Cannabis Shortages Spread in the West
Oregon, Nevada, Colorado, and Other States Follow California
Cannabis greenhouse flower prices in California are surging off the lows from last September and are now up 80-100% based on private channel checks. And it’s not just greenhouse but outdoor and indoor pricing that is jumping as well, though indoor is showing a smaller rise. This is a big step function change from just January when I wrote about shortages emerging in California. Only one month ago greenhouse flower prices were up only 30-50%. Why are prices increasing so quickly?
The reason is simple: there is little to no inventory after the punishing market conditions of the last 18 months, when prices fell and then stayed below the marginal cost of production and were too low for anyone to make money. The glut of cannabis produced after the big capex cycle of 2020/2021 has been worked off, inefficient producers went out of business and about 14 million square feet of licensed cultivation was not renewed and came off the market.
It’s not like people stop smoking cannabis if producers produce less, so prices jump to send a signal to the market to produce more. None of this should be a surprise. Cannabis is a commodity just like any other commodity. Yes, there are different levels of quality. And yes, scaling production and producing consistent quality is very hard, but at the end of the day the same laws of supply and demand that dictate every commodity cycle, rule in cannabis.
What we have learned in the past 18 months is that if cannabis sells for prices below the cost of production, guess what? That’s right, cultivators will stop producing flower, farmers will go out of business and eventually prices will recover. In normal industries, you might have the capacity to fund losses for awhile, but as I have written, there is no capital available for cannabis companies.
And the even bigger story is not just that California wholesale markets are staging an impressive recovery, but that tight inventories are starting to spread throughout the west and other unlimited markets.
I have checked in with cannabis operators in Oregon, Colorado, and Nevada and they all report strong demand, tightening inventory and firm prices. Grown Rogue (Canada: GRIN), which operates in Oregon, highlighted this in a press release announcing an expansion in Oregon and the CEO said, "We are encouraged by the 17% decrease in outdoor weight harvested in Oregon in 2022 compared to 2021 and are experiencing a strong recovery in pricing and demand for flower products.”
Very soon, I’m expecting prices to increase in Nevada as well as inventories there appear to be very low. The only market in the west that is behind the curve is Arizona, which has its own special dynamics after a bunch of capacity was added and one company in particular has been driving prices lower. But even there, supply is coming offline and I expect prices to firm by year end.
Cannabis is a big market, estimated to be $100 billion, albeit an estimated three-quarters of it is illicit. But not all of the production is illicit. If one had a more cavalier attitude towards the law, imagine the following: Buying sun-grown, legally cultivated California cannabis for $700-$800 a pound and then transporting it to New York or New Jersey where black-market prices are approximately $6000 to $7000 a pound.
Or consider how people in Virginia buy cannabis. It is legal to consume, but illegal to sell cannabis. If one were to disregard the law, one could easily even charter their own plane and make a fortune. Many days last year, I daydreamed about this while getting my butt handed to me in the market every day.
Some portion of legally grown cannabis in unlimited license western markets gets sent east. And it is my opinion that this will be impossible for police to shut down. Even in the days of heavy enforcement and zero tolerance towards anything cannabis, they couldn’t shut down the cannabis trade. Now with lax attitudes, who exactly is stopping this trade? Certainly not New York, which currently has approximately 1200-1400 illicit cannabis stores in New York City according to the NYPD including one across the street from City Hall.
That is one reason why what happens in California, shouldn’t stay in California. These unlimited license markets are interconnected to some extent because of the portion of flower that inevitably heads east. And that’s why shortages in California impact every other “producer” market and why it is no surprise even an unlimited license market like Michigan is seeing firming of pricing.
On the other end of the spectrum are limited license markets that are crumbling or starting to look shaky as supply catches up to demand. Massachusetts has been a prime example of what happens to a limited license market as it used to be an incredible market with prices over $4000 a pound and now prices are firmly below $1500 and lots of inefficient producers are suffering.
What is a surprise though is Illinois, which used to be considered a safe market. Now prices are falling and signs are that the rest of this year could be worse. With bordering state Missouri legalizing adult sales and additional cultivation capacity coming online, Illinois pricing is weakening after consistently hovering for years above $3000 a pound.
In the long run, it is unlikely that any market can sustain prices above $1500-$2000 a pound with the exception of craft quality and super high end cannabis brands. That’s why if you haven’t built your business with the lowest possible wholesale cannabis prices in mind and don’t have a culture of driving down your COGS like a Grown Rogue or Glass House (OTC: GLASF), you have long term problems.
Another point to consider is that just because prices are rising doesn’t mean that California is all sunshine and roses. There are still deep problems, especially in the retail part of the market, where 40-50% of the dispensaries are thought to be in distress. With high expenses, taxes, the weight of 280e, which hits retailers the hardest, and with too many retailers crowded together along with vast cannabis “deserts,” California still has serious problems to fix. And there are still way too many brands in California, many of whom do not control their supply chain and have benefited from the recent excess supply of cannabis and low prices. These brands are likely soon to experience significant problems.
But this distress, will also be an opportunity for those able to capitalize on the ongoing shakeout. In other words, this too is part of the rationalization process that will make California, a much healthier, sustainable market. And California’s recovery should be a big positive for the whole industry. You can’t have the world’s largest cannabis market in significant distress without a cloud hanging over the entire industry.
So far, the big surprise story of 2023 turns out to be not political or legislative news, but the stabilization and comeback of the unlimited license markets and in particular the Western cannabis markets. And this is welcome news to a beleaguered industry.