Cannabis insiders are split over the impact of inflation on the market

In the days leading up to the recent bear market entry, cannabis insiders Benzinga offered mixed opinions on the impact of inflation on the cannabis sector.

As fears of skyrocketing inflation fueled the bear market, some remained bullish on cannabis, in some cases positive.

On the other hand, multiple sources cited numerous pain points, including rising production costs, the unlicensed market, slowing sales momentum, and falling product prices.

The cost of cannabis has been falling in many major markets for months, with consumers seeing per-milligram prices trend downward for most of the year. In many markets, consumers are seeing prices falling while the cost of other products is rising.

Due to various factors, including the return to office work, the rising cost of living, and slower wage increases, the urge to buy cannabis has slowed since late last year.

According to Marijuana Business Daily, overall sales growth in five western state markets was 15.9% in 2021, compared to 39.2% a year earlier.

“The entire cannabis industry is suffering from the post-COVID-19 retail slump, and now the wholesale market is following suit,” said Chris Vaughn, CEO of Pacific Consolidated Holdings and California-based delivery service Emjay.

The bottom line is offset by falling cannabis flower prices. Vaughn cited an option saturated market as part of the problem. He said premium flower prices have fallen from about $1,100 a pound in 2021 to between $400 and $600 this year.

When prices go down, production costs go up. Morgan Paxhia, co-founder and chief executive of Poseidon and AdvisorShares Poseidon Dynamic Cannabis ETF, said, “Companies have seen costs escalate across the board, including construction, labor, packaging and more.” Paxhia noted that the rising cost of living is affecting consumers equally.

Brandon Dorsky, CEO of California-based edibles brand Fruit Slabs, believes that inflation is not included in most consumer cannabis goods prices, except for high-end products with price elasticity.

“Everyone else is afraid to factor in the cost of inflation,” Dorsky said. He added that he tried to raise prices when fruit prices rose, but was pushed back by various traders.

Conversely, operators like Michael Sassano, CEO of Somai Pharmaceuticals, said cannabis companies had years to address rising cultivation and production costs.

“Incremental inflation for things like packaging, nutrients or extract solvents should be offset by those years of production efficiencies,” Sassano said.

Notwithstanding, Paxhia said the slowing economy increases the likelihood of a recession.

Photo by Yarygin/Getty Images

RELATED: Is the Cannabis Industry Inflation-Proof?

“Legal cannabis hasn’t really been tested in a macro recession, so we’ll see how consumers behave during this time,” Paxhia said.

Geoffrey Lawrence, CFO of California-based cannabis brand Claybourne Co., said consumers are switching back to the less expensive unlicensed market.

Lawrence believes that states can improve their marketplaces and hedge against inflation “by creating a more equitable distribution of cannabis retailers so that we deflate the illicit market while increasing cannabis sales and tax revenues.”

Confidence in the cannabis market

Other operators and insiders seem sanguine about the downturn and its impact on cannabis.

“Cannabis is fundamentally recession-proof; There will always be a need and consumers,” said Anne M. Davis Esq., co-founder of cannabis health platform Bennabis.

Sweetleaf Madison Capital CFO Kevin Bush expects the sector to be “significantly less” affected than other markets.

“Whatever volatility arises in input prices derives from general inflation in the economy as a whole,” he said.

Bush added, “This amount is tiny compared to the volatility in input prices that results from much larger factors affecting price levels in the cannabis industry.” He cited government regulations and market demands as key factors.

On the consumer side, Bush said, cannabis should achieve results similar to another “vice” industry, alcohol. If that’s true, cannabis sales would likely continue to do well, but consumers could switch to more affordable, lower-quality products.

In the US market, piecemeal regulations always play a role. Cannabis POS company Cova Software CEO Gary Cohen cited lower availability of income, the return of public alternatives to non-cannabis, and tougher MSO competition as reasons for the decline in sales.

investing marijuanaPhoto by Olena Ruban/Getty Images

Cohen anticipates that mature government markets with widespread penetration will have more of an impact on their sales volume. However, newer markets with tight retail distribution may see fewer sales due to expensive products.

“I think the global supply chain will catch up at the end of the year and by then wage increases will also have stopped rising,” said Cohen, forecasting a fall in inflation in early 2023.

Uncertainty in the cannabis market

Others say it’s too early to say what inflation and downturns will have on cannabis.

Jordan Lams, CEO and founder of Moxie, identified numerous uncertain areas of concern, including potential mismatches in demand between businesses and consumers, the fallout from the hiring frenzy and tighter capital.

“This time it’s not exclusive to capital-intensive plant operators, as we’ve seen recently with the announcement of layoffs by major ancillary technology vendors,” said Lams.

In May, Akerna Corp announced layoffs as part of restructuring plans. The following month, Dutchie announced that it was shedding 8% of its staff. The job cuts aren’t just affecting the U.S. market, as Canopy Growth Corp. announced a layoff of 8% of the workforce in April.

This article originally appeared on Benzinga and has been republished with permission.

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