Race to the bottom? Plummeting Michigan marijuana prices great for buyers, bad for business

The continued free fall in retail marijuana prices in Michigan is great for customers, but tough for business.

Profit margins appear to shrink further, at least in the short term, as a surplus of freshly harvested marijuana enters the legal and illicit markets during what is known in the marijuana industry as the “October harvest,” a time of harvest for outdoor farms. Croptober caused a monthly price decrease of $30 per ounce in 2020 and $13 in 2021.

In an economy experiencing significant inflation (grocery prices are up 13% in the last year), marijuana is an anomaly.

Marijuana insiders point to the growing glut of marijuana being produced by licensed businesses for nearly 1.5 million plants at any given time in a state where only about 200 of 1,773 communities have chosen to allow recreational sales.

“That’s what’s causing the race to the bottom,” said Harry Barash, who runs the 8,000-member Michigan Cannabiz Professionals Facebook page and works as a cannabis industry specialist for Michigan-based real estate firm NAI Farbman. Southfield. “If you can’t get your price per pound down to a number that’s economically feasible, you better have a much higher quality product so you can compete.”

He believes Michigan’s marijuana industry is moving toward beer and spirits, where customers are offered low-priced products produced by big, deep-pocketed manufacturers along with specialty spirits bottled in lower quantities at higher prices. .

In some respects, he said, it’s already there. “I’m guessing maybe 60% to 70% is bottom shelf, maybe 10% middle shelf and 20% top shelf.”

According to the latest data provided by the Michigan Cannabis Regulatory Agency (CRA) in September, the average retail price of an ounce of marijuana, enough to pack a pipe 56 times, was around $110.

That’s a 73% price decline from the cannabis flower cost of $393 per ounce in September 2020 and a 46% drop since marijuana retailed for $394 an ounce a year ago.

Browse the shelves or online menus of most dispensaries and it’s not uncommon to find even lower prices. Ounces of marijuana with names like Vanilla Gorilla, Cheesequake, and many other high-potency strains approaching 20% ​​THC can be had for $100, sometimes less.

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Although prices fall, total sales continue to increase. In September, the state reported a record $195 million in recreational sales, a pace that, if sustained, will approach $2.5 billion over the next year, including medical marijuana sales.

How far will prices go?

Barash doesn’t think marijuana prices have bottomed out and said there’s still room for prices to come down. Retailers MLive spoke with said the wholesale price per pound of marijuana flower, which was nearly $3,500 two years ago, now hovers between $1,000 and $1,500. At $1,000, the wholesale cost of an ounce of marijuana is around $36.

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

At $500 per pound, the cost of producing an ounce of marijuana is around $18.

Barash said falling prices make growing marijuana less attractive, eventually leading to lower production and price stabilization, as seen in other states, like Washington and Oregon, with older markets.

“Based on the current cost of entry, it takes a lot longer to recoup your investment, which really makes it not a great business model anymore,” Barash said. “Washington and Oregon have already bottomed out and are on the upswing.

“Those markets are much more stable now. We are a little right behind them. It’s going to get worse, then it’ll probably get a little better and level off.”

Despite companies earning less revenue, there has not been an increase in companies leaving the market.

One victim is Grand Rapids-based Terrapin, a growing and processing operation that opened a 35,000-square-foot facility in 2020 and was eventually licensed to grow up to 10,000 plants. In July of this year, the Detroit Free Press reported that the company was operating with a skeleton crew after laying off nearly 42% of its staff. The business is now closed and the licenses revoked.

Lume, which operates grows and one of the state’s largest retail chains, closed four stores in July but said plans to open retail stores in three new cities were still underway.

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“There have been a lot of layoffs in the industry,” Barash said, “and there has been a lot of consolidation. People are trying to figure out how they can lower their costs.”

Optimism

Barry Goodman, owner of Freddie’s, a business with a retail store and a seven-acre farming and processing plant in Clio, thinks the market is bottoming out.

Right now, he said growers are constantly lowering their prices to compete. There are too many growers and not enough retailers to sell it, she said. But that may soon change.

“Detroit, for example, will opt for 60 recreational licenses,” said Goodman, who also owns the Southfield-based Goodman Acker personal injury law firm. “That will take some of the surplus that is driving down the price.

“And then other cities across the state will enter the market. They’re seeing that it’s actually a blessing because there’s more money for public safety, there’s very little crime, and the curb appeal is high-end. They look like Starbucks, jewelry stores, that kind of thing.”

Detroit’s plan to allow recreational sales was upheld in court as early as 2020 after multiple lawsuits accused the program of giving longtime Detroit residents unfair preferential treatment. The city now hopes to start issuing marijuana retail licenses in 2023.

Goodman said other marijuana business owners he speaks with agree “we hit rock bottom.”

“I think by the spring, when there are more dispensaries, I think the price will go up 30%,” he said. “So instead of $1,000, $1,200 (per pound), I’m thinking anywhere between $1,200 and $1,800, depending on quality.”

App

Beyond the visible forces of the market, there is a market for unlicensed marijuana that puts pressure on prices through competition that is almost impossible to quantify. A study issued by the Anderson Economic Group in 2021 estimated that only a third of all marijuana purchases are made through licensed commercial sales.

“There are so many outdoor grows being done illegally by a million different people,” Goodman said. “I think law enforcement would help solve this problem, but it doesn’t seem like they get involved in illegal growth.”

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

This month, the CRA fined and suspended a Detroit medical marijuana retailer after an inspector in May 2021 observed unlabeled marijuana-filled backpacks and duffel bags in the store; and state police raided a Grand Traverse County cannabis farm and CBD store on suspicion of operating as an unlicensed marijuana business.

Numerous industry experts called for increased enforcement during the CRA’s quarterly meeting in September.

At that meeting, Allison Arnold of the Cannabis Attorneys of Michigan said there aren’t enough growers on the licensed market to supply the amount of marijuana distillate available on shelves, indicating some comes from black market sources.

“Illicit sales continue to be the primary way Michiganders obtain their cannabis” and “there are also a growing number of licensed cannabis operators offering illicit or untested products,” Shelly Edgerton said in a statement issued by the MCMA after quarterly meeting. “We can help address both of these pressing issues by cracking down on the illicit market and increasing law enforcement statewide.”

Despite the problems, Barash said the industry is “going nowhere.”

“The Michigan market is likely to mature into a $3 billion industry, is what the CRA is telling us, but it will definitely go through a lot of corrections and adjustments,” he said. “People are going to have to keep evolving, spinning and being creative to be efficient, because we all know that profit margins are not what they used to be.”

More on MLive:

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Business suspended after discovery of bags of marijuana

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