October 25, 2022

Cannabis Market Outlook from a California Perspective

Cannabis Market Outlook from a California Perspective
Photo: Glass House Farms

The future is bright for California cannabis, even amid an historic sell-off in cannabis prices and a larger illicit than legal market. President Joe Biden is in poised to deschedule cannabis, thousands convicted of nonviolent cannabis crimes will be forgiven, and interstate trade will be the law of the land. Moreover, California’s illicit market will fade away, allowing for some traction on cannabis prices.

Too good to be true? Not according to Graham Farrar, President of Glass House Brands. He is an optimist, not just about his business, but about cannabis industry prospects overall.

Farrar believes Biden’s vow to pardon all prior federal offenses of cannabis possession, his push to have the states follow suit, and, perhaps most important for the industry, ordering Health and Human Services Secretary Xavier Becerra to expeditiously review how cannabis is scheduled under federal law will ultimately save the industry. Farrar thinks cannabis will eventually be descheduled as a result of the administration’s recent moves.

Farrar sees Biden’s action as “a lot more strategic,” rather than “some political stunt” ahead of the midterm elections. He said Biden’s cannabis announcement is “much bigger than people think.” Farrar interprets it as an end-around Congress. “Congress is a tough road, no matter the issue,” he pointed out. In our interview, Farrar recounted each cabinet member and department head’s cannabis resume and sees their Biden administration appointments as intentional to fulfill campaign promises regarding cannabis. Ultimately, Farrar believes “Biden can legalize cannabis” and that he is going to do so “within the next two years.”

Farrar noted California is “the fifth largest country in the world” by gross domestic product. He said, “not every state can grow cannabis” and cited the Golden State’s massive agricultural industry. Farrar said, “the future looks like California,” when he talked about interstate trade post-federal legalization. Farrar revealed he has been made aware there are some industry insiders lobbying against legalization because it will take away their monopolization of individual state markets, but he does not believe they will be successful, especially considering Biden’s recent efforts on cannabis reform.

When asked about local markets, Farrar acknowledged they are currently “brutal” owing to crashing prices. He expressed a good deal of sympathy for smaller growers, seeing their plight as a combination of costly regulation, taxes, and the illicit market. He pointed to some northern California counties that have limited the size of greenhouse grows to 10,000 square feet and said cultivation at that scale cannot succeed “at these prices.”

Farrar estimated the illicit market is “two to three times the size” of California’s legal market, due in large part to the fact that “60% of municipalities are not signed up [to allow licensed cannabis businesses].” Meanwhile, consumers in jurisdictions that have opted-out are “buying from the illicit market.” More broadly, he asserted, “every time you try to prohibit mutually beneficial transactions, you fail,” meaning legalizing cannabis in a state that already had a thriving unregulated market for decades is a fool’s errand. Farrar noted pointedly that California has “11,000 liquor stores but just 1,000 dispensaries,” highlighting not just the imbalance in that metric, but how state policy has tied the cannabis industry’s hands by limiting distribution within the state.

Speaking about Glass House, Farrar said the firm “sold their first pound from their new farm in July” and has plans to “be in every store” with an ethos of “elevating lives with California cannabis.” The fact is, Glass House is a massive undertaking that will ultimately occupy 6 million square feet of greenhouse. The firm has successfully driven the cost of production down to $150 per pound and has their sights on $100 per pound next year through “technology, quality, and consistency.” Farrar said Glass House wants to be “the Casmigos [tequila] of cannabis;” that is, high quality and affordable versus “1942,” a bespoke tequila brand that doesn’t achieve the widest distribution due to price, but instead appeals to a particular and affluent consumer. That said, he noted Glasshouse will put out products at different price points.

Farrar sees a changing cannabis market and industry; he thinks descheduling is going to happen and sees interstate trade in the future where multi-state operators in, for example, Illinois “should probably just do retail.” He expects states inhospitable to growing cannabis can and should look to California for their supply, as much of the country does for other agricultural products. Regarding cannabis prices, he thinks business attrition will reduce supply even as federal legalization surges demand. Farrar’s optimism does not stop at California’s border; he sees federal legalization as a near-term event – within two years – an eventuality that Glass House appears built to take advantage of.

October 18, 2022

Massachusetts Wholesale and Retail Cannabis Prices Continue to Decline

Massachusetts Wholesale and Retail Cannabis Prices Continue to Decline
Photo: Jon Flobrant/Unsplash

The Massachusetts Cannabis Control Commission (CCC) recently issued data for August 2022 adult use sales on the state’s Open Data Platform. August 2022 adult use retail sales, at $130.9 million, were down 1.2% from upwardly revised (+$1,345) July 2022 sales of $132.5 million and up 3.7% from August 2021 adult use sales of $126.2 million. August 2022’s weighted average wholesale spot price was $2,271 per pound, down 56.3% from August 2021’s average spot price of $3,534, which suggests that consumer demand is increasing while cannabis prices are falling.

August 2022 average daily sales of $4.22 million were down 1.2% from July average daily sales of $4.27 million.

The CCC also provides information on the number of licensed and operating cannabis businesses in the state. The table below shows the license count of approved businesses for the last three months. The pace of issuance in this unlimited license state continues to be glacial, but regulators in the state have said they are keeping a close watch on how the cannabis industry develops and “have learned lessons from other states with unlimited licensing.”

Massachusetts Cannabis License Count

Massachusetts is coming up on the fourth anniversary of legal adult use sales in November. The weighted average of wholesale spot prices began to climb in earnest as adult use sales commenced in late 2018 and peaked in December 2020, with just a few limited price drawdowns in the first three years of sales. Price had settled into a $163 range from December 2020 through December 2021 when the downside limit at $3,492 per pound, established in February 2021, gave way. Price peaked again in October 2021 just as the economy was moving into the post-pandemic phase. Since October 2021, the weighted average spot price has fallen just over 36%. The all-time low was reached in July 2022. Since July, price has risen just over 9.5% per pound and, with contiguous states getting up and running, there is little likelihood that the market will ever see prices near the $3,700 level again.

Massachusetts does allow, and even offers financial incentives for outdoor cannabis growing, but it is unclear what the size of the outdoor harvest will be this year. That said, with prices still high compared to much of the nation, there is sure to be demand for product at lower price points when it reaches the market. The first frost date in eastern Massachusetts takes place in October and in September in western Massachusetts, so it is likely that some outdoor product will hit the market this month.

The chart below depicts retail gram prices for flower from January 2021 to present. The price per gram of cannabis flower in Massachusetts has fallen for 18 months in a row as of September 2022.

October 11, 2022

How Will the Late Oregon Outdoor Cannabis Harvest Impact Wholesale Prices?

How Will the Late Oregon Outdoor Cannabis Harvest Impact Wholesale Prices?
Photo: Sergey Pesterev/Unsplash

Pandemic pricing and demand likely saved a number of cannabis businesses in Oregon, a situation discussed in regard to Colorado in an interview featured in last week’s Premium Report. However, the regression to pre-pandemic pricing is once again putting cannabis businesses at risk. Perhaps the confluence of larger harvests, price erosion, and the license moratorium will finally dent supply in Oregon, allowing prices to stabilize at last.

Oregon cannabis prices have staged a limited recovery over the past several weeks, with outdoor product gaining 19.9% since hitting a year-low level in mid-July. Outdoor has traded up amid talk of a later-than-typical harvest due to the delay in planting caused by heavy spring rains. Greenhouse product also staged a rally from mid-July through mid-August, pushing prices up until experiencing a decline in mid-September. Indoor cultivated flower also experienced an uptick in pricing over the same time period, but as with greenhouse grown flower, prices experienced another decline before leveling off to start October.

Generally speaking, strongly trending markets that develop high price volatility typically mean a reversal of the overall trend. While it is too early to call a bottom in Oregon cannabis prices, especially with the harvest imminent, the pandemic price effects have been completely reversed – and then some. This might be considered a “clearing” of the market, thus setting the stage for a steady but slow increase in cannabis prices.

Yet, the winds of change are blowing through the Oregon cannabis industry. Cannabis Benchmarks spoke to Casey Houlihan, Executive Director at the Oregon Retailers of Cannabis Association, to discuss the status of the Oregon market today and in the coming months. Houlihan has been on the front lines of the industry with political and industry contacts throughout the state, in addition to putting on events like the Oregon Interchange, where retailers and product vendors are guaranteed time with business connections.

Houlihan is seeing “a lot of retailers shutting down” and “growers turning in their licenses,” but noted the “amount planted this year exceeds the amount from last year,” illustrating the crosswinds prevailing in the Oregon cannabis industry. When asked about the smaller month-on-month wet weight harvests, Houlihan said, “late frosts and a wet June delayed plantings so a lot of plants are still in the ground.” He expects outdoor to start coming to market from late October to early November this year. He is seeing  substantial greenhouse light-deprivation product in the market now, which might account for the downturn in greenhouse prices of late.

Regarding the moratorium, Houlihan is frank in his assessment: “it’s like a bandaid on a bullet wound.” He added that he is still seeing “people coming into the market who think they have the special sauce” to make money in cannabis cultivation. Houlihan has been witness to a beleaguered industry, with retailers slashing prices and growers flooding a weakened market with product.

Some thought the moratorium would lead to a bid under cannabis real estate and existing licenses. However, Houlihan said there was “an exodus from the production side as owners rushed production and licenses into the market,” resulting in sharply lower prices for cannabis property and licenses. Again, illustrating the crosswinds prevailing in the market, he sees multi-state operators expanding their Oregon footprint, “buying up additional market share.”  Houlihan said businesses are “trying to sell cannabis properties with a license attached,” because prices are higher on package deals.

He said there is an exodus of consumers into the illicit market because the product quality is high and the prices are below those of lesser quality products in the legal retail space. Where retail stores are charging $250 to $300 per ounce ($4,000 to $4,800 per pound), consumers can find triple-A quality flower for $1,000 per pound in the illicit market. Houlihan said, “consumers pay as much as 75% less for quality cannabis in the illicit market.” He is seeing some of the best craft growers turning in their cultivation licenses, but not leaving the market; that is, highly skilled growers are moving to the illicit market. As he sees it, “the highest quality product is still in the illicit market” and the illicit market is thriving with deeply educated consumers, as the legal market remains under significant financial pressure.

So, while the winds of change are indeed blowing through the Oregon cannabis industry, they are crosswinds: the moratorium failed to lift prices for cannabis business and licenses, yet the illicit market and some specific, licensed craft cannabis outfits are thriving even as cultivation licenses are being turned in amid an uptick in cannabis prices.

October 4, 2022

Colorado Cannabis Companies Urging for “Tax Holiday” and License Moratorium

Colorado Cannabis Companies Urging for “Tax Holiday” and License Moratorium
Photo: Alexander Grey/Unsplash

Some of the most well-known cannabis companies in Colorado are petitioning the state’s Marijuana Enforcement Division (MED), the Colorado Department of Revenue Division of Taxation, and the Governor’s office for an excise tax “holiday” and a moratorium on cultivation licenses in the state. MED, on its own, can initiate a license moratorium and implement a tax holiday, but cannot eliminate the tax overall.

One signatory to the license moratorium and tax holiday requests is Silver Stem Fine Cannabis, a vertically integrated firm and multi-state operator. Stan Zislis, Chief Business Development Officer for Silver Stem, spoke with Cannabis Benchmarks about the industry’s requests to Colorado officials.

Regarding the request for a holiday from the state’s wholesale excise tax, Zislis expressed a good bit of flexibility in how it might be implemented. He suggested the state might replace the lost revenue through sales taxes at retail, pointing out the first $40 million of the wholesale excise tax is earmarked under the state constitution for the BEST (Building Excellent Schools Today) fund. When asked how long the tax holiday might be in force, if implemented, Zislis said, “possibly years, depending on how much time it takes to fix the AMR system.” AMRs – or Average Market Rates – are calculated quarterly by the Colorado Department of Revenue and are used to levy taxes on internal transfers from adult use cultivators to commonly-owned retail and product manufacturing operations.

Zislis, like many in Colorado’s cannabis industry, has issues with the how AMRs are calculated, especially during periods of rapidly falling prices. The “averages the AMR are using lag the market,” he noted, and thus do not reflect current wholesale prices. AMRs are calculated on data taken from the most recent two quarters to apply to the current quarter. For example, AMRs that will go into effect for Q4 2022 were calculated based on wholesale transactions that took place between June 1 and August 31, 2022. In instances of sharply falling prices, AMRs might be set at rates well above current market prices, resulting in higher tax responsibilities, thus adding to the financial pressure inflicted on firms amid falling prices.

While Zislis is not married to any particular alternative to the AMR approach, he did point out there is no “market rate for internal transfers to, for instance, the firm’s retail outlets.” He suggested one alternative might be to “base the excise tax on the cost of production,” for vertically integrated businesses, and noted the state is charging “taxes on taxes.”

Regarding the proposed moratorium, Zislis referred to cannabis price history in his state. “This isn’t the first time Colorado cannabis has been in a downturn,” he pointed out. He further asserted that a cultivation license moratorium “should have been implemented in 2017, which would have resulted in a more stable market today.” Zislis said the state was “already headed toward oversaturation then,” referring to the sell-off in 2017.

Cannabis Benchmarks Colorado Spot Index recorded that, at its lowest point, the 2017 market was down 18% and fell an additional 30.4% in 2018. The current June 2021 to present sell-off is very nearly 39%. Notably, demand in the state’s legal market was still on the upswing in 2017 and 2018, but that is not the case today. Zislis noted that “June 2021 was the last month of year-on-year growth” in Colorado cannabis sales.

Meanwhile, “there are over 1,200 cultivation licenses,” he said. Zislis conceded that with medical and recreational licenses co-located, there are actually about 1,000 grow operations, which he considers too many. He added that the number of cultivation licenses is up by over 100 this year, and said “speculators and social equity applicants” were among those gaining licenses. On the number of cultivation licenses in a broader sense, Zislis said “2020 and 2021 was a lifeline” to businesses that would have otherwise had to shut down, speaking of the boom in sales that occurred during those years. If not for the surge of demand during the initial year or so of the COVID-19 pandemic, he feels numerous businesses would have been forced to close, eventually resulting in reduced cannabis supply.

Zislis said discussions of the moratorium are sometimes too narrowly focused, with people asking, “what will the moratorium do for me tomorrow?” He counseled a longer view, citing natural business attrition as reducing cannabis supply over time. The moratorium request is for two years, but Zislis said “social equity and those medical licenses that are about to get recreational permission” should be exempted from the moratorium. As well, he noted that “a change at the federal level” should cause a “review or repeal” of the moratorium.

The proposed moratorium is for cultivation licenses only and Zislis, when asked if retail should be included, emphatically said, “no, we need more retail stores.” He said each jurisdiction, referring to localities that can opt-in or out of cannabis, “has the right to determine time, place, and manner” that cannabis businesses can operate. Zislis noted that, 10 years after voters approved adult use legalization, “more than half of Colorado’s municipalities still prohibit cannabis businesses,” including Colorado Springs, “the second largest city in the state.” Zislis said the cannabis business overall is “limited by state, federal, and local government” and is “not a free market.”

His view is that “to keep taxing and adding licenses would be irresponsible” in the current environment. Ideally, Zislis would like the moratorium to be “for two years and see how it goes,” and noted there are many ideas floating around about how the tax system might be changed to make it more amenable to cannabis businesses by more accurately reflecting actual wholesale prices.

September 28, 2022

Michigan Contemplates a License Moratorium to Help Stabilize Cannabis Market

Michigan Contemplates a License Moratorium to Help Stabilize Cannabis Market
Photo: Matteo Paganelli/Unsplash

The Michigan Cannabis Regulatory Agency (CRA) held a meeting on September 14, 2022, to three questions regarding a potential license moratorium and whether “excess grow licenses” should be done away with, as covered by MLive.com. Each excess license allows adult use growers an additional 2,000 plants on top of the maximum 10,000 plants allowed under regular Class C grow licenses. Up to five Class C licenses can be “stacked” to equal 10,000 plants, while each “excess license” allows 2,000 more plants to be added to the amount granted by the underlying Class C licenses.

According to the CRA, the following questions were under consideration at the public meeting:

  1. Would you support a change in the law to place a moratorium on the issuance of grow licenses? If so, under what conditions? If so, for what period of time?
  2. Should the agency eliminate the excess grower license established in the administrative rules?
  3. Should the agency promulgate a rule to authorize an individual to hold an interest in more than five marijuana growers or in more than one marijuana microbusiness after January 1, 2023?

Speakers from the caregiver community, recreational cultivators, and various cannabis industry organizations spoke at the meeting to express opinions regarding the above questions, occasionally interspersed with complaints regarding licensing fees, the evolving caregiver system, and high number of communities that have opted out of the adult use industry.

Most speakers supported the notion of a moratorium, though many expressed support for the continued issuing of licenses to social equity and Native American applicants during the moratorium. Smaller growers from the caregiver community expressed worry about being crowded out of business by multistate operators and operators from Europe, according to one speaker.

The Michigan Cannabis Manufacturers Association (MCMA) spokesperson said the organization was “open to the moratorium,” but qualified the statement by stating they “don’t support a blanket moratorium.” The MCMA further muddled their stance by expressing concern over “the market situation.” MCMA acknowledged low prices and said they “recognize oversupply … but also lack of participating cities [that allow adult use cannabis businesses].” The CRA must “deal with the illicit market,” according to the MCMA. As well, the organization expressed “concern about excess grower licenses,” but wondered “what other licenses might be impacted.”

The National Organization for the Reform of Marijuana Laws (NORML) weighed in at the meeting, pointing out they “disagreed with the creation of excess grow licenses,” referring to the time at which they were memorialized in law. The organization did not take a stand on the moratorium and opined on the small number of communities opting into the cannabis business. NORML did concede that “small farmers would be helped by the moratorium.”

The Michigan Cannabis Industry Association (MCIA) came out in favor of the moratorium; they said they “surveyed their members last spring” and found widespread support for the moratorium. It appears the moratorium has long been under discussion in the state’s cannabis community.

Thomas Levine, a cannabis attorney, said his firm has been against the “excess grower” licenses from the outset, asserting they were beyond the scope of the law. He said he does not support a moratorium because he thinks it might stop “people in [the] process” of obtaining a license.

Overall, the moratorium gained support from speakers representing individual cannabis businesses, while cannabis advocacy and business organizations, NORML and MCMA, did not offer full throated support. The MCIA, however, does support the moratorium.

David Harns, Public Relations Manager for the CRA, said the agency will “take the information gained from the public meeting and internalize it.” The CRA does not have the authority to implement a moratorium and the questions regarding licenses – multiple and excess growing – will be taken up in the next “rules session” after the new year, according to Harns. There is no expected date for the legislature to formulate a bill that would impose a moratorium on cannabis licenses nor a target date for implementation of a moratorium. The alphabet soup of cannabis organizations is likely to weigh in through their lobbyists, according to Harns, although the meeting suggested all players are not on the same page. Stay tuned.

More immediately, plant count data from the CRA indicates a large fall harvest is on the way, which will further pressure prices in an already oversupplied market.