Financial

The Complexity of Growing Cannabis

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Tapping into a new market

The legalisation of cannabis for private and commercial use in compliance with regulations has opened up a new and significant market for South Africa as one of the countries with the perfect climate for growing superior quality cannabis and stimulating job creation. However, growing export-quality cannabis comes with a long list of stringent requirements, especially when you are growing cannabis for medicinal use.

According to Neil Sanford, New Business Development Executive at Aon South Africa, growing cannabis on a commercial scale requires substantial initial capital outlay with an investment that is sizable enough to carry a new business through an 18-month offtake period, on average.

“While it is cheaper to produce on South African soil in comparison to other countries, you do need a license to grow cannabis on a commercial scale, with produce being used for medicinal purposes calling for stringent requirements under a cultivation licence from the South African Health Products Regulatory Authority,” says Neil.

The cannabis playbook in South Africa

  • The private cultivation, possession and use of cannabis by an adult for personal use was legalised in September 2018 by the Constitutional Court of South Africa.
  • Updated cannabis laws are on the cards such as the Cannabis for Private Purposes Bill that is currently under consideration.
  • Any commercial use of cannabis must be cultivated under a South African Health Products Regulatory Authority (SAHPRA) cultivation licence.
  • The primary cannabis chemicals used for medicinal purposes are delta-9-tetrahydrocannabinol (THC) and cannabidiol (CBD).

“Cannabis that is grown for medicinal purposes requires a structure to be built that the plants are housed in, which is climate controlled in a sterile environment, comparable to an ICU for plants,” explains Pierre du Preez, Head of Business Development and Client Transition at Aon South Africa. “Once the environment is set up and is compliant with regulations, mother plants are secured that are barcoded for reference and quality purposes. Cloned plants are made from the mother plants, that are meticulously tested and nurtured to produce a yield with a suitable percentage of CBD oil for medicinal use.”

There are many risk factors that need to be taken into account. “There are many potential pitfalls that a grower could be faced with throughout the cannabis growing process. This could take the form of a pest infestation that could compromise the crop, a fungus attacking the plants, something happening to the harvest in transit to the buyer, or even product liability or injury to people originating from the finalised product from a medicinal perspective,” explains Pierre.

“The risks are far-reaching and can be financially devastating in any of these events for the cannabis grower,” says Neil Sanford. “That is why it is important to speak to a specialised insurance broker and risk advisor in the field who has done their homework and can help you to make better decisions when it comes to your cannabis business.”

It is important to consider aspects such as:

  • Liabilities – aspects such as general premises, spread of fire, products, professional indemnity as well as D&O insurance.
  • Crop and greenhouse – To cover the growing crop from seed to bud, including the greenhouse.
  • Material damage – Property cover that includes electric fencing, buildings, computers and generators.
  • Business interruption – crop loss is a possibility, and you would need to consider a solution that will help you tide over to your next growing cycle, minimising business and profit loss.
  • Transit – to transport this high-value commodity, growers often make use of helicopters or cash in transit vehicles due to the risk of hijacking.

“Here the guidance and insights of a professional broker versed in the complexity of agricultural and cannabis risks will prove invaluable in striking the balance between affordability and being appropriately insured for a worst-case scenario.  As the cannabis trade and market continues to grow and diversify, so too will the risks that the industry is faced with.  A professional broker will prove invaluable in developing a suitable risk management strategy coupled with appropriate insurance tools so that South Africa’s burgeoning cannabis industry and growers are better prepared and equipped to leverage their full market potential,” Neil concludes.

 

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