Weekly Report -- Published on 27 May 2016
U.S. Cannabis Spot Index up 3.4% to $2,096 per pound.
The simple average (non-volume weighted) price increased $100 to $2,268 per pound, with 68% of transactions (one standard deviation) in the $1,685 to $2,851 per pound range. The average deal size decreased by less than a half pound to 7.8 pounds. In grams, the spot price was $4.62, and the simple average price was $5.00.
The distribution of transactions by grow type was nearly identical to last week, with outdoor deals decreasing 1% and greenhouse deals increasing 1%, to 84% and 8% respectively.
The dominance of transactions for indoor flower, combined with a nearly 5% increase in the simple average price of indoor flower, drove a 4.6% increase in the simple average price. A 16% increase in the price of outdoor flower in California was the major driver of a 13% increase in the simple average price of outdoor flower nationally, and also supported the increase in the simple average composite price.
Deal sizes for indoor flower ranged from 0.5 to 40 pounds, while deals for greenhouse flower ranged from 1 to 60 pounds.
Outdoor flower transactions ranged from 1 to 100 pounds.
Volume weighted prices increased across all grow types. The impact on the weighted composite price from a 15% increase in the price of outdoor flower was moderated by both its minority contribution of 17% to the total weight, along with a decrease of 3% in the total weight of outdoor flower from 20% last week.
The US Spot Price is up $147, or 7.5%, from its 8-week low of $1,949 per pound on April 8th. Prices for indoor flower spanned from $1,100 to $3,800 per pound; greenhouse flower spanned from $1,200 to $3,000 per pound; and outdoor flower spanned from $950 to $2,800 per pound.
Increases in the price for outdoor flower in California and Washington State helped drive a 15% increase, or $238, in the national weighted outdoor price to $1,798, decreasing the spread between greenhouse and outdoor flower to $26 per pound from $215 last week.
Changes to crowdfunding rules put into place recently by the Securities and Exchange Commission (SEC) could offer new sources of capital for cannabis businesses looking to start up or expand. Marijuana Business Daily (MBD) analyzed the implications of the newly permitted sources of funding. Previously, cannabis operations have relied generally on raising funds from friends and family. More recently, private investors, venture capital firms, and other forms of private finance have entered the space as the threat of federal prosecution has diminished. Still, MBD points out that frequently only accredited investors could place funds in most private companies in return for an equity position. Now, thanks to the loosening of the SEC’s rules, private individuals can invest as little as $2,000 per year, and in some cases more based on their net worth, in return for an ownership stake in a business. Companies are permitted to raise up to $1 million annually by employing this method. The SEC also made moves toward facilitating smaller investments by not requiring audits of financial statements for those companies seeking initial funding or those attempting to raise less than $500,000.
Overall, the SEC’s rules changes appear to open up new avenues for cannabis businesses to obtain capital, which is significant in an industry that commercial lenders still view as being off-limits due to its federal illegality. Additionally, the SEC’s regulatory shift comes just after Colorado, Oregon, and Washington all opened up their cannabis markets to out-of-state investment and, in some cases, ownership as well. However, in all of those states, specific limits on the type and amount of investment allowed from out-of-state residents remain in place; in other words, none of the states in question simply opened the floodgates for an investment and ownership, free-for-all. As such, licensed businesses will have to be extremely wary that any potential capital raised via crowdfunding conforms to the particular state’s rules. In the case of Washington, which will be discussed in more detail below, this means that ownership stakes for crowdfunders is out of the question, as that state now allows out-of-state investment, but not ownership in its licensed cannabis businesses. Additionally, potential out-of-state investors in Washington businesses must pass a background check and be approved by the Liquor and Cannabis Board (LCB), which would seem to put crowdfunding for licensed businesses off-limits in that state.
Experienced investors may remain wary as well, although the crowdfunding allowances would seemingly open up the field to potential investors that are relatively inexperienced. In any case, the fact that certain financial statements do not have to be audited, combined with the relative youth of the legal cannabis industry, should work to dissuade some from apparently attractive pitches. Frequently, businesses that have operated for years in legal states do not have professionally prepared financial articulation documents, due mainly to the fact that seeking outside investment in their businesses in the early years of legalization was out of the question for various reasons. Additionally, due to the newness of the market and the recent shift to newer models facilitated by legalization - specifically large-scale outdoor production and cultivation in sizable, well-equipped greenhouses - financial projections made by many new companies, in addition to those looking to expand into new models, have not yet been demonstrated on the ground. As has been the case for the majority of private investment into the industry, the companies that may stand to gain the most from the SEC’s rule changes are ancillary firms that can demonstrate sound financial projections without some of the uncertainties and burdens that surround businesses that “touch the plant.” Finally, the imminent election of a new president may also cool the enthusiasm of investors in the coming months until the new commander-in-chief’s stance on legal cannabis is known with more certainty.
June Forward closes unchanged at $2,125 per pound.
The final June Forward premium decreased to 4.1% as the US Spot Price increased to $2,096 per pound.
This week’s forward volume represented 9.5% of the total number of observed spot and forward transactions. 86% of the forwards had durations of at least three months. 64% had durations of at least 4 months. 57% of the forwards had durations of five or more months.
This week’s forward deals were reported from California, Colorado, Oregon, Washington, Nevada, Arizona, Vermont, Rhode Island and Maine. 61% of this week’s reported forwards were for monthly deliveries and ranged from 2 to 100 pounds. 39% of this week’s reported forwards were for weekly or biweekly deliveries and ranged from 5 to 20 pounds. The average forward deal was for 15.8 pounds.
The distribution of forwards by grow type was 18% outdoor grown, 7% greenhouse and 75% indoor grown. The six-month Forward Curve and the premium or discount to the US Spot Price are illustrated in the table below.
The chart below illustrates the April Forward versus the average US Spot price during the month of April. The April Forward was initially assessed in October 2015 at $1,850 per pound, and increased until peaking at $2,100 in early February. The low and high in March were $1,965 and $2,030 per pound, respectively. The April Forward expired at $2,010. During the month of April the US Spot Price averaged $1,976 per pound. Over the course of 26 weeks, the April Forward averaged $1,994 per pound. Thus, for the month of April 2016, the average Forward buyer would have paid $18 more, or 0.9%, than the average Spot buyer.
An article in Willamette Week documents specific cases of real estate speculation in Portland, Oregon’s now-tight warehouse market, funded largely by a California investor. This is on its face unremarkable; we have reported on numerous occasions that speculators have been buying up land and buildings in areas that permit cultivation and in which new markets are set to develop. However, we have not yet discussed the phenomenon of cannabis real estate speculation and development in a broad, general context. Cities and regions in California that have regulations in place allowing commercial cultivation are currently experiencing such activity in earnest, while Oregon’s rush largely took place last year ahead of this year’s application period for adult-use licenses. Even in slow-to-develop Massachusetts, a company billing itself as a leader in “cultivation and processing infrastructure” is working on developing a 1 million square foot site that will be split into different units and leased to producers. Numerous other ancillary firms also specialize in acquiring and developing real estate to serve the needs to cannabis businesses. Private groups and individuals have employed similar models in order to participate in, and hopefully profit from, the cannabis industry while also keeping it at arm’s length.
The above practices have various ramifications for cannabis business owners. On the positive side, ancillary companies covering site acquisition, development, and leasing to cultivators or processors can significantly lighten for operators the up-front capital costs necessary to start a cannabis business. Turnkey facilities further relieve burdens on operators as they eliminate the costly and intricate process of equipping a facility and coordinating various contractors in installing electrical, HVAC, and plumbing systems sufficient to support cultivation operations, as well as the local inspection and permitting process that generally follows. Extraction businesses have also traditionally faced steep start-up costs, especially as the industry has become more tightly regulated and fire inspectors more stringent in evaluating and permitting operations employing flammable solvents, in addition to machines that place product under high heat and pressure. To walk into a facility that is ready to run with top-of-the-line equipment likely would have been a dream to many early movers in legal markets, who frequently had to employ their own revenue to incrementally spruce up and optimize less-than-ideal warehouses.
On the other hand, lessees face difficulties familiar to many renters: The funds expended on rent do not go toward securing property and their situation is ultimately uncertain, subject to the whims of the lessor. In Colorado, cases in which a cultivation operation rented, built out, and successfully operated a facility have sometimes resulted in that operation being forced out when the landlord decided that he or she preferred to obtain their own license and chase revenue greater than simply the rent received from the tenant. Turnkey facilities could also in the future put lessees at a competitive disadvantage. While many such facilities being built out currently may indeed be able to be classified as “state of the art,” that may not be the case in five years. In such a situation, perhaps the landlord or property management company is not willing to expend funds to upgrade the facility to the latest standards, leaving the tenants to run operations that are exceeded in efficiency and productivity by newer entrants to the industry.
Overall, the inability of cannabis businesses to access commercial lending, in addition to the fact that many properties are off limits due to the fact that they are financed by commercial mortgages, is the root cause of the current trend in privately financed cannabis real estate speculation and development. If changes to the federal status of the plant - or specifically to banking regulations - take place in the near future, cannabis business operators will be able to exert more control over this aspect of their business, as previously unattainable start up capital to buy and equip sites and facilities will be able to be financed and spread out over time.
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