Harvest One Cannabis Inc (CVE:HVT) (OTCMKTS:HRVOF) (FRA:2CN) received a huge boost to its operating model today. The federal government has coming to a very important conclusion on outdoor cannabis grow in Canada; a decision with could have important implications for the entire sector.

As reported by the Globe & Mail this morning, the federal government is expected to unveil new regulations this week which will allow for commercial outdoor cultivation. Up until now, only indoor and greenhouse grow has been allowed, where security and environment are controlled, and every interaction with a plant is video recorded. These stringent requirements will be more difficult to achieve outdoors.

As it stands, Harvest One Cannabis is one of the few Canadian LPs which has purposely positioned itself to capitalize on such an opportunity. The company has used part of the proceeds from its previously announced bought deal financings and covertible debenture issue to purchase 398 acres of agricultural land in British Columbia for the purpose of outdoor grow, trough its wholly-owned subsidiary United Greeneries Holdings Ltd. The company took a gamble that consultations which took place with the federal government last November on outdoor grow laxity potential regulations would eventually bear fruit. There were indeed correct.

Harvest One CEO Andreas Gedeon sits down with Midas Letter Founder James West in-studio May 2018

Subject to regulatory approvals, Harvest One expects that initial grow area on its B.C. interior properties will consist of approximately 140 acres of row-style, individual plant settings with irrigation and feeding lines. As it’s too late in the agricultural production cycle to really move this year, 2019 would be the likely starting point of such operations.

While the news is a much-needed boon for a company which has seen a steady drumbeat of selling since late-January 2018, it remains to be seen what kind of lasting stimulative effect it has on the stock price, if any. Harvest One has afforded itself a substantial head-start, but with outdoor yield costs expected to eclipse $0.25/g or below, it won’t take long before Big Cannabis comes calling with a detailed operating model of their own.

Negative Catalyst On the Market

There’s a reason why Big Cannabis has consistently attempted to stifle attempts at outdoor grow legalization. As outdoor cultivation costs are much cheaper, the resulting downstream margin pressure will accelerate. The industry’s stated platitudes of concern regarding outdoor product theft ring hollow.

However, it’s important to realize the outdoor cannabis grow has limitations which limit the scope of damage to established indoor LPs.

The first obvious factor is weather—or more specifically—lack of ideal year-round growing conditions. Sativa plants can typically take up to 10-12 weeks once it begins flowering to produce commercial yields—sometimes longer. That extensive growing period (compared to indoor growers) may limit the harvesting to two per year. Obviously, indoor growers can produce yields year-round.

Secondly, outdoor growers face inferior environmental conditions versus their indoors competitors. Everything from lighting/soil/air flow limitations to greater exposure to bugs and pathogens will likely make for lower quality yields. Thus, outdoor cannabis cash crops will not be suitable for inclusion in many medical cannabis strains and refined medical products.

Lastly, outdoor cultivation is more challenging given the requirements for pesticides and treatments to prevent mold and mildew. Those variables are more tightly controlled indoors, where state-of-the-air HVAC and humidity control systems are commonly used. The natural environment hosts a wider ecosystem of hard-to-control variables which will limit the predictability of yields from year to year.

Still, with a upcoming expected advantage in yield costs and a running start versus the competition, Harvest One’s options have greatly expanded. Perhaps most importantly, Ottawa’s decision has provided a much-needed forward looking catalyst into next year.

Harvest One Cannabis is currently higher by $0.02 to $0.78/share (↑2.63%). At almost 1 million shares traded by midday (946,282), volume will likely chime-in at its higher levels since late February.