What’s the Real Reason for the Crash in Cannabis Prices?

Will we see marijuana prices bottoming out in 2023?

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Written by David Rabinovitz

on Monday, January 2nd, 2023

The supply glut is the symptom, and until the industry recognizes and focuses on the cause, they will not be able to stop the problem

Every day for several weeks, the news media, from Forbes to the Washington Post, have been breaking the news that marijuana prices are plummeting, largely blaming overcapacity.

The authors often seemed surprised, but the truth is that this has been brewing for several years. The cannabis industry is filled with people who often don’t understand the basics of the business and don’t understand the industrial construct of cannabis. The industry operates differently than most — it’s the only industry where government regulators have banned interstate commerce. As a result, supply gluts in one state drive prices down while supply constraints in another keep prices high. Just look at Massachusetts (which is experiencing a price drop) and New York (one newly opened store had a line almost entirely spanning a New York city block, link via New York cannabis attorney Jeffrey Hoffman).

So what’s behind the drop in prices? It’s not the supply glut. The oversupply is the symptom. Unless the industry recognizes and focuses on the root cause, it will not be able to fix the problem. I recently heard from a successful Massachusetts cannabis entrepreneur who paid off early and big and is now trying to raise $20 million to start an indoor grow operation in New York. Lightning doesn’t always strike twice, however, and as we’ve noted in previous articles, over time we’ve come closer and closer to the first Armageddon—interstate trade.

But let’s look at why prices are crashing, focusing on the market I know best: Massachusetts. There are two driving factors, and for today’s discussion we’ll start with need.

The state regulator has never updated the market on how much product is needed or reported a full spectrum of production capacity data. Effective regulators should track and publish how many grams of flower (including flower equivalents such as vape cartridges, oils, infusions, etc.) are sold in the market. This data should be easily estimated as each state uses a seed to sale tracking system and should publish how much flower (or flower equivalent) has been sold at retail and based on plant counts and harvests how many grams of flower are in supply chain inventory maintained. Reporting on these valuable statistics would allow the industry to know how many flowers are needed to meet demand and how much inventory is available or needed in the supply chain. In technical terms, this is referred to as demand planning.

The second reporting metric is production capacity. This includes how much canopy area has been licensed and is in operation, how many crops are reported in that canopy area and, based on past local industry performance, the average yields that can be expected from those crops. The regulator could also disclose how many square feet of canopy has been applied for and (a) received a provisional license but not received a final license, and (b) submitted an application but not yet obtained a provisional license.

Nobody I’ve spoken to seems to have a clear idea of ​​how many square feet of canopy it will take to meet the state’s demand. How much Canopy has been licensed is accessible via the state’s open data platform with a bit of spreadsheet work, but Canopy for provisional licenses isn’t disclosed, nor is Canopy for applications. This means that new entrants are flying blind as to whether the market has room for another entrant.

As a result, cultivators rush forward without understanding when supply and demand are likely to be in balance or when that balance has already occurred.

The real culprit is the overhang of the shade extension roof. Let me explain…

It can take months, if not more than a year, from finding a site and obtaining municipal approval to applying for a license. The licensing process takes months and then comes the expansion. Cultivation processes are complex and take a long time. It can easily take two years from project conception through approval to commissioning. As a result, when supply and demand balance, there will be a backlog of applications to process, licensees building facilities that have yet to begin cultivation, and new crops that have not yet reached their first harvest. And when that happens, just as the federal government usually calls a recession about eight months after a recession begins, markets won’t realize that supply and demand are balanced for at least a year afterward. Overcapacity seems inevitable. If these two previous sentences sound familiar to you, thank you for being a regular reader. This is from our February 2019 column. It took three years to get to this point here in Massachusetts. Newly opened markets like New York could reach this place within 18 months.

During the winter months we will read about pile-ups on American roads. The underlying cause is often cited as ice or fog, or reduced visibility due to snow. The cause is not the weather, but vehicles driving faster than the driver can anticipate. Therefore, when the driver finally sees the plethora of brake lights clotted on the roadway, it is too late to stop and the vehicle slams into the pile ahead.

Welcome to cannabis in 2023.

If enough brake lights and hazard lights are producing a sufficiently bright light, oncoming drivers will slow down sufficiently and stop before the collision.

Oversupply is not the cause but a symptom. The cause is that the market doesn’t recognize when enough production capacity is available, and so the industry rolls on until prices crash. It’s too late then.

Overcapacity is unavoidable. And until regulators start feeding the market critical data, investors will fund cultivation capacity until each state experiences its own local price slump.

Cannabis losses will be huge over the next two years. That doesn’t mean running away from the market. But it means you have to adjust your strategy to take advantage of the chaos and overcapacity. Fortunes are made and lost. All you have to do is decide which side of the coin you are on.

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