Race to the end?Michigan marijuana price slump is good for buyers, bad for business

The continued free fall in retail marijuana prices in Michigan is good for customers, bad for business.

Margins look to shrink further, at least in the short term, as newly harvested cannabis hits both legal and illicit markets during harvest time on outdoor farms known to the cannabis industry as “croptobers.” Croptober sparked a monthly price drop of $30 an ounce in 2020 and a $13 drop in 2021.

In an economy experiencing severe inflation — grocery prices rose 13% last year — cannabis is an anomaly.

Marijuana insiders point out that only about 200 of the state’s 1,773 communities have opted to allow recreational sales, and that businesses with nearly 1.5 million plants licensed at any given time are producing a growing glut of cannabis.

“That’s what caused the race to hit rock bottom,” said Harry Barash, who runs the 8,000-member Michigan Cannabiz Professionals Facebook page and serves as a cannabis industry expert for Southfield-based NAI Farbman Realty. “If you can’t get the price per pound down to an economically viable figure, you better have a higher quality product to compete with.”

He thinks Michigan’s cannabis industry is moving in the direction of beer and liquor, offering customers lower-priced products made by large, deep-pocketed manufacturers, as well as specialty “top-of-the-line” liquors that are bottled in lower quantities at higher prices .

In some ways, he said, it already exists. “I’m guessing maybe 60 to 70 percent bottom shelf, maybe 10 percent mid shelf and 20 percent top shelf.”

The average retail price of an ounce of marijuana — enough to pack 56 pipes — was about $110 as of September, the latest data from the Michigan Cannabis Regulatory Agency (CRA).

Prices are down 73% from the September 2020 cost of cannabis flower at $393 an ounce, and a 46% drop since the retail price of cannabis was $394 an ounce a year ago.

Peruse the shelves or online menus at most pharmacies and it’s not uncommon to find lower prices. A few ounces of cannabis like Vanilla Gorilla, Cheese and many other highly potent strains close to 20% THC sell for $100 and sometimes less.

While prices have fallen, total sales are still increasing. The state reported a record $195 million in recreational sales in September, and if the pace holds, it will be close to $2.5 billion next year, including medical marijuana sales.

How much will the price drop?

Barash doesn’t think marijuana prices have bottomed out, and says there’s still room for prices to fall. Retailers who spoke with MLive said the wholesale price for a pound of cannabis flower was close to $3,500 two years ago and is now between $1,000 and $1,500. The wholesale cost of an ounce of marijuana is $1,000, or about $36.

“The benchmark for many indoor growers is to produce flowers for around $500 a pound,” Barash said. “So there is really a lot of room for producers to make money.”

At $500 a pound, it costs about $18 to produce an ounce of marijuana.

Falling prices have made growing hemp less attractive, ultimately leading to lower yields and stable prices, as seen in other states with older markets such as Washington and Oregon, Barash said.

“With today’s cost of entry, it takes longer to recoup the investment, which really makes it less of a good business model,” Barash said. “Washington and Oregon have hit rock bottom and are rising.

“These markets are a lot more stable now. We’re right behind them. It’s going to get worse and then maybe a little bit better and stabilize.”

Despite the reduction in revenue flowing to companies, there has not been a large number of companies exiting the market.

One victim was Grand Rapids-based Terrapin, a cultivation and processing business that opened a 35,000-square-foot facility in 2020 and was eventually allowed to grow up to 10,000 plants. By July of this year, the Detroit Free Press reported that the company was left with only skeleton staff after laying off nearly 42 percent of its workforce. The business is now closed and the license is invalid.

Lume, one of the largest retail chains in the state, closed four stores in July, but said plans to open retail locations in three new cities are still ongoing.

“There’s been a lot of layoffs in the industry,” Barash said, “and there’s been a lot of consolidation. People are trying to figure out how to reduce costs.”

optimism

Barry Goodman, owner of Freddie’s, believes the market is bottoming out.

For now, growers have been lowering prices to compete, he said. There are too many growers, and retailers just don’t have enough capacity to sell it, he said. But that may soon change.

“Detroit, for example, will choose 60 recreational licenses,” said Goodman, who also owns Southfield-based Goodman Acker personal injury law firm. “That will take away some of the surplus that lowers prices.

“Then other cities across the state will come into the market. They see that it’s actually a boon because there’s more money for public safety, there’s less crime, and the curb appeal is high-end. They look like Starbucks, jewelry stores or whatever. s things.”

Detroit’s plan to allow recreational sales has been upheld in court since 2020 after multiple lawsuits alleging the program unfairly provides preferential treatment to longtime Detroit residents. The city now expects to begin issuing retail marijuana licenses in 2023.

Goodman said other cannabis business owners he spoke with agreed that “we’ve bottomed out.”

“I think by the spring when more pharmacies come out, I think prices will go up 30 percent,” he said. “So instead of $1,000, $1,200[per pound]I think it’s $1,200 to $1,800, depending on the quality.”

law enforcement

In addition to visible market forces, there is an unlicensed marijuana market that is putting pressure on prices through competition that is barely quantifiable. A study released in 2021 by Anderson Economics estimates that only one-third of cannabis purchases are made through licensed commercial sales.

“There are a million different people who illegally do a lot of outdoor crops,” Goodman said. “I think law enforcement will help with this, but they don’t appear to be involved in illegal growth.”

However, there are signs that law enforcement and regulators are stepping up efforts to eradicate black market marijuana from both illicit and licensed markets.

CRA fined and suspended a Detroit medical marijuana retailer this month after an inspector observed backpacks and duffel bags full of unlabeled marijuana in store in May 2021; state police raided A Grand Traverse County hemp farm and CBD store suspected of being an unlicensed cannabis business.

Many in the industry called for stronger enforcement at the CRA’s quarterly meeting in September.

At that meeting, Alison Arnold of Michigan Cannabis Attorneys said there are barely enough growers in the licensed market to supply shelf-available marijuana distillate, suggesting some of it comes from black market sources.

“Illegal sales remain the primary way Michiganders obtain marijuana,” and “there is also an increasing number of licensed marijuana operators offering illegal or untested products,” Shirley Edgerton published after the MCMA quarterly meeting said in a statement. “We can help address these two pressing issues by cracking down on the illicit market and strengthening statewide enforcement.”

Despite the problems, Barash said the industry “is not going anywhere”.

“The Michigan market may be maturing in a $3 billion industry, that’s what the CRA told us, but it’s definitely going to go through a lot of corrections and adjustments,” he said. “People are going to have to continue to evolve, adapt and get creative to be more efficient because we all know that profit margins are not what they used to be.”

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