October 3, 2023

New Mexico is no stranger to cannabis and cannabis legalization. The state passed the nation’s first medical cannabis law back in 1978, allowing limited use of the drug for some cancer patients. Cannabis was legalized for adult use in 2021 and the first licensed sales of recreational cannabis began in New Mexico on April 1, 2022.

In this article, an industry insider details some of the challenges that have sprung up in the last 18 months; namely, New Mexico’s legal cannabis market is grappling with an oversaturation of licensed businesses, while also seeing prices driven down by oversupply and illicit product from out-of-state making its way into the supply chain.

Low Barriers to Entry Lead to Hyper-Competitive Market

Looking at sales numbers, the first year-and-a-half of New Mexico’s adult use cannabis industry could be considered a success story for a relatively low-population state. In August, according to data from the state’s Regulation and Licensing Department (NMRLD), total cannabis sales in New Mexico – medical and adult use –  reached a record $48.2 million, compared to $40.8 million in sales in August 2022.

For Ben Lewinger, however, the data tells only part of the story. Lewinger is Executive Director of the New Mexico Cannabis Chamber of Commerce. He noted that several factors are creating serious challenges for New Mexico’s cannabis sector.

One issue is the way the state established its adult use cannabis market, specifically the licensing process. “New Mexico took a very forward approach in the way that we legalized, in that we had very few barriers to entry for licensure,” Lewinger told Cannabis Benchmarks. “Instead of having a social equity program or social equity quota, social equity was built into the DNA of how our regulatory framework was designed. It was very easy for anybody who wanted a license to get a license. And the result is we have over 2,000 licensed operators in New Mexico, across cultivation, manufacturing, retail, and testing facilities.”

That relative ease in obtaining a cannabis license means there are currently over 1,000 approved dispensary licenses in the state. A NMRLD spokesperson told Cannabis Benchmarks that 610 of those retail licenses are active. In comparison, Colorado, with a population nearly three times as large as New Mexico’s, had 679 active adult use retailer licenses as of the beginning of September.

The oversaturation of retailers means that individual stores are capturing smaller slices of the overall pie in a state with a population of only 2.1 million. Lewinger described New Mexico as currently having a burgeoning, but, for the moment, unstable market where licensed businesses are seeing decreasing revenue. “There are a ton of retailers who [are bringing in] less than $25,000 in revenue a month,” he said. “We are starting to see those businesses close, left and right.” Additionally, according to Lewinger, New Mexico is currently producing more cannabis and cannabis products than there is demand in the state.

Illegal Cannabis in New Mexico Drives Down Legal Market Prices

Another challenge, Lewinger noted, is the “huge amount of illicit cannabis product” coming into New Mexico from California, Oklahoma, and other states that are also experiencing cannabis surpluses due to their own overproduction.

One of the state’s top cannabis companies recently told Lewinger that wholesale outdoor-grown flower is currently selling for anywhere from $1,000 to $1,200 per pound. At the same time, he said, “you can get pounds of Grade A flower for $300 that are coming in from Oklahoma, and you can put those into our state traceability software through loopholes. That has really driven the price of properly regulated, New Mexico-licensed cannabis into the ground.”

The flood of out-of-state, illicit cannabis also impacts prices of other cannabis products in the state. “When you have truckloads of flower and trim coming in from other states and introduced into the state traceability software illegally,” Lewinger pointed out, “some of that is turned into distillate and finished products, forcing the price for manufactured products to depress as well.” A manufacturer told Lewinger that the wholesale price for distillate in New Mexico was $9,000 a liter last year. Currently it’s $4,200 to $4,600 per liter of distillate.

New Mexico Cannabis Regulators Working to Weed Out Bad Actors

That said, Lewinger noted that the New Mexico Cannabis Control Division has dramatically tightened up its enforcement over the past several months. An NMRLD press release from July, for example, announced that the department had revoked the license of a cannabis retailer in Albuquerque for selling out-of-state cannabis products. According to the release, among the violations found at the dispensary in question were “possessing, receiving, and selling cannabis products that were not native to New Mexico and were marked with California stampings.”

“I firmly believe that the way our state legalized was the right way to do it,” Lewinger said. “But the side effect of that is you have a bunch of operators [who] have very little intention of ever participating in the true legal market. I’m thinking of two dispensaries that were closed for selling California product, and neither of them even came to their hearing. Which makes me think that was their plan all along; to set up shop, make it as long as they can selling California product so they had higher margins on what they were selling.”

The priority now, Lewinger believes, is for the state’s cannabis sector to stabilize and undercut the illicit market. “Creating supports and funding for small and medium-sized operators,” he said, “so it’s not only MSOs” – large, multi-state operators – who are left standing as the industry matures and consolidates.

Medical Cannabis in New Mexico After Recreational Legalization

As in other states that have legalized cannabis for adult use, the medical cannabis market in New Mexico has softened considerably since the opening of recreational sales. NMRLD reported medical cannabis sales of $13.5 million in August 2023, compared to $16.5 million for August last year.

For his part, Lewinger believes the medical cannabis sector will survive in New Mexico. “Like every other state we’ve seen enrollment in our medical cannabis program nosedive,” he acknowledged. “But I like to think that’s more of a correction. For medical cannabis here, you have higher THC limits on products, which I think is very appealing, especially for patients struggling with chronic pain or cancer treatment.”

He also noted that medical cannabis sales in New Mexico are tax-exempt. “We have a[n adult use] cannabis excise tax that’s 12%, and then everywhere in New Mexico has a gross receipts tax of 6% to 10%,” he said. “The total tax on [adult use] cannabis is anywhere from 18% to 22%, depending on where you live in the state, but medical cannabis patients don’t have to pay any tax. I do think that is enough for people, especially for folks that really believe in cannabis as plant medicine, to continue to renew their [patient] licenses.”

As Famous as New Mexico Green Chile?

Lewinger believes that, with the financial resources needed for cannabis regulation and compliance now coming into the state coffers via tax revenue from the industry, that the legal market in New Mexico has turned a corner.

“Our state had a very aggressive timeline from when the governor signed the cannabis regulation act to our first adult use sale,” he said. “It took less than 12 months to create a brand new division to regulate legal cannabis and staff it up. So it’s only now, a year-and-a-half into the legal industry, that the state has revenue and our regulators are able to have sufficient compliance and enforcement activities across the state. Huge kudos to them, because they are doing a really good job of cracking down on those bad operators. And I think that is what’s going to make the biggest difference in regulating our industry.”

Lewinger also expects New Mexico cannabis to come into its own as a brand, as its quality becomes better known. “I would put New Mexico cannabis up against the best cannabis grown in Humboldt County [in northern California] and British Columbia any day of the week,” he said. “Especially with our outdoor, sun-kissed soil. I would put it up against cannabis anywhere in the world. I look forward to a day when we have interstate commerce, and we’re exporting our green cannabis and cannabis products alongside [New Mexico’s famous] green chile. I hope that in five years’ time there’s a pathway for new operators to enter and thrive in the state’s industry.”