Top Factors You Need to Consider Before Starting a Hemp Extraction Business
Thinking of starting an extraction business? Well, you’re not the first. With the implementation of the 2018 Farm Bill that opened the door for hemp processing, the extraction industry has seen a significant boom within the last several years. There are plenty of enthusiastic entrepreneurs in this industry that are eager to step into the world of hemp extraction and CBD production. That being said, there are a number of factors that must be taken into consideration before diving in headfirst.
Calculating Operational Costs
No matter how attractive a business opportunity may be, an accurate calculation of operating costs and necessary equipment costs is essential for starting up, building, and maintaining momentum in the hemp extraction industry. Realistic calculations of operating expenses can mean the difference between expanding or closing your doors at the initial six months.
As an example, picture any startup that decides to take the operation to the next level and start a full-fledged business. In order to do this, the startup calculates their own operating expenses and finds that operating costs to produce a single product is roughly $3 dollars. This is an essential piece of information that can be implemented in a number of calculations in any business startup including your margin, build a scale-up plan, or project potential project revenue.
As the cannabis industry develops, there will likely be a point in which large corporations will try their hand in the CBD industry. When these larger businesses join the market, smaller hemp extraction startups who are capable of offering their products at more competitive prices, and keep operating costs at a minimum will likely keep revenue flowing in an increasingly competitive industry.
Supercritical CO2 vs. Ethanol – Why Solvent Choice Matters
In the cannabis extraction industry, there are a number of very popular extraction methods depending on the scale and scope of the operation. What are likely two of the most prevalent extraction solvents are supercritical CO2 and ethanol, both of which have their benefits and detriments. Whatever those factors may be, choosing an extraction solvent is crucial in calculating the operating costs of your extraction startup:
Input Biomass Material
Whether extracting using CO2 or ethanol, this factor is likely the most difficult to calculate. Price changes can be the result of a variety of different factors including government regulations, the weather during growing cycles, and market conditions to name a few. Unless purchasing hemp or cannabis biomass outright, it is likely that you will pursue processing fees, partnerships, or split contracts with the grower of the material. This may be a difficult process, but it is unreliant on the extraction method.
No matter the extraction method, the end products are the same. This includes vaporizers, topicals, tinctures, edibles, and more. The product packaging will be the same, although what is on the label may differ slightly from the solvent of choice. In fact, it is more likely that companies using CO2 will label their products as such.
No matter the extraction method, analytical third-party testing is essential for product formulation. With either extraction process, this is necessary to ensure a safe product by testing for residual contaminants or solvents, and legal products by testing for THC levels in CBD products.
Any extraction equipment will require thorough maintenance and cleaning no matter the solvent chosen by the processor. This is an essential practice that ensures quality extraction practices and high-end products.
Benefits, wages, insurance, taxes, workman’s comp, training, and turnover are all necessary calculations in any business operation regardless of the extraction method chosen. But it is important to consider how many employees you will want to conduct the type of extraction equipment you utilize on your operation and the education level necessary for this.
CBD Extraction Utilities and Gear
Operating costs are widely varied based on the solvent and method used for extraction. Supercritical CO2 extraction is significantly more efficient than ethanol, requiring one cycle to achieve 99% efficiency. This implies that CO2 extraction absorbs power, using just 67 amps to operate an extraction cycle.
Both the extraction method and equipment used will have a cost impact on total production. Ethanol-based extraction equipment tends to be generally cheaper in immediate costs; however, supercritical equipment is often much more cost-effective in the long-term because of the drastically reduced processing cost of CO2.
The cost of the facility in which the processing will take place will greatly depend on the extraction method. Supercritical CO2 extraction machines often have a very small footprint and are easy to scale up because they require no specific infrastructure. On the other hand, ethanol extraction requires keeping considerable quantities of ethanol on hand. Because of its combustibility, special infrastructure and licensing are required in the form of a blast-proof, C1D1 storage center to legally accommodate the ethanol required for extraction.
CO2 is an extremely powerful and affordable solvent, with an estimated cost of about $1.32 to complete a cycle of extraction. Ethanol extraction, however, requires a massive supply of food-grade ethanol which points back to the need for blast-proof, C1D1 storage space. Running a full cycle of food-grade ethanol extraction will cost roughly $83.15 in each extraction cycle.
Both extraction approaches may require proper disposal of raffinate and fats and waxes in the dewaxing process to remain compliant with regulations. Nevertheless, you need to take into account the extra (high) costs for ethanol recycling/waste elimination. While many new investors are drawn to the comparatively low start-up costs of ethanol extraction, the expenses of facilities, utilities, selection of solvent, and licensing all lead up to ethanol having significantly higher operating costs. The greater cost of ethanol extraction is especially pronounced since you scale up.
If you are planning to start an extraction business in this very competitive field, it is crucial that you take these considerations in mind when planning and executing your operation. When it comes to upfront costs, many processors are tempted into implementing ethanolic extraction methods despite the fact that supercritical CO2 is far more profitable, safe, and efficient in the long term. So, what will you choose? Long term expenses, and adulterated products, or long-term profitability with the safest, effective hemp or cannabis products on the market?
Jon Thompson, PhD, is a separations scientist and CEO of extraktLAB, an accredited engineering company for the CBD, hemp and cannabis industries