Photo: Wesley Gibbs/Unsplash
California is arguably the largest legal cannabis market in the world and, as such, lessons might be learned by states that have recently legalized cannabis. The most striking current economic features of California markets are the deterioration in wholesale prices, the legal tax regime, and the failure to eradicate, or apparently even put a dent in, the illicit market. The state may have continued along for many years with dueling legal and illicit markets and what is arguably a very expensive tax regime if it were not for the significant and ongoing price deterioration. The downtrend in price has highlighted tax issues, as well as the entrenched illicit market and its effects on legal cultivation and prices. California cannabis price pressures continue, foreshadowing dire consequences for small cannabis farms and processors of outdoor product, as well as retail outlets that see demand for sun-grown, smokable flower from their customers.
To get a better handle on what is driving California cannabis business, Cannabis Benchmarks spoke with Brian Hilliard of Norcal Consultants. His long term take on the California cannabis industry is that it will survive, but will be significantly changed in five years time. He sees “big alcohol, tobacco, and pharma buying up land” to produce massive quantities of (mostly) outdoor grown cannabis and driving the price for such plant material “down to $100 per pound” to fulfill the demand for extracted products they create. Along with further price deterioration, Hillard predicted a drop in quality as alcohol, tobacco, and pharmaceutical firms create cannabis products for mass distribution.
The extraction market has been a double-edged sword in California. On the one hand it has created another demand channel for outdoor grown product. However, outdoor flower prices have continued to deteriorate even as the new demand channel – extracted and manufactured products – expands, in large part because extractors are high-volume buyers that can secure lower rates relative to smaller purchasers of smokable flower. Hillard explained that farmers are often “waiting for five months to get paid” when they sell to retailers or processors, essentially consigning product for sale. Extractors, on the other hand, pay up front for sun-grown cannabis flower and other parts of the plant, so farmers can avoid the uncertainty and delays involved in “consigning” their crop. Hillard sees much of the demand for extracted products coming from Los Angeles and other big cities where style is as important as substance and finely packaged edibles, concentrates, and cartridges are challenging the dominance of smokable flower.
Although the California cannabis markets are undergoing changes wrought by oversupply and, in some cases, plateauing demand, Hilliard noted outlets outside of the licensed retail system are thriving in northern California, with well established “sessions” picking off medical and retail customers. Essentially, “sessions” are markets outside the regulated market, where mostly medical card-holding buyers meet sellers at pre-designated dates to buy and sell cannabis in a farmer’s market atmosphere. While “sessions” may not be strictly legal, they are well-established “bazaars” in major California cities, occurring three to five times per week in some cases.
Despite Hillard’s prediction for continued erosion of outdoor grown crop prices, he sees a perpetual market for “jewel box” cannabis, the best of the best of all grow types that discerning consumers will always seek out. In his mind, growers that can successfully distinguish their product from the run of mill, heavily marketed products will always have a place in the cannabis ecosystem. Moreover, he said the “traditional market” – meaning unlicensed operators – will continue to thrive as well, with veritable grower dynasties finding a way to survive amid a rapidly changing landscape. In fact, Hilliard said with the advent of the legal market “nothing has really changed” among the dynastic family businesses.
So what might other states take from the California cannabis experience? One sure lesson is that ever increasing supply means lower prices. Consequently, taxation schemes based on state revenue considerations rather than industry realities may have to undergo significant changes to bolster the sector when oversupply inevitably swamps the market. Moreover, eradicating illicit markets is nearly impossible with expensive licensing regimes essentially shutting out experienced growers by dissuading them from entering legal systems. And finally, that cannabis businesses will find a way to survive, sometimes without regard for legal market requirements, creating a non-virtuous circle that is very expensive, if not impossible, to curtail.