The future for some US tobacco farmers may be in growing cannabis.
Altria, the US maker of Marlboro cigarettes, made a $1.8bn (€1.58bn) investment in Cronos last week amid pressure to find new growth avenues as US smoking rates decline.
The partnership, which includes the option for Altria to take majority control in the future, may see the firm’s US tobacco suppliers switch to cannabis if the drug is legalised, said Mike Gorenstein, chief executive of Toronto-based Cronos. While several states have legalised marijuana, it remains banned at the federal level.
“It’s certainly helpful that Altria already has a relationship with local contract farmers. We can help those farmers transition immediately into cannabis cultivation,” said Gorenstein.
Altria outsources tobacco production to “several thousand” farmers. “We work with thousands of tobacco farmers today and value those relationships,” said Altria’s Steven Callahan.
Cronos grows its own cannabis at a facility about 130km north of Toronto, but it’s more focused on genetics and intellectual property than cultivation, said Gorenstein.
Its shares surged 22% to a market value of around €2bn on the Altria deal, making it the fourth-biggest cannabis 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.”
Farmers in parts of the US tobacco belt such as Kentucky have already been switching to hemp, a variety of cannabis that has little or no psychoactive effects. That shift is expected to continue if the US farm bill is passed this month, fully legalising hemp and its extracts.
Cannabis could also be an alternative for US soybean farmers who have been hit by Chinese tariffs.
A US soybean farmer with an average 444-acre farm and yield of 49 bushels has lost an estimated $43,500 (€38,200) in income from the trade war.
That could be made up by the profit from 16kg of cannabis, which requires 300sq feet of planting area.
Cronos isn’t the only Canadian cannabis company that’s looking to reduce its reliance on cultivation in favour of higher-margin endeavors like intellectual property and brands.
CannTrust Holdings is in talks with farmers in the Niagara region of Ontario who want to switch crops to cannabis, CEO Peter Aceto said in an interview last month.
“We have spoken to farmers who are absolutely willing to make that switch,” he said.