Despite being in a legal state (WA), almost no processors do CO2 CBD extraction from biomass here on a contract basis. A lot of guys elect to just do it on a some kind of oil split (60/40 or even 50/50) and holders of large quantity of biomass don’t seem to have alternatives, so they take the oil split, or just sell the biomass outright to the processor at a low price, who is brokering the oil on the backend to a waiting buyer for a small margin.
My impression is it’s a risk-tolerance issue; most extractors don’t know what kind of yield they will get from different biomass harvests, so they are hesitant to buy it at a $ per % point of CBD rate, and just throw their hands up and say they’ll split whatever comes out of the machine, and not think too much about it.
This led us to start setting up our CO2 extraction facility to process the biomass we have from farmer partnerships, but our internal needs aren’t that huge, so our facility has some excess capacity. Rather than it sitting idle a large chunk of the time, we want to explore doing the contract extraction we were (unsuccessfully) looking for in the first place, but for others now. We don’t really want to do oil-splits, because we only want to use our own biomass for our own finished products, and being a broker looks like a PITA and a distraction.
So, my question is, what kind of rates do people think are fair, when factoring in that we already have the (partially-idle) equipment, and it would be aimed at small-batch contract extraction and winterization. I’ve heard quotes from other states of everything from $25-$85/lb for the CBD extraction, and then a separate rate for winterization. I want to charge enough to cover our costs and keep things moving when not extracting for our own needs, but not price outside of the reach of the small boutique farmer/producer trying to get their crop reduced to oil before they sell it. Any input/advice/warnings/critiques/insults/examples are greatly appreciated.
The accurate but unhelpful answer is that your (fair?) service is worth what the market is willing to pay you for that service. I think that even with a CO2 operation you should be able to make money at all but the lowest of those per lb rates. The rest is up to your local market. If you’re already operating, you should be able to determine to a pretty accurate level what your costs are. If you can’t do that, stop here, and go figure your shit out. If you don’t know your costs you can’t know if you’re making or losing money.
I’d suggest you price yourself high enough that you’re making money but low enough that you’re running 100% of the time, then slowly increase your rates until you are just barely able to keep running at around 100% of your desired capacity, or you’re happy with what you have/the customers you can serve.
You will likely find that 20% of your customers produce 80% of your revenue, and 20% produce 80% of your problems. With any luck, those two groups won’t overlap too much and you can safely fire those customers in the second group.
This comment makes me wonder how much analytics you do in house, or if you have a really, and I do mean really good lab you trust with your life?
If it matters any I’m in Colorado, doing ethanol extraction and if I send the same sample of biomass to 3 different labs I’ll get a variance of at least a couple %, sometimes more. So yeah, the more risk averse among us are probably better off waiting until we see a total crude number rather than risk capital and labor hoping that what the labs COA was for that 18 wheeler worth of hemp flower actually matches up with the average CBD content across all those supersacks.
I’d also suggest that the lack of or limits to the amount of $/lb contract extraction out there is probably because extractors aren’t the only ones who are capital constrained and trying to expand their startup businesses.
In more mature agricultural commodities, the farmer usually isn’t putting up their own capital to turn their corn or barley harvest into neutral spirits or whiskey for later resale. For that matter, there’s a wide range of distilleries that can transform harvest into liquor, without prior interaction, if you were a farmer seeking out a distillery to change your harvest into booze how would you know whether you’ve picked a high end one (Lagavulin, Stranahans, etc) or one of the plastic bottle, bottom shelf crap distilleries? In more mature markets, we know whats considered “good” because their reputation precedes them, in a less mature market those reputations are still being built and often fragile.
You make some good points, and we’ve seen firsthand that variance in biomass testing from different labs, same source material.
We do have really good lab relations, which has certainly helped along the way, but this puts us in a position to control our supply chain a bit more, while cutting COGS down significantly. We’ve sold CBD tinctures for years, blending from other vetted sources, the hope is bringing the CO2 extraction in-house just gives us more control over our processes, and any tolling work we do “on the side” is just gravy. It doesn’t need to be particularly profitable for us as a stand-alone extraction business, we are already our own most profitable customer, so that justified the capital expenditure up-front.
As you said, in more mature ag industries, these issues are solved to the point of almost being commoditized, but right now, its Wild Wild West in Washington when it comes to brand new hemp farms coming online all at once, few futures contracts in place, and no existing infrastructure for toll CO2 processing. IMHO there is a “gap” that we think we can fill, while serving our own production needs. It helps that electricity is cheaper here, since that is turning out to be a bigger cost than expected, and we aren’t going to toll as a charity, but I think serving today’s “small-batch” clients needing CO2 extraction that don’t want to dump 6-figures into equipment, leads to important relationships as they grow larger in the future. If our costing model can get us under $20/lb marginal costs to run batches for others, I think we’d be able to pick and choose clients to fit around our equipment’s in-house downtime. The devil is in the details though, and we have lots to learn about optimizing yields before we start tolling for others at a flat-rate per pound.
