Weekly Report -- Published on 26 August 2016
U.S. Cannabis Spot Index up 0.2% to $1,689 per pound.
The simple average (non-volume weighted) price increased $20 to $1,942 per pound, with 68% of transactions (one standard deviation) in the $1,453 to $2,430 per pound range. The average deal size increased 46% to 13.9 pounds this week, from 9.5 pounds last week. In grams, the Spot price was $3.72, and the simple average price was $4.28.
The distribution of transactions was similar to last week, with the proportion of greenhouse and outdoor deals each increasing by 1%. The contribution by volume of indoor grown flower decreased to 50% this week, from 55% last week, however the U.S. Spot Index was nominally unchanged as volume weighted average prices increased across all grow types; most notably outdoor grown flower was up 6%.
Indoor flower spanned from $1,000 to $3,200 per pound; the median price was $2,000. Greenhouse flower spanned from $1,350 to $2,400 per pound; the median price was $1,600. Outdoor flower spanned from $900 to $1,600 per pound; the median price was $1,250.
Deal sizes for indoor flower ranged from 0.5 to 50 pounds.
Deal sizes for greenhouse flower ranged from 1 to 135 pounds.
Deal sizes for outdoor flower ranged from 1 to 100 pounds.
When ranked by deal size, the average for the top quartile was 40.7 pounds, while the the average for the bottom quartile was 1.3 pounds.
The 6% increase in the weighted price of outdoor grown flower was driven largely by a 33% increase in the price of outdoor flower in Washington State from $1,000 to $1,333 per pound.
As illustrated in the graph below, the U.S. Spot Index has remained comparatively stable over the past six weeks, fluctuating within a $132 per pound range.
After rates for indoor and outdoor-grown flower both hit year-to-date lows last week, this week saw prices for those grow types increase slightly, with rates for all grow types and the composite U.S. Spot Index ticking up marginally but generally holding steady. Consequently, the price differential between the three grow types also remained quite similar compared to last week, with the difference between indoor and greenhouse-grown product already discussed above. The Transaction Stats graph on page 1 shows that more of the volume traded this week was greenhouse flower (37% this week compared to 29% the week prior), but the relative volumes observed for the other grow types did not shift substantially. Overall, it appears that the market in August achieved a measure of equilibrium, especially compared to the turbulence of July.
We noted last week that, despite across-the-board price decreases this summer, warehouse product has retained its value relative to the prices commanded by other grow types. This statement was due to the fact that, as rates for all grow types and overall have decreased generally, the gap in pricing between indoor production and that of other grow types has increased since the spring, prior to this summer’s novel price movement.
It must be noted, however, that the composite U.S. Spot Index, as well as the weighted average for indoor-grown product nationwide, is propped up by rates for such flower in the country’s smaller, more tightly regulated, medical-only markets. States with such systems have artificially inflated prices due to various combinations of the following factors: limited supply (via license and / or plant caps), restrictions requiring higher-cost indoor production, a risk premium associated with the industry due to a poorly articulated regulatory framework, lack of demand due to low patient counts (or high retail prices), and, in newer markets, high startup costs for growers that are still being recouped.
On the other hand, rates for indoor-grown product have plunged dramatically in the major western markets since July. For example, the weighted average price for warehouse flower in Colorado dropped 25% between the weeks ending July 1st and August 5th. Though those rates have recovered slightly in recent weeks, prices for indoor product in Colorado remain in many cases roughly $1,000 less per pound or more than they are in states such as Nevada, Arizona, and Illinois, as well as the small East Coast markets. Pricing differences between states with more market-oriented systems and those with command-and-control approaches are explored more in our Mid-Year Review & Outlook.
September Forward closes at $1,625 per pound.
Forward prices held steady for a second straight week. With the U.S. Spot Index experiencing relative stability for six consecutive weeks after a volatile start to July, and with improving clarity regarding the forthcoming supply surge, weather conditions remain the principal uncertainty in the months ahead. At $1,625 per pound, the September Forward closed at a discount of 3.8% relative to the U.S. Spot Index.
This week’s distribution of forwards was 4% outdoor, 10% greenhouse and 86% indoor and were reported from California, Colorado, Washington, Nevada, Arizona, Michigan and New Hampshire. The average forward deal was 12.6 pounds. The premium or discount to the U.S. Spot Index are illustrated in the table below.
Forwards for weekly and biweekly deliveries ranged from 1 to 25 pounds, while forwards for monthly delivery ranged from 5 to 50 pounds. The lowest priced forward was $900 per pound in California for delivery of 12-pound lots consisting of last year’s harvest, and priced to be competitive with new supplies coming to market. The highest priced forward was for $3,000 per pound in Michigan for monthly delivery of 10-pound lots for the next six months.
A greenhouse cultivator in California is currently selling last year’s crop on the spot market for $1,400 per pound, but - in anticipation of the supply surge - has entered into a forward agreement for $1,300 per pound for his yet-to-arrive new crop. A dispensary buyer in California reported wide availability of low-priced greenhouse and outdoor supplies, allowing him to be a price setter in both the spot and forward market, leaving some growers frustrated with his take-it-or-leave-it attitude. An indoor grower in Nevada commented that prices are often based upon who one knows; this grower has entered into multiple long-term delivery arrangements, each 5-pound lots priced at $2,500 per pound, yet sells the same product to new buyers on the spot market at $3,200 per pound. Another grower in Nevada is selling 10-pound lots on the spot market at $3,000 per pound and offering discounts to $2,800 per pound for those willing to enter into forward arrangements for deliveries of 10 pounds per month for the next six months.
While weather forecasts for October and November may change between now and then, at least some of the recent stability in the forward market may be attributed to the lack of severe natural disasters and weather conditions relative to this time last year. 2015 saw major wildfires burning in cultivation-heavy areas of California and Washington throughout the summer and into the fall. Though wildfires have occurred this year in California, they have not hit the state’s major cultivation regions. Additionally, California’s drought, while still an issue, is not as severe this year as last. Moving away from the West Coast to Colorado, the outdoor harvests of Pueblo area farmers were diminished last year by uncharacteristically heavy precipitation in the spring that stymied crop growth and development early. This spring saw no such conditions or other extreme weather events that characterize Colorado’s sometimes unpredictable weather.
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The Wholesale Spot Price Spreads graph below reveals specifics of the differences between rates for indoor and greenhouse product in the four major western markets for each week in the month of August
The gap in pricing between indoor and greenhouse-grown flower was tightest in Colorado and averaged $82 over the course of the month. Washington saw the largest overall difference, averaging $218, just a bit more than California’s average of $210. The difference in rates between the two grow types in Oregon in August averaged $174.
In making this comparison, it must be noted that the designation of “greenhouse” product can indicate a wide variety of actual growing conditions. Greenhouses can vary from multi-million dollar rigid structures equipped with the latest in agricultural automation, monitoring, and climate-control technology to small, homemade hoop houses constructed of tarp and metal conduit. Interestingly, greenhouses in Colorado tend to skew toward the former description, while growers in the West Coast states often cultivate in the latter.
The lack of strict regulation that has characterized California and Oregon’s medical markets in particular has led to less available capital and a lack of legal protection necessary to construct large, technologically sophisticated greenhouses of the type that have been going up in Colorado recently. As such, it could be presumed that much of the greenhouse product in Colorado contains the aesthetic characteristics of indoor flower due to the increased protection afforded by rigid, climate-controlled structures. Contrastingly, plants in simple hoop houses are much more exposed to the elements, potentially causing rates for such product to drop as buyers seek flower that can pass for indoor on store shelves.
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