INSIGHTS BLOG > Anatomy of a Cannabis Price Crash

Anatomy of a Cannabis Price Crash

Written on 25 December 2022

by Ruth Fisher, PhD

What Drove Oversupply?
What Drove So Much Red Ink?
The Good News

Market prices in cannabis have been crashing in more mature markets due to massive oversupplies of cannabis products:

Canada:^[1]

…product oversupply led to price drops of more than 50 per cent...

To compete, illicit growers have also slashed their prices by about 30 per cent.

California:^[2]

… wholesale market, with prices said to be dropping by up to 60% since at least mid- June for outdoor-farmed flower.

… many indoor growers appear to be on better footing, for instance, with wholesale prices reportedly down 10%-20% compared to outdoor farmers.

Colorado and Oregon:^[3]

In Colorado, the average price per pound has declined 51% since the fourth quarter of 2020. In Oregon, it’s down 36%.

Michigan:^[4]

Retail adult use cannabis prices in Michigan are half of what they were a year ago and newly reported data from state regulators suggest they have even further to drop this year [see Figure 1].

Nevada:^[5]

… prices have dropped by 50% this year.

“Wholesale flower prices that we are seeing right now around the state are closer to $450 to $600 for freshly harvested, high quality sun grown … Last year at this point in the season, we were looking at prices around $1,100 to $1,200.”

Washington: ^[6]

Similar to Colorado’s marijuana market, Washington is in a race to the bottom. Their prices are already drastically lower than Colorado’s and seem to keep dropping.

Figure 1

Sources claim that legal market cultivators in California are growing two^[7] to three^[8] times the amount of cannabis sold in legal dispensaries. Similar such excesses are no-doubt causing the price crashes in other markets as well. What’s going on in these markets? How can there be such drastic surpluses in supply, contributing to so much red ink for businesses? These are the questions this analysis seeks to answer.

What Drove Oversupply?

“In the capital markets, it’s easier to sell a dream than it is to sell reality,” says independent analyst Scott Willis. “You get a higher valuation for your company if you just promise things that haven’t happened yet—because nobody can fact-check you.”^[9]

It seems that hype and hubris are the primary culprits of excessive supplies in cannabis markets. Every time a new state legalizes cannabis activity, we see the same hype and hubris claiming sales will quickly soar into the billions, while each supplier asserts that he’ll be the one to achieve dominance.

Several markets have approached (NV, OR) or surpassed (AZ, CA, CO, IL, MA, MI, WA) annual sales of a billion dollars.^[10] However, it will be quite some time before growers are able to consolidate enough to profitably manage supply. In the meantime, many different growers in the market are trying to grab as large a share of the market as they can, without taking into account that the other suppliers are trying to do the very same thing. The result is massive oversupply.

What Drove So Much Red Ink?

Early entrants into cannabis markets likely had some combination of several different sets of expectations that turned out to be inaccurate.

Overestimated Staying Power of High Initial Market Prices

Early entrants were attracted to cannabis markets by high initial prices. Unfortunately for sellers, initial prices plummeted as massive supplies from large numbers of growers quickly overshot market demand.

Underestimated Difficulty of Producing Quality Cannabis

Many growers new to cannabis underestimated the difficulty in growing good quality cannabis,^[11] and many early growers of good quality cannabis underestimated the difficulty in scaling up supply.^[12] Many growers had lower-than-expect initial yields as they learned how to cultivate, harvest, and or scale high quality cannabis grow operations.

Underestimated Burden of Taxes and Regulations:

Many growers underestimated the difficulties in having to constantly adapt to a quickly evolving regulatory environment. Regulations involving testing and tax rates, for example, seem to be constantly in flux. Many growers have also underestimated the burden of security, tracking, and reporting requirements, not to mention the burden of license fees, sales taxes, state income taxes, and, notoriously, 280e federal income taxes.

Underestimated Longevity of Chaos

Perhaps the biggest draw for early entrants into cannabis was the vast open space the budding new markets had to offer. Initially, everyone was a new entrant; there were no established legal market suppliers; it was a completely level playing field. Opportunity was unbounded. The bad news was that everyone was a new entrant; there were no established legal market suppliers. Everything has had to be built from scratch. Building an industry from the ground up has created several big problems for market participants.

First, as each new state has legalized cannabis activity, the rollout process has taken much longer than anticipated. Applicants spend months,^[13] if not years,^[14] passing through the application, vetting, and licensing processes. Regulators face months-long, if not years-long backlogs of activity in trying to process applications, conduct inspections, issue licenses, and enforce regulations. All the while, prospective businesses bleed cash while waiting to be able to open their doors for business.

Second, as each new state rolls out newly legalized cannabis activity, it experiences supply chain coordination problems as bottlenecks appear in the value chain, due to shortages, for example, in cannabis products,^[15]licensed testing services,^[16] and/or licensed dispensaries.^[17]

And third, construction of all the infrastructure needed to support smoothly functioning cannabis markets (e.g., banking/payment, PoS and seed-to-sale tracking, market information, and advertising) has taken much longer than most people expected.

Many licensed market participants will continue to be forced out of the market as they find themselves unable to ride out the chaos until the market becomes more manageable and/or predictable.

Underestimated Level of Competition

Perhaps it was the idea that early cannabis markets were brand new, with no established supply, that led many new licensed cannabis cultivators to underestimate the extent of competition in the market. Yet, from the very beginning competition in licensed grow markets has been strong due to the existence of: Black Markets, home grow, and licensed growers with deep pockets.

Even the earliest entrants faced massive competition from long-embedded Black Markets. Black Markets have continued to threaten licensed market activity for several reasons. First, easy access to Black Market supply has severely constrained the prices licensed growers could charge from the very beginning. Second, lack of resources to enforce Black Market activity has enabled Black Markets to survive, even as licensed activity ramps up. And third, the difficult market environment for licensed suppliers (e.g., high costs of doing business, leading to high prices, together with lack of profitability) has led many would-be legal market participants to divert activity to Black Markets.

Some states allow home grow cannabis, while others do not.^[18] Regardless, home grow is presumably largely unenforced. While the home grow market probably does not significantly constrain prices in licensed markets, its presence is still worth mentioning.

Finally, as markets evolve, well-funded large growers are emerging^[19] that are creating difficult operating environments for other growers. In particular, these large operators are able to bleed cash through the process of market expansion, price crashes, and consolidation of operations. Importantly, the large fixed costs of cannabis operations generate significant economies of scale; that is, large operators have big cost advantages over small operators, making it increasingly difficult for small growers to compete.

Underestimated Consumer Resistance

Finally, many early entrants into cannabis underestimated how deep the resistance to cannabis continues to be for many people in society. So many people either continue to disapprove of any cannabis activity whatsoever, or they have a serious need for education and guidance before they’ll consider engaging with cannabis. The traditional healthcare industry has been particularly resistant to recommending cannabis for patients, unless or until they have well-supported evidence of its efficacy, together with ample guidance to help them support patient use.

The Good News

As prices continue to fall in more mature cannabis markets, the situation looks bleak indeed. However, there is good news: What’s happening in cannabis is the same pattern we see in all new markets with fantastic potential. A new innovation is discovered (in cannabis, of course the plant is quite old, but legal markets are new). The massive potential of this new innovation is hyped publicly, if not over-hyped, creating inflated expectations by many. As markets begin to develop, reality sets in, establishing limits and disillusionment, i.e., market crashes. As the market continues to evolve, discoveries of solutions to existing problems, together with new applications, create a new upswing in the market. Finally, as the market matures, its potential plateaus. This market cycle that’s associated with new innovations is called the Gartner Hype Cycle,^[20] after the company that first described it (see Figure 2).

Figure 2

Gartner Hype Cycle

Source: Jeremy kemp at English Wikipedia, https://commons.wikimedia.org/wiki/File:Gartner_Hype_Cycle.svg

While many early licensed cannabis market participants have not fared so well, their activity has helped pave the way for much larger and more sustainable markets to come. Many early buildouts will be sold for pennies on the dollar. At the same time, early activities have revealed problem areas (e.g., the need for testing standards, sustainable cultivation methods and packaging solutions, protection for small and legacy market participants, etc.) that are being (or hopefully will be) addressed. All this will lead to subsequent markets that offer much better products at much lower prices.