When the maker of Marlboro cigarettes, made a $1.8 billion investment in Cronos Group Inc. it was a clear sign to tobacco farmers that marijuana is on the rise.
Altria, the parent company of Marlboro has the option to take majority control of Cronos Group in the future. “We will see Marlboro’s U.S. tobacco suppliers switch to cannabis if the drug is legalized,” said Mike Gorenstein, chief executive officer of Toronto-based Cronos. While several states have legalized marijuana, it remains banned at the federal level.
“It’s certainly helpful that Altria already has a relationship with local contract farmers,” Gorenstein said in a phone interview Friday. “We can help those farmers transition immediately into cannabis cultivation.”
“We work with thousands of tobacco farmers today and value those relationships,” said Altria spokesman Steven Callahan. “I can’t speculate on future decisions they may make.”
Cronos grows its own cannabis at a facility about 130 kilometers (80 miles) north of Toronto but it’s more focused on genetics and intellectual property than cultivation, Gorenstein said on a conference call with analysts Friday. Its shares surged 22 percent to a market value of C$3 billion ($2.3 billion) on the Altria deal, making it the fourth-biggest pot company.
“It’s worth noting that Altria does not grow their own tobacco,” he said. “We think that model of growing your own plants is very difficult to scale and to execute well.”
The investment by Altria “propels Cronos in the top two of global cannabis companies in terms of financial resources and execution capabilities,” GMP Securities analyst Martin Landry said in a note published Monday.
Farmers in parts of the U.S. tobacco belt such as Kentucky have already been making the switch to marijuana. That shift is expected to continue in states where marijuana is legalized if the U.S. farm bill is passed this month.
Cannabis could also be an alternative for U.S. soybean farmers who have been hit by Chinese tariffs, Bloomberg Intelligence analyst Alvin Tai said in a Dec. 4 report. A U.S. soybean farmer with an average 444-acre farm and yield of 49 bushels has lost an estimated $43,500 in income from the trade war. That could be made up by the profit from 16 kilograms of cannabis, which requires 300 square feet of planting area, he added.
Cronos isn’t the only Canadian pot company that’s looking to reduce its reliance on cultivation in favor of higher-margin endeavors like intellectual property and brands. CannTrust Holdings