race down? Plunging Michigan marijuana prices are great for buyers, bad for business

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

Profit margins appear to be shrinking even further, at least in the short term, as a surplus of newly harvested marijuana enters both the legal and illicit markets during the outdoor harvest season, known in the marijuana industry as “croptober.” Croptober triggered a $30 month-on-month drop in price per ounce in 2020 and $13 in 2021.

In an economy that’s experiencing significant inflation — food prices are up 13% over the past year — marijuana is an anomaly.

Marijuana insiders point to the growing glut of marijuana produced by companies licensed for nearly 1.5 million plants at any given time, in a state where only about 200 out 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 Southfield-based real estate firm NAI Farbman. “If you can’t bring your price per pound down to an economically feasible number, you’re better off buying a much higher quality product to be competitive.”

He believes Michigan’s marijuana industry is headed toward beer and liquor, where customers are offered low-priced products made by giant, deep-pocketed manufacturers alongside specialty “premium” liquors bottled in smaller quantities at higher prices will.

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

According to the latest September data from the Michigan Cannabis Regulatory Agency (CRA), the average retail price for an ounce of marijuana — enough to fill a pipe 56 times — was about $110.

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

Check the shelves or online menus of most pharmacies 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 with THC levels approaching 20% ​​can be had for $100, sometimes less.

While prices fall, total sales continue to rise. The state reported record sales of $195 million in September, a pace that if maintained will reach $2.5 billion next year, including medical marijuana sales.

How far will prices fall?

Barash doesn’t think marijuana prices have bottomed and said there is still room for price declines. Retailers MLive spoke to 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. At $1,000, the wholesale cost for an ounce of marijuana is about $36.

“The benchmark for many indoor grows is producing buds for around $500 a pound,” Barash said. “So there really is so much scope for a producer to make money.”

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

Barash said falling prices are making marijuana less enticing to grow, which ultimately leads to lower production and price stabilization, as seen in other states with older markets, such as Washington and Oregon.

“Based on today’s entry costs, it takes a lot longer to recoup your investment, which really doesn’t make it such a great business model anymore,” Barash said. “Washington and Oregon have already bottomed out and are on the upswing.

“These markets are much more stable now. We’re kind of right behind them. It gets worse, then it will probably get a little better and stabilize.”

Although less revenue goes to companies, there hasn’t been a wave of companies exiting the market.

One victim is Grand Rapids-based Terrapin, a grower and processor that opened a 35,000-square-foot facility in 2020 and eventually got licensed to grow up to 10,000 plants. In July of this year, the Detroit Free Press reported that the company was operating on an emergency crew after nearly 42% of its workforce was laid off. The shop is now closed and the licenses are invalid.

Lume, which is growing and is one of the state’s largest retail chains, closed four stores in July but said plans to open retail stores in three new cities are still on track.

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

optimism

Barry Goodman, owner of Freddie’s, a company with a retail site, seven-acre cultivation and processing facility in Clio, believes the market is bottoming.

For now, he said, growers are consistently cutting prices to stay competitive. There are too many growers and not enough retailers to sell it, he said. But that could change soon.

“Detroit, for example, will register with 60 recreational licenses,” said Goodman, who also owns Southfield-based personal injury law firm Goodman Acker. “That will take some of the excess that will lower the price.

“And then other cities across the state will enter the market. You see it’s actually a blessing because there’s more money for public safety, there’s very little crime, and the curb appeal is high. They look like Starbucks, jewelry stores or something.”

Detroit’s plan to allow recreational sales has been upheld in court since 2020, after multiple lawsuits accused the program of unfairly giving preferential treatment to longtime Detroit residents. The city now expects to begin issuing retail marijuana licenses in 2023.

Goodman said other marijuana entrepreneurs he speaks to agree “we’ve bottomed out.”

“I think by 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 $1,200 to $1,800 depending on quality.”

enforcement

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

“There’s so much outdoor crop grown illegally by a million different people,” Goodman said. “I think law enforcement would help address this issue, but they don’t seem to be interfering with the illegal growth.”

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

The CRA this month fined and suspended a Detroit medical marijuana retailer after an inspector observed backpacks and duffel bags full of unmarked marijuana at the store in May 2021; and state police raided a cannabis farm and CBD store in Grand Traverse County on suspicion that it was an unlicensed marijuana store.

Numerous industry insiders called for stronger enforcement during the CRA’s quarterly meeting in September.

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

“Illegal sales remain the primary way Michiganders get their cannabis,” and “there is also a growing number of licensed cannabis operators offering illegal or untested products,” Shelly Edgerton said in a statement released by the MCMA after the quarterly meeting was issued. “We can help address both of these pressing issues by cracking down on the illicit market and stepping up enforcement nationwide.”

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

“The Michigan market will likely mature into a $3 billion industry, CRA tells us, but it will definitely go through a lot of corrections and adjustments,” he said. “People have to evolve, rotate and get creative to be efficient because we all know profit margins aren’t what they used to be.”

More about MLive:

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Michigan is poised to step up marijuana enforcement

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