PP 34 | Cannabis Processing Equipment

 

As more and more states legalize cannabis, business opportunities and demands also rise proportionately. The industry is in the phase of figuring out the best methods for processing cannabis and with what equipment. The Buying Assistant of Aaron Equipment Company, Andy Cohen, joins Tony Frischknecht to talk about what’s happening to their side of the fence which is equipment. Andy gives his insight on the flow of the cannabis market and why information is a powerful tool in this industry. He also touches on how the companies and banks behave when it comes to this business, and the big role processing equipment plays in whether you succeed or not.

Listen to the podcast here:

Processing Cannabis: Why Do We Buy New Equipment? With Andy Cohen

I’ve got with me, Andy Cohen. He is the Buying Assistant for Aaron Equipment Company. I met Andy at the MJBizCon Convention in December of this year. The reason why I have him on is there are only a few people that are working and building a company like he is. He is on the equipment buy and resale of all kinds of manufacturing equipment. Andy, I want to welcome you for being on. Thank you so much.

Thanks, Tony. It’s great to be here. I’m excited to have a talk with you about what’s going on over on my side of the fence.

First of all, I’d like to share with the people that I have Andy on because he’s got a valuable service that they’re providing. In no way whatsoever am I connected with Aaron Companies and their sales. This is valuable for the readers out there. I wanted to give that to everybody and my readers to make sure they understand that part of it. Andy, you’re out of Wood Dale, Illinois, correct?

Yes.

You’re in the big land of Chicago and everything’s happening so you’ve got to be seeing some huge moves happening?

There’s been a ton of movement on this industry. I’d like to talk a little bit about Aaron Equipment so people have a sense of who we are and what we do. Aaron Equipment is a used equipment dealer. We are the world’s largest stocking inventory dealer. We have been around for many years. It’s a family business of which I’m the fourth generation. When I came to work here, I was told by my superiors aka my boss and uncles, my dad and uncles to find an industry and make it my own. I chose cannabis because it’s an emerging market. There weren’t a lot of set players in it and I felt there was an opening for us to make some money.

The cannabis market flow is dependent on legislation. It might see some lows before it jumps up again as the market figures itself out. Click To Tweet

With that, we started attending shows where I met you. Since I saw you, we’ve created and established and sent live a used cannabis equipment marketplace where we are making services available for buying and selling of used equipment, consulting, financing and all that sort of stuff. Getting back to your original question about what I’ve been seeing is there’s been a lot of movement especially here in Chicago because of the legalization that occurred on January 1st. Chicago has a supply problem where there’s not enough product to go around. Illinois is giving out 40 new licenses on July 1st. That’s when companies will find out if they have the license to produce, grow and process cannabis in all forms and that’s when they can buy machinery so we’re gearing up for that.

That’s a common trend. It seems that everybody sells out first. It’s happened in so many states now it’s nothing new. It’s funny that the knee jerk reaction of what states do when it comes down that they’re releasing more licenses where it’s basically you’ve got this inflow of people that may or may not have ever been in a dispensary and they want to buy something. They go to the dispensary, they’ve got lines out the door, they want to be a part of history and they run out in three days.

There was no flower left on January 1st in Chicago. It’s unbelievable.

It happens in every new market. It’s funny. I would think that people would have gotten used to it by now. I guess that’s not the case and the other good thing is, in Illinois for the people that are building businesses there, that may have not gotten the license, they’re like, “I still have another opportunity to do so.” The other reason why I have you on is there’s been an interesting dip in the market, especially over the last months so I’m sure you’re starting to see potentially some of the asset sell-offs that are coming with some of the guys outside of Illinois. Especially, the guys that are connected with Canada with the restructuring that’s starting to happen up there and the slowdown of the economy. I’m sure you’re starting to see these assets. Are these guys reaching out to you? Are you finding them a little bit of both? How is that system working for Aaron Equipment?

I would say a lot of both. We do have excellent SEO plan in here that if someone’s looking to sell any equipment, but specifically cannabis equipment, we get a lot of inbound requests to sell equipment and we’ve seen that pickup. It’s interesting to see how the market is. The market now is not solid. This is how much this piece is worth. It’s still fluctuating and figuring itself out but one of the interesting things that we’ve seen is that people are a part of the shakeout with what you said with Canada and even in the US. There’s been a decent amount of shakeout people that started businesses that are now either going out of business or looking to get out. For that reason, there has been a flood of supply of machinery to the market. This has not only driven down used prices, but it’s also driven down new prices. We are often seeing people who want to sell their used equipment for more than a new one currently costs.

This is backward somewhat because they bought the top dollar at the top price.

PP 34 | Cannabis Processing Equipment

Cannabis Processing Equipment: A flood of supply of machinery to the market not only drives down the prices of used machines, but the new ones as well.

 

Also, something interesting that we’ve seen and I hope the people who are reading this that owns machinery may have heard this from an OEM. One of the common things we’ve heard from people looking to sell their equipment is the OEM, which by the way, for those who don’t know, OEM means Original Equipment Manufacturer, which is someone who manufactures equipment. Aaron Equipment has a division that makes equipment but it’s called Paul O. Abbé, but we are a dealer of used equipment in our core. These OEMs are telling their customers, this was a couple of years ago saying, “Our demand is so high right now that we don’t have any of this machine in stock. If you want to sell your machine eventually, you can sell it at below new because whoever wants to buy it can get it right away versus having to wait six months’ lead time for us.” With the drop in demand, prices and overall shake out of the market, there’s a lot of OEM that are sitting on inventory. That dramatically reduces the chance that someone’s going to buy a used one for close to new because they could pay for a new one and get it immediately and not wait.

What you’re saying is it used to be that way, but now it’s not. As an owner, you’ve got to adjust your expectations to what kind of cost you’re going to get recoup on this asset.

That’s not to say that the margin couldn’t go up or down or either way. Nobody can say for sure but adjusting expectations is something that I’ve been working on a lot when I speak with people who are looking to sell their equipment. At the end of the day, we are a used equipment dealer. We do want to make money. If we are going to lift something that is way overpriced, it can be extremely detrimental not only to that specific situation of not being able to make money off it. If a new customer, someone who’s never been to our website comes and they know their stuff and they see a used machine that’s being priced more than a new one, they’ll never come back to our site. They’ll be like, “These guys don’t know what they’re talking about. They’re out of their minds.” It’s something that we have to be careful about when we’re choosing which opportunities to take.

It sounds like you’re being cautious and it’s a good thing. It sounds like you find your place in the industry, like so many other companies. Being able to do that and navigate that, you guys have been in the used equipment industry for many plus years. How are you seeing this different from most other industries finding your way around? Is it unique in any way? Is it similar to your core business as it is now?

I would say that it is alike in several ways and unique in other ways. The things that are similar are the fluctuations. The good news for this industry is that a shakeout doesn’t mean a collapse. A perfect example of that would be ethanol, the production of ethanol gas for fuel. That industry ebbs and flows, according to legislation, like cannabis has. It’s become legal so it’s been going up. That’s a little bit of a different distinction of legislation. Ethanol usually with different parties of presidents like under Obama, there were huge subsidies for R&D projects production of ethanol as alternative fuel sources.

Since President Trump has been in office that has gone away and that’s not specific politically. It’s generally how the parties do their subsidies. During 2008, 2009 and 2010, we started to see a lot of people getting into the ethanol industry buying all this equipment. It was cheap, there were tax subsidies and once all the tax subsidies dried up and there was no market for it because the government wasn’t subsidizing it anymore, it disappeared and there’s a shakeout. It always comes back and that’s what cannabis is going to be like. There’s going to be this lull here before it jumps up again as the market figures itself out.

Companies are obviously not willing to shell out money for equipment that they may not be able to legally use yet. Click To Tweet

I would say the uniqueness of the cannabis industry is the people in it. Being my age at this business, I’m not the only one here besides one other person who’s under the age of 33. That gives you an idea of what people are like in companies that we deal with like manufacturing companies, chemical companies. Mostly an older crowd in much more business-appropriate and more formal. They expect others to be more formal. The nice thing about cannabis is everybody is here to figure out what’s going on. Everybody’s nice. I mentioned when I saw you at the show, the conversations that I had with customers were unlike any other show I’ve ever been to. Number one is because people didn’t even consider the fact that used equipment might be out there.

We had people walk by our booth, read our banner and go, “Wait for a second,” and they walk up and wait to use the equipment, “Do you have any of this?” I’d say, “Yes, we have a few of these units.” They’d be like, “I’ve been going around at each OEMs booth and getting prices I’ve never thought about the idea of buying used.” That’s unique to the cannabis industry because it’s well-known throughout other industries such as chemical, pharmaceutical, food, cosmetics that used equipment is a viable avenue for production. That’s unique and again the type of people that are there. They’re more friendly and more open to helping each other out. I have not had any conversations with cannabis people yet where somebody is like, “Screw off, I’m busy,” which is something I’ve gotten often in the other industries.

That’s probably refreshing for you especially as a buying assistant. It is unique especially people that have been in the industry for a long time. We have known nothing but to buy new only because there hasn’t been an option to do otherwise. There’s been a small particular person buying these extraction machines, processing machines or packaging machines and these companies are finally opening their eyes to the amount of interest in the industry. That’s been happening over a couple of years but more so now and guys like you are like, “Now there’s a turnover of equipment. We can take advantage of this.” I want to point out the fact that these guys are still running their businesses as cash comes in, which is unlike 99% of the company out there. They either have a business loan of some sorts for their business. As a cannabis owner, it’s tough to have access to cheap money.

It’s interesting that you bring that up. I want to mention a little tidbit and it’s something that I’ve been noticing a lot. It’s unfortunate and I feel bad for a lot of these people that are in the situation. We see a lot of people from Canada but what you mentioned that shakeout is more advanced right now than the one in the US. A lot of these people actually did buy this equipment on loan money and not only did they borrowed out, but they borrowed at a significantly higher interest rate because of cannabis and whenever they took that loan. It’s still high-interest rates for cannabis business loans. Back then they were even higher. We’ve seen some people that have been paying 20% interest on loans. Not only do they come to me and telling me, “I paid $100,000 for the extraction system. I need to get $75,000 back for it.” I tell them, “Now, the market for that piece is at $40,000.” Hearing that is brutal. I mentioned this to you before the call, my father always says it’s like telling somebody their baby’s ugly. It’s hard to do and it’s unfortunate but that happens. I’ve seen that a little bit more in the cannabis industry than I’ve seen in any other industry that’s blossomed the way this one has. I’m not sure why that is.

Do these people get hostile with you when you talk with them about what’s actually going on? Do they want to listen to reason?

Some listen to reason but most people are reasonable. They understand and at the least, they say, “I hear you, I’m going to go another route. I’m going to list it somewhere else. I’m going to sell it somewhere else.” That’s always okay. There are a few people and the loud people stick out the most. It’s the vocal minority, but there are people who get upset and curse me out, yell at me or tell me I’m freaking crazy for asking that kind of price and they think they know it’s worth more. You have to take it on the chin because that’s part of the business. There have been a few cases where people have chewed me out and come back and been like, “You were right, I need to sell this.” It’s totally understandable why they’re so emotional, especially at the nascency of an industry. For instance, craft brewing, there are a lot of people that are in it because it’s their passion.

PP 34 | Cannabis Processing Equipment

Cannabis Processing Equipment: Cannabis customers that are calling looking to buy equipment are generally a little bit less informed.

 

When you mix passion with your work, there’s obviously a lot of emotion involved and that always doesn’t meld well but it’s understandable and we try to help people as much as they can. Sometimes they think that I’m not telling the truth and I’m only trying to get their equipment for less money. If that’s how they feel, that’s how they feel, but that’s not the case. That’s the main thing we do. Sometimes people call it and they’re like, “With this price, it’s so high, I can get a new one.” The first thing you say is, “We’re helping people sell their equipment. We’re trying to figure out the market as well.” The first question we ask, “What would you want to pay for it?” That is the market price. Businesses and sellers don’t set the market price. It’s what someone is willing to pay for it and that can change on a case by case basis.

It’s hard to stomach when you paid $1 million for and now only worth $500,000.

Sometimes it’s even less. We’re seeing $0.40 on the dollar now in some situations. The thing is, there is some good news. Most of what I’ve been talking about with pricing is related directly to extraction equipment. It’s the stuff that takes the cannabis plant and either you can do hemp or cannabis. One is for THC oil. One is for CBD oil. There’s a whole mix you can do. I won’t get into that but there’s other equipment such as tanks which are stainless steel tanks for those big round things that you see in plants around the world that are holding stuff.

They may have agitation which means they have internal mixers that are mixing whatever is in there around while it sits there. Tanks, reactors, pedals and reactors and pedals are tanks with specifications for pressurization. What happens inside is being done in a vacuum. It’s a little bit complicated. There are centrifuges, falling film evaporators, white film evaporators and also packaging equipment that can be sold into other industries. The only other industry that extraction equipment can be sold into would be fish oil, which there are not a lot of plants that do that. It’s not an in-demand industry. Also, perfume in botanicals and essential oils, anything where you’re pulling oil out of a plant. There is another industry to sell that extraction equipment to but it’s not nearly big enough to handle the influx of use equipment on the market now.

Which state are you guys seeing the biggest need for used equipment now?

The biggest use of the equipment would definitely be the entire state of Illinois. We were talking a lot of companies who want to buy equipment but they simply can’t pull the trigger yet because companies are not obviously willing to sell out a bunch of money for equipment that they may not be able to legally use yet. We see a lot of demand but it is delayed. It is basically unearned revenue. We are seeing a lot of demand for used equipment in Oregon, California and Washington, people who are looking to get in and people looking to get out. There are a lot of them on both sides. We are seeing a ton of interest from states that are doing hand processing. We have a company in Georgia that we’re doing business with and one in Kentucky and places where it’s neither recreationally or medically legal to smoke cannabis. Federally, in Canada, it is legal. That also plays in more to our core business as Aaron Equipment outside of cannabis.

Money in cannabis will be made in the processing side - taking raw materials, packaging, and selling them. Click To Tweet

We like to deal with higher ticket items as far as value goes and the margins are higher. Hemp versus the cannabis product industry, when I say cannabis products, it’s THC and THC oil or THC products. Cannabis is one part of the plant and you need a lot more hemp to produce the same amount of oil that you produce for THC. That requires bigger equipment and higher capacity, which is the stuff that we have in stock. I would say that the THC business is in its nascency and its infantile, so a lot of the equipment is low capacity in which we do have but we tend to help companies scale up and build. That’s what we want. We want to make a name for ourselves now so the next upswing, we’re there to help people fill out their equipment needs.

As an investor, anytime there is a downturn in the economy this allows for a lot of opportunities for the investor. With that said, where do you see the most opportunity in this industry as we sit? Is it in the extraction? Is it the farming side? Is it the processing of the plant side? Where would you feel that it makes the most sense now?

It’s the processing side and the taking of raw materials that others have created, making products and packaging them and selling them. That’s where the money will be made. I could be wrong. With harvesting, there’s been a significant drop in the price of hemp and the price it brings to the market.

In one season, it’s changed dramatically. Maybe 2/3 has changed in price depending on where you’re buying it.

That creates problems for people who did not forecast for it because if you have a budget and it’s based on getting X amount for your product and it goes down to 30% and you don’t prepare for it, it can put you out of business. Until the growing stabilizes, I’m not an expert in any way on that end of the business as far as the market for raw material. It seems to me from what we’re getting from the people who do it, it’s not doing great. Also, harvesting equipment, like grow lights, hydroponics and that sort of stuff has a low resale value. You’re almost better off buying a new one. It’s a difference of dollars, maybe tens of dollars, not even hundreds of dollars between new and used for that type of equipment.

I do think that processing is there. This shakeout going on right now is more of a roll-up in consolidation and once it becomes federally legal, which I do think is where it’s heading, that’s the situation and this is speaking from experience with other industries. What happens is there are the little guys, the passion projects and there are a few small guys that become a little bit bigger and there’s a shakeout. A few of those small guys get even bigger and drop out and there are a few big players. Once the big guys come in that would be like pharma companies, like Pfizer and DuPont and all those companies like that. Even in this situation, big tobacco companies may be getting into it as well because they have the infrastructure to produce these products. That will be the next shakeout but we’re about 5 to 10 years down the line from that. I do think that the processing is where it’s going to be. Owners and business entrepreneurs who are looking to get in that business need to take a hard look at being cost-effective and that’s where we come in because we sell used equipment that’s at half the price, at least, of what people are paying new.

What I like about that is you’re getting a better quality machine. You can go in and buy some of these machines for half the price because maybe you’re buying it from China or some other place in the world where they’re making the products cheaper. You also see it in the quality and the maintenance on the machines as you’re using them over the years or whatever. Being able to get something for half the price that’s twice as good of a machine is hard to beat. Things are on sale now and I’ve talked to a lot of different processors and the bottleneck is the processing now. We’ve got plenty of farmers and farmers have produced plenty of raw material to process. Now, it’s coming to these processors to do it. Is there the right equipment out there for these processors? Is it like enough to do this job well or are we still waiting for somebody to design and build some of the processing equipment that’s needed to make this a full-fledged industry?

That equipment is actually out there. There’s a lot of crossover of equipment that can be used in different industries. I would say, and I don’t mean this in a negative way, that cannabis customers that are calling and looking to buy equipment are generally a little bit less informed. They’re coming to us with, “I want to do this.” They may have looked at a machine and it may not be right for what they want and will direct them in the appropriate direction. They may even come to us and say, “We want to do this. We want to dry and freeze our cannabis. How do I do that? What machine do I do with that?” We can grow from there with ourselves and our experts and the machinery so they know what’s going on. We’ve got a couple of engineers on staff that works with people on specific issues.

The equipment is definitely out there. Most people that work at pharma companies or food and beverage and food and science companies like that. They’re chemical engineers and process engineers. They’ve had schooling in this type of work so they know exactly what they’re looking for and what they need. One of the things that we need to be better on and we need to work on how to do better is how to inform customers about what they need. If they don’t know what they need, how we can get them what they need and how we can understand better what they need and get them that information. That’s why on our used cannabis on marketplace website, we have an Ask the Experts tab and we have Canada advisors on there.

It’s a guy named Chris Newman, who I met at the shop as well. We put them up on our website so people can ask them questions if they have questions outside of equipment. We have a guy who works in Chicago on cannabis law, getting licenses and all that sort of stuff and David Ruskin from HMB Legal Counsel. Basically, we’re trying to help people as much as we can because we want to make everyone more informed. The more informed people are, the better business decisions they can make. If these people aren’t in business and this industry is gone, we don’t make money either so we are in the interest of keeping people along and helping them out.

Andy, where can people reach out to you if they want to either talk to you about some equipment that they’re looking for or they have some questions about, “I’ve got this to sell and I don’t know where to sell it to?” How can they reach out to you and talk to you?

Our website is www.AaronEquipment.com. There is a Used Cannabis Marketplace button to go to on there. You can search for us online cannabis equipment that will come up first. My email is Andy@AaronEquipment.com. Please feel free to reach out to me directly if that’s how you want to do it. You can go through our website to fill out a form if you have something to sell. If you’re looking to buy, you can look at everything that’s listed there and request some quotes. You guys can call me if you’d like. My direct line is (630) 238-7555. That’s pretty much the best way to reach me. If you’re looking to buy something, I am not a salesman. I’ll introduce you to one of our salesmen who helped you out from there. I’m also always looking to hear about the industry. If you’ve got somebody you want to talk about with me, even if you don’t have anything to sell it by, I’m happy to have a conversation and create a relationship. It’s always good to learn as much as you can from as many people as possible.

A big key to all this is information. We’ve got a lot of places and sources that we can get an influx of information. The internet is huge. The issue is what’s real and what’s not and deciding if that is the correct information. There are many different sources. Guys like you that are aware of the machinery aspect of what’s needed are extremely helpful. Thank you so much for doing that. I also want to ask the readers out there, if they’re interested in breaking down on some of the equipment, if they have comments or more questions on it, feel free to ask me. I can ask Andy or you go directly to asking Andy. Please go to PlantProblem.com and you can ask your questions and comments. Also, subscribe to Plant Problems. There’s a subscription area right there that you can tie into and you can also catch me on Facebook and LinkedIn. Andy, you’ve got a LinkedIn as well, correct?

Yes, I do.

You can reach Andy as well on LinkedIn. I want to thank everybody for reading out there and I can’t wait to share my next interview with you. I hope you are having a great day.

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About Andy Cohen

PP 34 | Cannabis Processing EquipmentAndy Cohen first joined Aaron Equipment Company as an intern in 2011 in the inventory department. Andy now is an assistant in the buying efforts.

His duties include assisting the buying efforts and sourcing of new equipment to purchase.

Before joining Aaron, Andy worked for a prominent logistics company as a carrier representative and also spent time as a manager at a short term rental company. Andy graduated from Ohio State University in 2014 with a Bachelor’s Degree in Strategic Communication.

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