert Aire eventually developed a questionnaire for potential customers after realizing many producers did not have a firm grasp on their operations. The company often has clients go through the form five times to make sure both sides have a solid understanding of what equipment is necessary for the specific operation.
He added it has gotten easier to work with producers as more have professionalized their operations. More and better suppliers also means more supply, which has started to push the price of legal weed down. In Colorado, for example, the average price fell by as much as 62 percent from 2014 through 2017, according to the Colorado Department of Revenue. For consumers, that means lower prices, but for producers, it means tighter margins and a need to improve even more.
“If you’re not a lean, mean manufacturing machine, your costs are higher than what the market is buying it at,” Coursin said.
Those price changes have come without many businesses getting involved because there are still risks to the industry, particularly in the U.S., where the drug remains illegal under federal law.
“There are a number of companies, major companies, who are eyeing this marketplace but don’t want to get in because it’s not federally regulated,” Coursin said.
Marijuana’s federal status in the U.S. complicates things like banking and taxation, but Coursin said sales in Canada follow a more traditional business approach because it’s nationally regulated. He added that in the U.S., there is always at least a small worry the federal government could come in and shut everything down.
In a Marquette University Law School poll taken in August, 61 percent of surveyed registered voters in Wisconsin agreed with the view that marijuana should be fully legalized and regulated like alcohol, compared to 36 percent who disagreed.
Support for legalization was strongest among those ages 18 to 29 and those who consider themselves very liberal, at 81 and 90 percent, respectively. Just 27 percent of those with “very conservative” views supported legalization. Support was strong among Democrats at 78 percent, although 43 percent of Republicans surveyed did support legalization.
Those findings match national results from a Pew Research Center survey released in January that found 61 percent of Americans supported legalizing marijuana, nearly double the 31 percent support found in 2000. The more recent survey also found wide gaps in support based on age and political affiliation.
Wisconsin is in the minority of states when it comes to legalizing marijuana for medical purposes, as it is not among the 31 states and the District of Columbia that have made the jump to legalize medical marijuana. Nine states and the District of Columbia have approved adult recreational use, according to the National Conference of State Legislatures.
Legalizing marijuana was among the issues Democratic candidates for Wisconsin governor ran on in the party’s primary. A number of candidates said they supported full legalization; the party’s nominee, superintendent of public instruction Tony Evers, says he supports legalizing medical use and holding a statewide referendum on recreational use.
“Public opinion on legalizing recreational marijuana has shifted drastically over the last decade, so it’s important to me that everyone has the opportunity to be heard,” Evers said in a statement. “If Wisconsinites believe we should be legalizing recreational marijuana, then I would support a bill making it to my desk as governor.”
Gov. Scott Walker, meanwhile, opposes efforts to legalize marijuana. His campaign pointed to law enforcement professionals considering it a gateway to other drugs and argued states should not encourage drug use with opioid addiction on the rise.
Some states – including Illinois, Pennsylvania and New York – have expanded medical marijuana to allow it as a substitute for opioid prescriptions.
“Scott Walker is committed to finding new ways to lift regulation and create a more prosperous business environment in Wisconsin,” said Austin Altenburg, a spokesman for Walker’s campaign. “In legalizing (industrial) hemp farming and allowing families to use cannabidiol oil to treat health problems, the governor is proving that he is dedicated to ensuring that there is a balance between maintaining the health and wellness of the people of Wisconsin, while also continuing to make Wisconsin a leader in new industries.”
Whether marijuana policy becomes a major issue in the fall campaign or not, many voters will have a chance to weigh in on the issue in November. Sixteen counties and the city of Waukesha, a group that represents more than half the state’s population, will have some version of advisory referendum asking residents for their views on marijuana legalization.
Wisconsin has expanded its laws to include the production of industrial hemp, which has a variety of applications and comes from the same genus as the plants used for marijuana. The plants must contain no more than 0.3 percent tetrahydrocannabinol, or THC, the psychoactive ingredient in marijuana. The state has also allowed the use of cannabidiol, or CBD oil, which can have medical benefits without the effects of THC.
Wisconsin lawmakers initially approved use of CBD oil in 2013 under limited circumstances for those with seizure disorders. In 2017, the allowable uses were expanded to certain medical conditions with a certification from a doctor.
Also in 2017, lawmakers approved the creation of a pilot program for industrial hemp production; the 2014 federal Farm Bill allowed for such programs. The Department of Agriculture, Trade and Consumer Protection inspects plants grown under the program.
In early May, Wisconsin Attorney General Brad Schimel issued a statement declaring that while farmers could grow industrial hemp, it was still illegal to use those plants to produce CBD oil. After lawmakers and farmers took issue with Schimel’s stance, he issued a second statement clarifying that products produced from the pilot program, including CBD oil, would be considered lawful.
“Although our legislature has chosen to authorize industrial hemp pilot projects and products made from that hemp, it is still very important to remind Wisconsin consumers that certain products may threaten their health or could be mislabeled,” Schimel’s statement said. He advised law enforcement not to prosecute those producing products from the pilot program, but added rogue producers and retailers would still be subject to prosecution.
The state Department of Agriculture, Trade and Consumer Protection ultimately issued 245 grower licenses and 99 processor licenses this year as part of the industrial hemp program. About 135 growers reported actually planting crops this year, for a total of 1,643 field acres and 22 greenhouse acres.
The Michael Fields Agricultural Institute, a nonprofit doing research, policy and education work around sustainable agriculture and conservation, is one of the participants in the pilot program.
“It’s got all sorts of uses, from the fiber to the seed to the CBD oil,” said Jim Stute, research director for the East Troy nonprofit.
Wisconsin was a leader in industrial hemp production around World War II and the state’s climate is well-suited for growing the crop, Stute said, but he cautioned that it is also not the miracle crop some proponents claim it to be. He said once the plant germinates, it does not do a lot of active growing immediately, giving weeds a chance to take over. Since it’s a new crop, there is a lack of herbicides available for use in the U.S., adding to the challenge.
Hemp is also a heavy user of nitrogen, which means farmers have to add fertilizer to their fields to maintain proper nutrient levels, a major environmental concern.
Despite the challenges, Stute said there are opportunities. His research is focused on its potential as a cover crop and in seed production. With organic production, Stute said hemp could yield 2,000 pounds of seed per acre. At $1 per pound, the crop represents a potential boost to farmers struggling with a challenging agricultural economy.
“I think the potential is high,” Stute said, although he added there is more work to do to establish a functioning industry. “It’s in its infancy and we don’t have the infrastructure to deal with it, either the fiber or the seed.”
“It’s one of those things; time will tell,” he said.
Tom Ducharme, chief executive officer of iHemp, the company working to raise $12 million for its Sheboygan growhouse, said his interest in industrial hemp comes from learning about Wisconsin’s legacy of growing and processing the plant in the first half of the 20th century. Today, he feels his company has developed a strain of industrial hemp capable of producing high levels of cannabidiol with very low levels of THC.
“It’s a really, really good genetic plant,” he said.
Ducharme and his team see plenty of potential applications for hemp in medical, nutraceutical and industrial applications. He’s also launching a line of products under the name RX Hemp Medical this fall.
One of the major challenges facing those looking to grow hemp is its association with marijuana. That creates reputational risk that some investors and potential partners are concerned with, Ducharme said.
“I think a lot of that will ultimately go away,” he said, noting many media reports regarding the 2018 Farm Bill suggest industrial hemp could be removed from federal drug schedules.