June 29, 2022

Arizona Cannabis Sales Update

Arizona Cannabis Sales Update
Photo: 2H Media/Unsplash

The Arizona Department of Revenue (ADOR) published cannabis tax collections and estimated sales information for April 2022. Combined adult use and medical sales were $122.4 million in April, down 8.8% from an upwardly revised $134.3 million in March 2022 (previously $121.7 million) and down 7.9% from a downwardly revised $133 million (-$45,345) in April 2021.

Arizona Taxable Cannabis Sales

April ushered in yet another increase in the adult use market’s share of total cannabis sales. April is the first month in which adult use sales constituted more than 60% of total revenues.

Arizona’s April 2022 medical sales, at $47 million, were down 1.3% from March 2022’s upwardly revised sales of $53.9 million (previously $49.2 million) and down 35% from a upwardly revised $72.9 million figure in April 2021 (previously $72.5 million). Medical sales’ share of the total was 38.5% in April 2022 against 54.5% in April 2021.

The Arizona Department of Health Services (ADHS) reported 212,083 qualifying patients in April 2022, down 7.3% from March 2022’s patient count of 228,763 and down 31.1% from April 2021’s patient count of 307,975.

In April 2022, ADHS reported 7,245 pounds of flower sold to patients, representing a 3.7% month-on-month drop in sales from March 2022, when 7,527 pounds of flower were sold. April 2022 flower sales to patients were down 40% from April 2021 sales of 12,070 pounds.

ADHS also reports on sales figures for edible products. April 2022 saw 141 pounds of these products sold to patients, representing an increase of two pounds over March 2022 sales, but a decrease of 46% or 117 pounds from April 2021’s sales.

ADHS reported 1,463 pounds of “marijuana other” (extracts and non-edible infused products) sold in April 2022. The sale of such products jumped 41% month-on-month. Year-on-year sales, however, were down 16% from April 2021’s sales of 1,743 pounds.

Combined sales volume in Arizona’s medical market in April 2022 was 8,849 pounds, up from 8,705 pounds in March 2022, but down 53% from sales of 14,072 pounds in April 2022.

Arizona adult use sales began in late January 2021. Cannabis prices rose steadily through April 2021 as the market adapted to the new demand. From July through fall 2021, indoor prices started rising again, peaking at $2,450 per pound. Greenhouse prices were relatively steady, trading in a $20 range between $1,643 and $1,663 per pound.

Both grow types started on a downward trajectory in late fall / winter 2021, a move that has been unabated for indoor-grown product. Greenhouse-grown flower has traded between $895 and $971 per pound since March 2022, but indoor prices have continued to crater, testing the $1,100 per pound handle. The continuing move lower by indoor prices is collapsing the spread between indoor and greenhouse to just over $200, from $870 in fall 2021.

June 21, 2022

Insider Perspective on the New Jersey Cannabis Market

Insider Perspective on the New Jersey Cannabis Market
Photo: 2H Media/Unsplash

To get an overview of the New Jersey cannabis marketplace, Cannabis Benchmarks spoke to Edmund DeVeaux, President of the New Jersey Cannabusiness Association (CBA). The CBA represents Alternative Treatment Centers (ATCs) – those businesses licensed first in the medical cannabis sector that are now serving the adult use market – as well as applicants for New Jersey cannabis licenses and ancillary businesses, including cannabis attorneys and accountants. DeVeaux has been CBA President since 2020 and has observed and aided the licensing processes.

DeVeaux explained that of the state’s 12 licensed ATCs, eight were initially allowed to buy recreational licenses, paying upwards of $1 million or more to “have the corner on the market.” New Jersey CRC set requirements and regulations for the adult use market, including having “at least 100,000 pounds of cannabis” on hand to ensure that medical cannabis patients would be well-supplied after the recreational market opened. DeVeaux noted the state is now taking applications for recreational-only businesses, including cultivation, manufacturing, and retail operations.

Regarding the wider view on New Jersey’s cannabis market outlook, DeVeaux is very upbeat. He said the CBA’s goal is a “sustainable, diverse, and profitable” cannabis market. When asked about cannabis prices, DeVeaux said retail prices for indoor-grown cannabis flower are running at $460 – $480 per ounce, with eighth ounces selling for $38 to $48. He understands prices are high compared to many other state-legal markets but believes New Jersey consumers are willing to pay higher prices to access legal cannabis. He notes state taxes add to the cost of New Jersey cannabis but also sees progress on the tax front, with the state’s intention to eliminate medical cannabis taxes by February 2023.

The New Jersey cannabis market is dominated by indoor and greenhouse product. DeVeaux noted outdoor cultivation is allowed, though he is not aware of any outdoor grow operations at this time. When asked if medical cannabis is more expensive than recreational cannabis, DeVeaux said he was unaware of any price disparity, but said the typical conversation with medical patients focused on quality and quantity of cannabis available. His organization models itself after chambers of commerce; DeVeaux said CBA considers “the needs of consumers and producers” equally. He noted medical consumers see themselves as patients and cannabis as medicine and recreational consumers “no longer want to support the unregulated market, even at higher [than illicit] prices.”

DeVeaux strongly supports the SAFE Act. He said the industry needs financial services, including banking and insurance, and noted, “until the federal government removes cannabis from the Schedule 1 designation, we will not have interstate commerce.” He said the Safe Act will “eliminate punishment for banks and insurance companies going into cannabis” financial services.

Taking a longer view, DeVeaux, when asked about the prospect of federal legalization, was not particularly warm to the notion. He has contemplated the downside of interstate commerce and pointed out, “states with a lower cost of doing business and ‘right to work’ states, which typically have lower labor costs” might well undercut more expensive states that support worker’s rights.

DeVeaux is “pleased with the progress” in the nascent New Jersey cannabis markets and credits regulators with much of its early success. He conceded the state still “has miles to go,” but noted, “the road to success is not filled with damages as it was decades ago.”

The New Jersey Cannabis Regulatory Commission has supplied data on sales from April 21, 2022, through May 21, 2022, encompassing a two-day period in April 2022 and four complete weeks of sales and transaction numbers.

New Jersey Retail Marijuana Sales Figures

The April 21 – May 21, 2022, period shows total sales of $24.2 million on 212,433 transactions. The average transaction price over the contemplated period was $116.84. Average weekly sales were $4.84 million from April 21 – May 21, 2022.

June 14, 2022

Nevada Cannabis Sales Bounce Back After Months of Decline

Nevada Cannabis Sales Bounce Back After Months of Decline
Photo: Wesley Gibbs/Unsplash

The Nevada Department of Taxation (NDOT) issued March 2022 Cannabis Tax Revenue figures last week. March sales surged 18.1% month-on-month, breaking a four-month streak of declining sales figures. Year-on-year, retail cannabis sales are down 12.6% from $96.9 million in March 2021, but are up over 95% from March 2020, when the first pandemic crush occurred.

March 2022 adult use retail sales were $75.6 million, up 9.8% from February 2022 sales of $68.9 million, but down 16.7% from March 2021 adult use sales of $90.7 million.

Medical dispensary sales were just over $9 million in March 2022, up an astounding 216.7% from February 2022 dispensary sales of $2.9 million, according to NDOT data. Year-on-year, medical dispensary sales in March 2022 were up 46.8% from March 2021 medical dispensary sales of $6.2 million.

Nevada Retail Cannabis Sales

The Las Vegas Convention and Visitors Authority (LVCVA) reports March 2022 tourist volume at 3.3 million, a 27.4% month-on-month increase from 2.6 million visitors in February. LVCVA also supplied some perspective on pandemic effects with its April 2022 visitor data: April 2022 visitor volume is up 31.4% from April 2021 but is down 4.5% from pre-COVID April 2019 levels. The recovery of the tourism industry should add to demand but may not be enough to reverse the price downtrend.

Las Vegas Tourism Volume

Nevada indoor spot market prices have been under a good deal of pressure, losing 12.4% so far in 2022 and dropping 17.5% since March 2021. Greenhouse prices have fared worse, with the volume-weighted greenhouse price falling 29.5% in 2022. It is likely there is some quality difference between indoor and greenhouse product with the spread of indoor over greenhouse at $709 per pound. The deterioration in greenhouse prices may have spurred some growers to sell into the extraction market, putting further downward pressure on price.

Brandon Wiegand – President of the Nevada Cannabis Association and Chief Commercial Officer at The Source+, a vertically integrated adult use and medical cannabis company in the state – helped explain the state of Nevada cannabis prices in an interview with Cannabis Benchmarks this week. Wiegand said his state’s industry, like many others, is feeling the pinch in the post-COVID environment. He sees the retail sector under a good bit of pressure with falling sales amid falling prices.

Wiegand noted that while Nevadans got back to work like the rest of the country, they are also suffering under inflationary pressures. Service workers dominate the employment landscape in Nevada and any raises that were granted as employers sought to hire are mostly eaten up by inflation. With gasoline at $6.00 per gallon, Wiegand said people must “decide whether to fill my bowl or fill my gas tank.” The bottom line is people are choosing to fill their tanks and the retail cannabis business is suffering from the knock-on effects of such choices.

Adding to the pressure on growers and retailers is the fact that the market is oversupplied. Wiegand said “cultivators and producers increased production” going into 2021 on the assumption that pandemic demand was permanent. Cultivators and producers had good reason for that assumption, Wiegand explained. The pandemic all but stopped the over 3 million tourists that typically visit Las Vegas each month, but local retail traffic picked up and filled in the hole left by the shuttering of the Strip, with sales reaching record high levels even as most tourists stayed home. Additionally, though the federal subsidies dried up, people went back to work – and often at higher wages – so cannabis entrepreneurs reasonably planned for a permanently higher level of demand.

Wiegand guessed that about 14,000 pounds of cannabis is sold per month in the state, but cultivators are growing about 20,000 pounds a month, adding to price pressures from softening demand. According to Wiegand, southern Nevada is where most of the indoor and greenhouse product is generated, but he noted the northern part of the state is where a fairly massive amount of outdoor growing is taking place on tribal lands. Information on outdoor supply is uncertain given cannabis grown by Native American Tribes is not taxed, but Wiegand reckons tribal operations are generating thousands of pounds, “about the same amount of weight” as non-tribal indoor and greenhouse production combined, “but not bigger.”

Wiegand added the tribal cannabis is grown in “an ideal environment; a high and dry with cool temperatures.” He said the outdoor-grown tribal product has a strong retail presence, with “strong customer demand for well-grown outdoor product.” He also noted tribal cannabis makes up a big portion of the raw material in the extraction market. Finally, outdoor-grown product is very competitive on price, with wholesale rates at $900 to $1,100 per pound, well below the wholesale price per pound for indoor product. As a result, retailers are stocking up on the outdoor flower produced by tribal operations.

While the market is currently dealing with excess supply, Las Vegas is on the verge of seeing more retail outlets come online. Wiegand noted there are still 35 conditional licenses that have yet to open their doors. He does not believe the Las Vegas market is underserved, so adding more retailers would likely have the effect of diluting the revenues of existing stores.

When asked about the percentage of retail sales credited to tourism, Wiegand said “it depends on which tourists.” He pointed out, “tourists tend to spend more on retail cannabis purchases,” but “they are not repeat customers.” Tourism is also tricky because “professional sports drafting tourists are vastly different than conventioneer tourism” and “it is challenging for retailers” in that “it depends on what’s in town.” Overall, Wiegand guessed “20% of retail business” is due to tourism.

Wiegand noted cannabis businesses may be overtaxed with the state’s Fair Market Value (FMV) – a price set by the Nevada Department of Taxation and used to calculate businesses’ wholesale excise tax burden – at $2,500 per pound, a price not seen in the Nevada market since 2018. In addition to the FMV used to calculate the 15% wholesale tax, there is also the 10% retail excise tax. Wiegand characterized cannabis as “double-taxed” by the state, referring to the combination of wholesale excise tax with its too-high FMV and the additional retail excise tax.

It appears Nevada cannabis price pressures will continue with oversupply in the indoor and greenhouse markets thanks to expanding canopies post-pandemic. Additional pressure on indoor and greenhouse prices is also coming from the popular and expanding supply of Native American-grown outdoor flower, which can be half the price of top-shelf indoor product. Even as Nevada nears the five-year anniversary of the opening of its adult use market, there are growing pains.

June 7, 2022

California Cannabis Market Experiencing Declining Legal Sales and Tax Revenue

California Cannabis Market Experiencing Declining Legal Sales and Tax Revenue
Photo: Stephen Leonardi/Unsplash

The California Department of Tax and Fee Administration (CDTFA) issued data on taxable sales and cannabis tax collections for Q1 2022. Taxable Sales for Q1 2022 were under $1.2 billion, down 9.9% from an upwardly revised $1.3 billion (previously $1.26 billion) in Q4 2021. California Spot price slipped 5.3% in Q1 2022, which may account in part for the sequential decrease in taxable sales. Year-on-year, Q1 2022 sales are down 6.1% from Q1 2021’s $1.24 billion.

Total cannabis tax revenue collected in Q1 2022 was $294 million, down 7.3% from an upwardly revised $316.6 million (previously $308.6 million) in Q4 2021. Q1 2022 total tax receipts include excise taxes of $156.4 million, cultivation taxes of $32.7 million, and sales tax of $104.5 million. Total tax collections for Q1 2022 were down 5.9% from $312 million collected in Q1 2021.

Excise tax receipts fell 3% to $156.4 million in Q1 2022, from an upwardly revised $160.6 million (previously $157.4 million) in Q4 2020. This is the third consecutive quarter of lower excise tax revenues.

California’s excise tax is levied on both adult use and medical retailers based on the wholesale price paid, plus a mark-up rate set by the CDTFA in the case of bilateral trades between two unaffiliated parties. Year-on-year, Q1 2022 excise tax collections are down 3.4% from an upwardly revised $161.9 million (previously $159.4 million) in Q1 2021.

California Quarterly Excise Tax Receipts Q1 2021 - Q1 2022

Sales tax data in the table below shows quarter-on-quarter changes in collections from Q1 2021 through Q1 2022. Q1 2022 collections represent a 4.8% drop from Q1 2021 and, with the exception of Q2 2021, continue the recent trend of lower sales tax collections in each quarter. California’s general sales tax is applied to the retail purchases of cannabis by adult use consumers, but not medical patients, and varies by municipality.

Q2 2021 sales tax collections likely reflect the 15.2% increase in California’s Spot market prices between the end of January through the beginning of June 2021, as well as the resurgence of the pandemic during that time. Spot price moved from just below $1,300 per pound to nearly $1,500 per pound in that timeframe, likely on pandemic and 4/20 holiday demand.

California’s unemployment rate in January 2021 was 8.2% and fell to 7.9% by June 2021, after which it fell in each subsequent month, reaching 4.8% by the end of Q1 2022. During this time, most federal subsidies rolled off and cannabis prices underwent a steep downtrend, taking price down nearly 40% from the July 2021 peak per pound price. The reduction in tax collections from Q3 2021 through Q1 2022 suggests retail prices are just beginning to reflect steep losses in wholesale prices in late 2021 and into 2022.

California Quarterly Sales Tax Receipts Q1 2021 - Q1 2022

CDTFA also provided Cannabis Benchmarks with a breakdown of cultivation tax receipts for Q1 2022. Tax receipts for flower and leaves fell quarter-on-quarter, while receipts for fresh plants rose.

California Cultivation Tax by Product Q4 2021 - Q1 2022

As California’s cultivation tax is a flat tax by weight for each product type, that allows us to extrapolate the volume of product that entered California’s regulated market in recent periods. The table below shows that the amount of flower entering the commercial market had been on the rise throughout 2021 but contracted sharply in the opening period of this year. The amount of trim entering the market has been declining since Q2 2021, while the volume of fresh plants used to make extracted products bounced back in the most recent quarter. However, fresh plant volume remains down significantly from its peak in Q3 2021.

California Wholesale Sales Volume of Cannabis Products Q1 2021 - Q4 2021

Overall, in Q1 2022, cultivation taxes brought just $32.7 million into state coffers, down over 18% from an upwardly revised $40 million in Q4 2021, a quarter in which cultivation taxes might be expected to rise as the outdoor harvest occurs and holiday demand takes hold. Instead, cultivation tax collections have fallen in the past two quarters with cannabis growers either withholding product from the market, destroying product that is too costly to deliver, or possibly diverting product outside the legal market.

In any instance, California Spot has fallen 39.5% since summer 2021, indoor flower is down 34.8%, greenhouse is down 41.9%, and outdoor product is down 41.5%, squeezing the margins of legal growers of all types. The last time cultivation taxes rose from the third to fourth quarter was in 2019.

The CDTFA also announced the new “markup rate” that will go into effect on July 1, 2022. The rate has been cut from 80%, which prevails until June 30, 2022, down to 75%. The markup rate is adjusted every six months.

According to the CDTFA, “the markup rate is used to compute the average market price of cannabis or cannabis products sold or transferred to a cannabis retailer by a distributor in an arm’s length transaction. In these transactions, the average market price, which is subject to the state’s 15 percent cannabis excise tax, is the cannabis retailer’s wholesale cost of the cannabis or cannabis products plus the CDTFA’s calculated markup rate.” Based on how the excise tax is calculated, the reduction in the markup rate will result in a roughly 3% decrease in the excise tax paid by retailers in the case of an arm’s length transaction.

On the legislative front, according to the California Cannabis Industry Association, cannabis reform bill SB 1281 – which eliminates the cultivation tax, reduces the excise tax from 15% to 5%, and switches the burden to retailers instead of distributors – passed the California Senate last week. As well, SB 1293, which establishes the Cannabis Equity Tax Credit for equity applicants and licensees to apply up to a $10,000 tax credit to help defray costs, also cleared the Senate. Both bills are headed to the Assembly, after which they will be sent to Governor Newsom.

May 31, 2022

What Challenges are Oregon Cannabis Businesses Facing in 2022?

What Challenges are Oregon Cannabis Businesses Facing in 2022?
Photo: Markus Spiske/Unsplash

The Oregon cannabis market is headed for an epic shakeout, with retail and cultivation likely to be the first, and most painful, verticals to fail, according to one industry insider. Casey Houlihan, Executive Director of the Oregon Retailers of Cannabis Association, expects that within the next 18 months, the Oregon market will shrink due to massive oversupply and the glut of retailers in the state. When asked how the Oregon marketplace was faring, Houlihan said “the next year or year and a half will be bloody.”

Part of the state’s rationale for legalization was to eradicate the illicit market, but few states have been able to do so fully even as legal markets expand rapidly. There are retail product quality issues that appear to have emerged out of price declines as growers, manufacturers, and retailers look to less expensive products to compete with illicit market prices. Houlihan has witnessed the effects of the cessation of COVID-related federal relief and stimulus programs, as well as inflation, in retail businesses. He sees consumers pulling back – buying less expensive products and buying less often with inflation eating up disposable income.

Houlihan expects the reordering of the market will begin at the retail level, but noted, “when retailers sneeze, growers catch a cold,” meaning distress in one part of the market is easily spread through the supply chain. He thinks growers too will capitulate over the next 18 months and few new cannabis licenses will be issued with the moratorium in place. In fact, the only new licensing opportunities are for social equity entrants, such that an existing license that is surrendered will be issued to such applicants, but no new licenses will be issued.

Regarding demand, Houlihan is seeing “a rebound away from extracts” and stated flower purchases comprise “50% or more of the retail market.” The least expensive retail prices he has seen have been $30 an ounce for outdoor flower and $50 an ounce for indoor product. He has seen “mid or upper tier quality” smokable flower at $80 to $100 per ounce but noted flower “is still less expensive from a friend,” even with top shelf ounces going for $70 in some licensed stores. Despite extremely low prices, the reality is the legal market is still more expensive than the illicit market.

Some Oregon growers have responded to ever-lower prices by growing more product to sustain previous levels of income. As well, some of what is grown legally can end up in the illicit market as growers fight to survive, with some product reported as failing required testing instead finding its way “out the back door.” Ultimately, though, these self-defeating strategies will wear out and growers relying on them to stay afloat will have to either sell their businesses or close shop in a deficit situation.

There are signs that the market is beginning to seek balance. Houlihan said some growers have scaled back their operations, having learned that with cannabis prices low, and apparently headed lower, there is little point in expanding cultivation capacity.

Houlihan referred to the next 18 months as the “consequences phase,” a naturally occurring cancel / replace economic function in a massively oversupplied market. He noted that some social equity businesses feel they have been set up for failure, entering a market where the biggest players can go for months without earnings to drive smaller outfits out of business by undercutting price.

At the end of the day, Houlihan anticipates a natural attrition across the supply chain, beginning with retail and extending to cultivation. Newer, larger players – who can sustain losses to a greater extent and figure out how to make money in a heavily discounted environment – are likely to dominate the market in the coming years. The illicit market has not gone away and in fact is thriving on “back door deals” as some of Oregon’s first generation of legal cannabis entrepreneurs look set to be replaced in the “consequences phase” of the market.

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