November 29, 2022

California Cannabis Tax Collection Shrinks Along with Declining Prices

California Cannabis Tax Collection Shrinks Along with Declining Prices
Photo: Gio Bartlett/Unsplash

The California Department of Taxation and Fee Administration (CDTFA) issued data on taxable sales and cannabis tax collections for Q3 2022. Q3 2022 taxable retail sales, at $1.27 billion, were down 9.8% from upwardly revised Q2 2022 taxable sales of $1.4 billion and down 11% from $1.43 billion in sales in Q3 2021.

Total cannabis tax collected in Q3 2022 was $242 million, down 19.3% from $300 million in Q2 2022 and down 30.5% from the $348 million collected in Q3 2021. Q3 total tax receipts include excise taxes of $128.4 million and sales taxes of $113.6 million. Not included in the Q3 data are cultivation taxes, which were eliminated as of July 1, 2022.

California’s excise tax is levied on both adult use and medical retailers at a rate of 15% of the gross receipts of retail sales. Q3 2022 excise tax fell 12.5%, the fifth quarter in a row of lower excise tax receipts. The state had contemplated increasing the excise tax to make up for losses from the cultivation tax repeal but capped the excise tax at 15% for three years beginning July 1, 2022.

California Excise Tax Receipts

Sales tax data in the table below shows quarter-on-quarter changes in collections from Q2 2021 though Q3 2022. Q3 2022 sales tax collections fell 9.6% to $113.6 million from $125.6 million in Q2 2022 and are down 11.1% from $127.8 million in Q2 2021. California’s general sales tax is applied to retail cannabis purchases by adult use consumers, but not by medical cannabis patients, and varies by municipality.

There has been a good bit of variation across quarters, but year-on-year as of Q3 2022 the net quarterly loss is -3.7%.

California Cannabis Sales Tax Receipts

California cannabis prices remain in a long-term downtrend with the all-time low for the Cannabis Benchmarks California Outdoor Grown Spot Index during November 2022. Greenhouse flower prices have been on a similar trajectory, having also reached an all-time average monthly low in November. The unrelenting price pressures in California are forcing cannabis companies to lower production costs through reduced labor and increased spending on technology, but, at the end of the day, lower profit margins seem unavoidable.

While indoor product prices show some variability week-to-week, the average monthly price shows a steady deterioration. As energy prices have risen in the inflation spiral, it is fair to say indoor production prices have risen sharply over the past year, squeezing margins on the top end.

If cannabis is legalized on the federal level, California cannabis prices may come to dictate prices across the country due to the sheer size of the state’s output.

November 22, 2022

How High Will New York Cannabis Prices Be?

How High Will New York Cannabis Prices Be?
Photo: Lucas Favre/Unsplash

While New York’s legal adult use market is facing difficulties in getting off the ground, as we detail below, those with conditional cultivator licenses have harvested their outdoor crops and are now in discussions with potential buyers as they sit on inventory, waiting for the green light to be able to sell.

Although not market-tested, one source in possession of a conditional cultivator license relayed possible price ranges for wholesale product, based on discussions between potential buyers and sellers. The source told Cannabis Benchmarks that he expects smokable flower to sell initially for between $1,500 and $3,000 per pound, pre-roll grade flower to be priced at between $800 and $1,500 per pound, and for biomass for extraction to go for between $300 and $1,000 per pound, probably averaging about $500.

Again, no legal adult use commerce is allowed to take place currently, as retailers have yet to become fully licensed and operational. Meanwhile, as we discuss just below, a lawsuit appears as it will delay the licensing process for nearly half of the first crop of retailers. Delays in getting the adult use market up and running could put downward pressure on prices, as flower and other plant material will degrade in quality with extended storage. Additionally, if only a small number of retailers are able to open initially, prices could also be driven down as sellers compete for limited shelf space.

Regarding the aforementioned lawsuit, Michigan-based cannabis firm Variscite has won a stay on the issuance of 63 of New York’s 150 Conditional Adult Use Retail Dispensary licenses (CAURD) in localities across the state, according to the New York Times. Under current rules, CAURD applicants must have a cannabis-related conviction in New York State and be either a resident of the state or have their corporate headquarters in the state.

The Michigan firm is suing under the U.S. Constitution’s Dormant Commerce Clause, which has proven to be an effective basis for challenging state laws that limit non-state residents’ participation in new cannabis markets. Variscite maintains the CAURD application rules violate the interstate commerce clause and claim the state could achieve its social equity goals by other means, but Variscite would suffer irreparable harm if the firm waited for the non-justice-involved application window to open. The owner of Variscite has been convicted of cannabis offenses, but not in New York, nor is he a New York resident. The company applied for a CAURD license but was unable to obtain one.

The judge sided with Variscite and prohibited the state from issuing licenses in Brooklyn, the Mid-Hudson area, western New York, the Finger Lakes, and central New York – areas apparently contemplated for business location by Variscite. The judge’s decision will effectively deny the awarding of licenses to 63 of the 150 successful CAURD applicants. It is likely the state will challenge the judge’s ruling.

New York’s adult use cannabis industry was never going to be easy to stand up and the lack of communication from the Office of Cannabis Management (OCM) has sparked speculation about when the first retail outlets might open. In addition to the lawsuit cited above, Politico is stoking fear the industry may face tough sledding due to the proliferation of illegal cannabis sellers in New York and lack of enforcement against them. OCM begs to differ, citing law enforcement actions from “Cheektowaga to the City of New York.”

Nevertheless, the article sees a confluence of events that will undermine New York’s legal cannabis market before it opens, including the California to New York cannabis pipeline. A spokesperson for New Frontier Data stated plainly that “we have not been successful in California getting people to adopt the regulated market,” inferring New York will likely suffer the same fate due to expansive and entrenched networks of illicit cannabis distribution and retail. Furthermore, New York is losing investment dollars, the article notes, saying the botched Ascend Wellness deal was due to “concerns over the state’s establishment of the recreational market and insufficient policing of the illicit market.”

November 16, 2022

Illinois Cannabis Sales Remain Steady Heading into Q4 2022

Illinois Cannabis Sales Remain Steady Heading into Q4 2022
Photo: Aaron Burden/Unsplash

The Illinois Department of Financial and Professional Regulation (IDFPR) issued October 2022 adult use sales figures this week. October combined sales to in-state and out-of-state customers, at $131.5 million, were up 0.7% from September 2022 combined sales of $130.7 million and up 6.6% from September 2021 sales of $123.4 million.

October 2022 adult use sales to in-state residents, at $90.9 million, rose 1.5% from September 2022 in-state sales of $89.5 million and are up 11.9% from $81.2 million in October 2021. October 2022 sales were 69% of total monthly sales, up from 68.5% of total sales in September 2022 and up from 65.8% of total sales in October 2021.

October out-of-state sales, at $40.7 million, were down 1.3% from September 2022 sales of $41.2 million and are down 3.6% from October 2021 sales of $42.2 million. October 2022 out-of-state sales were 31% of total sales, down from 34.1% of total sales in October 2021.

IDFPR supplies monthly data on the number of items sold: October 2022 items sold at 3.1 million, was up 0.3% from 3 million items sold in September 2022 and up 12.5% from 2.8 million items sold in October 2021.

The average price of items sold in October 2022 rose $0.15 month-on-month to $42.40 per item but is down $2.34 from October 2021’s average per item cost of $44.74.

Illinois Cannabis Sales

The Illinois Department of Public Health (IDPH), which oversees the state’s medical cannabis program, issued updates on patient numbers and sales figures for September and October 2022. September 2022 medical sales were $28 million, down 3.1% from August 2022 sales of $29 million and down 14% from September 2021 sales of $32.6 million.

In September 2022, IDPH reported 239,294 qualifying patients since the program began in September 2014, a 1.4% increase over qualifying patients as of August 2022 and up 43.8% from 166,356 qualifying patients recorded in September 2022.

September 2022 flower sales in the medical cannabis program were $13 million, up 0.3% from August sales of $12.9 million, but down 14.9% from September 2021 medical sales of $15.3 million.

In September 2022, 63,667 unique patients purchased an average of 17.6 grams of dried flower, up 0.3 grams from 17.3 grams purchased in August 2022. Medical cannabis flower sold at an average price of $11.60 per gram, down $0.15 from the August 2022 price per gram and down 18.7% from $13.77 in September 2021.

In October 2022, IDPH reported 244,690 qualifying patients in the medical cannabis program, up 2.3% from September 2022 and up 42% from October 2021’s qualifying patient count of 172,362.

October 2022 flower sales in the medical cannabis program were $13 million, down marginally from September flower sales and down 15.5% from sales of $15.4 million in October 2021.

In October 2022, 63,945 unique patients purchased an average of 17.6 grams of flower, virtually unchanged from the September 2022 average purchase. Medical cannabis flower sold at an average price of $11.51 per gram, down $0.09 per gram from September 2022 and down 14.2% from an average price of $13.41 per gram in October 2021.

Illinois retains the highest cannabis prices in the nation for reasons well-covered here, but that does not mean the state’s cannabis prices are invulnerable. In fact, a recent four-month rally has reversed, with average monthly prices taking a turn lower in September and October 2022. Spot cannabis prices are still holding the $3,500 per pound handle; technically, the best-case scenario is for price to move sideways, but the more likely move is lower, perhaps to test recent lows in the mid $3,300s.

While in-state competition is severely limited, the fact remains cannabis just one state away in Michigan is trading at less than one-third the cost of Illinois spot. West Coast prices are just 20% of Illinois spot price. So, while high risk, there are those that think arbitrage at these metrics is worth the reward. Moreover, the quality differential from West Coast to Illinois is pronounced according to multiple sources and there is demand in Illinois for high quality cannabis – as there is in every market. Illinois prices will eventually erode, but for now they are in a sweet spot for the state’s cannabis industry.

November 8, 2022

New Jersey Approves First Wave of Annual Adult Use Cannabis Licenses

New Jersey Approves First Wave of Annual Adult Use Cannabis Licenses
Photo: Scott Graham/Unsplash

The New Jersey Cannabis Regulatory Commission (CRC) recently notified the public, via press release, that they have approved the first 18 annual adult use cannabis business licenses. 10 of the 18 licenses resulted from the conversion of conditional licenses to annual licenses. The remaining eight new licenses were issued to five cultivators and three manufacturers. The Commission Chairwoman said she hopes to see the “businesses up and running as soon as possible.”

The CRC said they have now awarded 801 conditional licenses in the state after approving 297 conditional licenses in the past week. As well, the CRC extended the time allowed for conditional licensees to convert to an annual license and noted the Commission is raising the 2023 cultivator excise fee designated for the social equity program from $1.10 per ounce to $1.52 per ounce. The full release can be found here.

In other news, CRC Executive Director Jeff Brown fired a warning shot over Curaleaf’s bow, according to Cannabis Wire. While noting Curaleaf has “one of the highest inventories in the state” and is the “second lowest in medical pricing,” Brown offset the praise with a warning, saying the CRC “is dead serious about ensuring patient access and compliance with labor provisions.” He said the CRC will have a “very vigilant eye on Curaleaf,” thus suggesting the firm might have run afoul of access and labor rules. Other members of the CRC weighed in as well, with one member saying, “I’m not fully convinced Curaleaf has made good faith efforts as it relates to our labor provisions.”

CRC Chairwoman Dianna Houenou said she has “also become concerned about some of the actions of Curaleaf and its commitments to workers, to safety, and to public health and patients.” In fact, Houenou declined to vote for Curaleaf’s expansion approval, although the firm was ultimately granted permission to expand into Bordentown, just across the river from Pennsylvania, where adult use cannabis remains illegal.

November 2, 2022

What Drove Oklahoma Cannabis Prices So Low?

What Drove Oklahoma Cannabis Prices So Low?
Photo: Jon Toney/Unsplash

The Oklahoma Medical Marijuana Authority (OMMA) published September 2022 tax collections, allowing us to extrapolate sales made in August 2022 in the state’s medical cannabis program. August 2022 sales, at $59.7 million, were down 8.4% from July 2022 sales of $65.1 million and down 22.7% from August 2021 sales of $77.2 million.

Oklahoma spot prices have undergone an epic shellacking since late summer 2020, losing 59% from the 2020 high of $2,229 per pound to the 2022 low at $915. Price losses of this magnitude are typically never fully reversed because they represent fundamental changes in the underlying market; in this instance, the rapid issuance of cultivation licenses.

In December 2021, the license frenzy reached its pinnacle with over 9,400 cultivation licenses, 2,519 dispensaries, and 1,712 processors for 384,500 patients; that is one cultivator for every 41 medical marijuana patients, one dispensary for every 153 patients, and one processor for every 224 patients. At the very least, this many licenses virtually guarantees a huge oversupply of cannabis and brutally competitive retail discounting, even considering not all licensees were operational.

In August 2022 there were 382,143 registered patients in the state’s medical marijuana program, down 1,220 (-0.3%) from July 2022’s 383,363 registered patients, but up just over 1% from August 2021’s 378,312 registered patients.

As of the end of August 2022, there were 2,374 dispensaries with active licenses, up 1.7% from 2,335 at the end of July 2022 and down just four from 2,378 recorded in August 2021.

The number of licensed growers at the end of August 2022 was 7,285, down 61 (-0.8%) from the month prior and down 1,345 (-15.6%) from August 2021’s 8,630 licensed growers.

OMMA reports there were 11,075 active cannabis business licenses in the state in August 2022, although regulators cannot say how many of those licenses are operational.

While the number of cultivation licenses has been reduced year-on-year, the reality remains that there are still 52 patients for every active cultivator license. The dispensary ratio is 160 patients for every license. In fact, if the Oklahoma Bureau of Narcotics is correct and over 1,000 cultivation licenses are involved in an illegal licensing scheme, the removal of those licenses would still leave the state with too many cultivators for the number of registered patients.

Recent news reports have focused on the “ghost owner” lawyers; attorneys accused of paying off their firm’s employees and others to claim cannabis license ownership, when the licenses were actually owned by an out of state or foreign entity or individual that does not meet state residency requirements (75% of any cannabis license must be owned by an Oklahoma resident).  News on 6 reports the Oklahoma Bureau of Narcotics spokesperson Mark Woodward said, “almost 25% of the farms in Oklahoma are potentially operating under the same fraudulent business scheme.” He also noted “well over a 1,000 if not close to 2,000” may be involved in the ghost ownership arrangements.

Presuming enforcement is coming for such operations, the impact on supply in Oklahoma’s medical cannabis market remains uncertain. Licensed cultivators involved in “ghost ownership” schemes may have been selling some or all of their production into the illicit market, which would lessen the impact on supply within the licensed medical system if those growers are shut down.

Oklahomans will vote in March 2023 on whether adult use cannabis should be legal in the state. If the measure passes, it might help alleviate at least some of the oversupply in cannabis and cannabis licenses.

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