Weekly Report -- Published on 21 October 2016
U.S. Cannabis Spot Index down 8.9% to $1,466 per pound, a new year-to-date low. The simple average (non-volume weighted) price decreased $28 to $1,765 per pound, with 68% of transactions (one standard deviation) in the $1,293 to $2,237 per pound range. The average deal size increased 23% to 16.1 pounds this week, from 13 pounds last week. In grams, the Spot price was $3.23, and the simple average price was $3.89.
This week’s Transaction Stats illustrate the first full-fledged flood of outdoor-grown product from the seasonal harvest. The relative frequency of observed transactions for indoor product remained steady, while those for greenhouse and outdoor flower are essentially the reverse of last week. Despite relatively fewer trades for outdoor product, such flower made up over half of the observed volume moved this week, doubling last week’s relative volume for that grow type.
Indoor flower spanned from $1,000 to $3,000 per pound; the median price was $1,800.
Greenhouse flower spanned from $1,200 to $2,500 per pound; the median price was $1,575.
Outdoor flower spanned from $800 to $1,800 per pound; the median price was $1,300.
The US Spot Index fell nearly 9% this week, settling at a new year-to-date low of $1,466 per pound, 5% lower than the previous one of $1,540 established two weeks ago. High-volume deals for relatively low-priced outdoor product, particularly in California, drove down the national volume-weighted average. The observed average deal size was up nearly 25% week-over-week, due largely to an almost 60% jump in the size of deals for outdoor flower compared to last week. However, despite the national Spot Index, as well as those for California and Washington, plumbing new depths, no year-to-date lows for individual grow types in the four major Western markets were observed this week. While the low rates and high volumes for outdoor product were significant enough to lower those Spot assessments, the newly-harvested field-grown flower is still garnering higher prices than last year’s product, the continued trading of which we observed into September.
Rates for both greenhouse and outdoor-grown flower declined this week, with pricing for the latter falling more sharply than the former. Indoor product prices ticked upward for the third straight week to $1,954 per pound, but on the whole have shown relative steadiness over the course of the previous two months. As the fall harvest has gotten underway, the volume-weighted average for indoor flower has risen 2.6% since that observed on August 26th.
The table below illustrates the U.S. Spot Index, along with the volume weighted averages for all transactions accompanied by a medical or recreational / adult-use designation, which represented more than 97% of all observed deals.
The spread between medical and recreational prices shrank significantly this week to $127, after an observed difference of $222 last week. A year-to-date low composite Spot Index in California, the nation’s largest medical cannabis market by far, drove pricing for product designated as medical to within just $39 of the national composite rate. Prices for recreational flower fell week-over-week in all three applicable markets, Colorado, Washington, and Oregon, driving down by over 5% the national rate for such product.
November & December Forward prices decline with sungrown supplies. As discussed in this week’s Spot commentary, large amounts of flower from this year’s outdoor harvest are beginning to reach the market. 42% of the this week’s observed transactions for outdoor flower ranged from 50 to 500 pounds, while 55% were for deal sizes of 25 pounds or more. Buyers are shifting the mix of their forward arrangements to take advantage of these new supplies. The proportion of forward deals for outdoor grown flower increased from 7.5% last week to 46.7% this week.
Greenhouse and indoor grown flower represented 13.3% and 40% of forward arrangements, respectively. With more outdoor grown flower on the way, the November Forward is down $50 to $1,450 per pound, while the December Forward is down $25 to $1,600 per pound. The November Forward represents a discount of 1.1% relative to the current U.S. Spot Index of $1,466. The premium or discount to the U.S. Spot Index are illustrated in the table below.
For comparison, the U.S. Spot Index averaged $1,801 and $1,927 per pound for the months of November and December 2015, respectively; thus, for the remainder of the year, the market is anticipating prices to be about $325 to $350 per pound lower than last year.
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OREGON - Forward Commentary
While much has been written about the impacts to the market of Oregon’s October 1st compliance deadlines, a rule change that will occur at the end of this year may have significant implications for pricing and supply in Oregon’s legal markets. Once 2016 comes to a close, the state’s medical dispensaries will no longer be allowed to retail products to adult-use consumers, as they have been permitted to do since October 2015. Due to the end of this allowance - in addition to the new testing rules, as we acknowledge at the conclusion of this section - it is an open question as to where significant portions of the fall harvest supply from the state’s registered medical growers will end up.
The uncertainty as to whether the production of Oregon medical cultivators will find its way into the legal market is due to the fact that such growers may only sell to medical dispensaries overseen by the OHA. However, most OHA-registered medical dispensaries are expected to convert to OLCC-licensed stores by the end of the year, as they can continue to sell product to patients in the state’s medical program, as well as general consumers. As more medical dispensaries switch to the OLCC system, medical growers will have fewer buyers for their produce and may be tempted to let that product go into illicit channels.
As we have noted over the course of this year, product harvested in the fall is typically parceled out over the course of the subsequent year, both to ensure steady revenue and in an attempt to gain higher rates during times of year traditionally more favorable to sellers, namely spring and summer. However, a significant decrease in the number of OHA-registered medical dispensaries in 2017 means that medical growers intending to remain completely legitimate could be forced to sell the entirety of their crop prior to the end of 2016, subjecting themselves to the buyer’s market that takes place each year around the fall harvest. Additionally, Casey Houlihan, Executive Director of the Oregon Retailers of Cannabis Association (ORCA), noted that some medical dispensaries were considering retaining their OHA-registered status into 2017 in order to take advantage of the aforementioned market conditions and secure product at cheap rates from medical growers desperate for buyers. A prior rule change put in place by Oregon officials - discussed in our report for September 23rd - allows medical dispensaries transferring to the OLCC-licensed system to bring their inventory with them. However, it should be pointed out that any product obtained at this point would have to adhere to the state’s new testing standards.
Ultimately, the above-discussed situation could lead to observations of very low-priced deals in the OHA system in the coming weeks and months, in addition to reduced overall supply in the state’s legal markets, as it is likely that some medical growers will seek to remain compliant while others may explore illicit channels for their product. In regard to the latter supposition, the inability for medical growers to find labs to test their product promptly will likely motivate some to release their product onto the black market. If enough do so, the loss of said supply could have implications months down the road, when in previous years such growers would still be wholesaling the results of their fall harvest to registered dispensaries. It must be noted that medical cultivators in Oregon are subject to reporting requirements, but they are limited to monthly self-generated reports of plants, inventory, and transfers that could in theory be circumvented easily.
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