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Investigating Why Cannabis Prices are Plunging in Canada

The continued drop in retail marijuana prices in Michigan is good for customers but bad for business.

Profit margins are expected to narrow even further, at least in the short term, as a surplus of newly harvested marijuana enters both the legal and illicit markets during "croptober," harvest season for outdoor farms. Croptober caused a $30 month-to-month drop in price per ounce in 2020 and a $13 drop in 2021.

Marijuana is an outlier in an economy that is experiencing significant inflation - grocery prices have been up 13% in the last year.

Marijuana industry insiders point to a growing glut of marijuana being produced by businesses licensed to grow 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 the NAI Farbman real estate firm in Southfield. "If you can't get your price per pound down to an economically viable level, you'd better have a much higher quality product to compete."

He believes Michigan's marijuana industry is headed in the same direction as beer and liquor, with customers being offered low-cost products produced by massive deep-pocketed manufacturers alongside specialty, "top-shelf" liquors bottled in smaller quantities at higher prices.

He claimed that it is already present in some ways. "I'd guess 60% to 70% is bottom shelf, 10% is mid-shelf, and 20% is top shelf."

According to the most recent Michigan Cannabis Regulatory Agency (CRA) data from September, the average retail price for an ounce of marijuana - enough to pack a pipe 56 times - was around $110.

This represents a 73% decrease from the $393 per ounce cannabis flower cost in September 2020 and a 46% decrease from the $204 per ounce marijuana retail price a year ago.

It's not uncommon to find even lower prices if you browse the shelves or online menus of most dispensaries. Ounces of marijuana with names like Vanilla Gorilla, Cheesequake, and many other high-THC strains can be had for $100 or less.

While prices are falling, total sales are increasing. The state reported a record $195 million in recreational sales in September, a pace that, if maintained, will approach $2.5 billion over the next year when medical marijuana sales are factored in.

Michigan marijuana prices, on average

In Michigan, the average retail price for an ounce of marijuana has dropped dramatically in the last two years. Here is the monthly average price for recreational and medical marijuana.

How much will prices fall?

Barash believes marijuana pricing has not reached rock bottom and that there is still room for prices to fall. MLive spoke with retailers who said the wholesale price per pound of marijuana flower, which was nearly $3,500 two years ago, is now between $1,000 and $1,500. An ounce of marijuana costs about $62.50 wholesale at $1,000.

"The standard for many indoor grow to produce flowers for around $500 per pound," said Barash. "There is really that much room for a producer to make money."

An ounce of marijuana costs about $31.25 at the cost of $500 per pound.

According to Barash, falling prices make growing marijuana less appealing, which leads to less production and price stabilization, as seen in other states with older markets, such as Washington and Oregon.

"Based on today's entry cost, it takes a lot longer to recoup your investment, which really makes it not such a great business model," Barash explained. "Washington and Oregon have already passed through the bottom and are on the rise."

"Those markets are now much more stable." We're right on their tail. It'll get worse. Then it'll probably get a little better and stabilize."

Despite lower revenue, there has not been a surge in the number of businesses exiting the market.

Terrapin, a Grand Rapids-based grow and processing operation that opened a 35,000-square-foot facility in 2020 and was eventually licensed to grow up to 10,000 plants, is one casualty. The Detroit Free Press reported in July of this year that the company was operating with a skeleton crew after laying off nearly 42% of its workforce. The business is now closed, and the licenses are no longer valid.

Lume, one of the state's largest retail chains, closed four stores in July but said plans to open retail locations in three new cities were still on track.

"There have been a lot of layoffs in the industry," Barash said, "and a lot of consolidation." People are attempting to figure out how to cut costs."

Optimism

Barry Goodman, the owner of Freddie's, a retail location, seven-acre grow, and processing facility in Clio, believes the market has reached the bottom.

Growers are currently lowering their prices to compete, according to him. He claims that there are too many growers and not enough retailers to sell it. But that could change soon.

"Detroit, for example, is going to opt-in with 60 recreational licenses," said Goodman, who also owns the Goodman Acker personal injury law firm in Southfield. "That will consume some of the surpluses that are lowering the price."

"And then other cities across the state will enter the market." They're seeing that it's actually a benefit because there's more money for public safety, there's less crime, and the curb appeal is upscale. They have the appearance of Starbucks or jewelry stores."

Since 2020, Detroit's plan to allow recreational sales has been upheld in court after multiple lawsuits accused the program of unfairly favoring long-term Detroit residents. The city now anticipates that retail marijuana licenses will be issued in 2023.

According to Goodman, other marijuana business owners he talks with agree that "we bottomed out."

"I think the price will go up 30% by spring when more dispensaries open," he predicts. "So, instead of $1,000 or $1,200 (per pound), I'm thinking $1,200 to $1,800, depending on the quality."

Enforcement

Aside from the visible market forces, an unlicensed marijuana market exerts price pressure through competition that is nearly impossible to quantify. According to an Anderson Economic Group study published in 2021, only one-third of all marijuana purchases are made through licensed commercial sales.

"There are a million different people doing illegal outdoor crops," Goodman said. "I believe law enforcement would be helpful in addressing this issue, but they do not appear to be involved in illegal growth."

However, there are signs that law enforcement and regulators are stepping up efforts to eliminate illegal marijuana from both the illicit and licensed markets.

The CRA fined and suspended a Detroit medical marijuana retailer this month after an inspector discovered untagged marijuana in backpacks and duffel bags at the shop in May 2021, and state police raided a Grand Traverse County cannabis farm and CBD shop on suspicion of operating as an unlicensed marijuana business.

During the CRA's quarterly meeting in September, numerous industry insiders called for stricter enforcement.

Allison Arnold of Cannabis Attorneys of Michigan stated at the meeting that there are not nearly enough growers in the licensed market to supply the amount of marijuana distillate available on shelves, implying that some of it come from black-market sources.

"Illicit sales remain the main way Michiganders get their cannabis," and "there is also a growing number of licensed cannabis operators providing the illicit or untested product," Shelly Edgerton said in a statement issued by the MCMA following the quarterly meeting. "We can help address these two pressing issues by cracking down on the illicit market and ramping up enforcement statewide."

Despite issues, Barash said the industry "isn't going anywhere."

"The Michigan market is likely going to mature at a $3 billion industry, is what the CRA tells 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, pivot, and get creative to be efficient because we all know the profit margins are not what they used to be."

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