August 17, 2022

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Wholesale cannabis prices collapse in California

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Marijuana farmers in California are now receiving the lowest price for their crop since cannabis was legalized in 2018 — calling into question whether what was once thought to be a slam dunk cash crop is even still worth planting

The problem: There’s simply too much legal weed on the market. The glut is such that it has depressed the value in some cases by more than half of what farmers once reaped. Dispensaries are also seeing less business from reduced demand, but unlike farmers, aren’t making major cuts in pricing.

This current economic state of marijuana is, in many respects, yet another byproduct of COVID-19.

Demand was especially high during the worst of the pandemic — when depression was rampant and entertainments options outside the home were few. That spurred growers to ramp up production.

But then the stimulus checks and the increased unemployment money stopped flowing, coupled with rising gas prices and inflation. And those who still had disposable income once again had more outside activities.

“The expanded unemployment benefits, stimulus payments and pause in student loan payments all contributed to an increase in cannabis sales along with the fact that people lost other outlets for discretionary spending,” said Adam Koh, editorial director of Cannabis Benchmarks, which tracks cannabis pricing at the wholesale level. “You couldn’t go to the ball game, you couldn’t go to the movies.”

People who normally would have a structured workday had time on their hands and were anxious, said Ryan Cullerton, director of product development and cultivation at MWG Holdings, a Sacramento-based cannabis distributor which also runs dispensaries in California.

“Smoking cannabis was a coping mechanism”, said Cullerton. “People were pretty stressed out and smoking weed made them feel better.”

In a classic supply-and-demand cycle, Koh said farmers grew more marijuana to meet increased demand, but ended up flooding the marketplace.

The piece per pound farmers receive for their cannabis for the week ending April 15 is down nearly 50 percent from the end of October 2020. That’s when rising prices hit their summit right before the fall harvest increased cannabis supply, shows data from Cannabis Benchmarks.

The first half of 2021 saw prices partially recover as the cannabis oversupply lessened. But by early June a large spring harvest added new cannabis to the legal California supply as more and more people were affected by the cutback in pandemic benefits, Koh said.

Since last June 4, the prices paid to farmers have been on a downward trajectory, but the April 15 data set new records.

Cannabis Benchmarks said the price received by farmers for their cannabis not only hit the lowest levels since pot became legal in January 2018, but the lowest since 2015 when the firm began analyzing the pricing of the medical marijuana marketplace.

The average $806 a pound California farmers received last week was down from $1,581 a pound at the end of October 2020.

Outdoor growers, which predominate in places like Mendocino County and Humboldt County, known as the Emerald Triangle, did worse.

They were fetching an average of $477 a pound, last week, shows the Cannabis Benchmark data, down from $1,074 a pound, in October 2020, a more than 55 percent drop.

Koh said it’s not uncommon for outdoor growers in California to receive as low as $250 to $300 a pound.

Compounding the problem for existing cannabis farmers is that millions of square feet of new farmland to grow marijuana has come online in Santa Barbara County, Monterey County and Lake County in the last 12-months alone, said Dustin Moore, the chief strategy officer for Embarc, which owns four dispensaries in Northern California and plans to open a Sacramento location in late summer..

The wholesale price drops have not been limited to California, the largest legal marijuana marketplace in the U.S, Other states such as Washington, Oregon and Colorado are also seeking price drops, Koh said.

He said one exception is Nevada, whose legalized industry is heavily dependent on Las Vegas tourists. While wholesale cannabis prices were rising in California back in 2020, they were dropping in Nevada because the tourists were gone, Koh said.

Prices are now back up in Nevada, he said, as tourists have returned.

While farmers are in the frontlines feeling the economic sting of falling marijuana demand, dispensaries and delivery services are also seeing customer reductions and many have started lowering prices.

Statewide, dispensaries and delivery services have reduced pricing by an average of 10 percent, said Cullerton to make up for lost customers. Many dispensaries are facing financial pressures because business is down on average 30 percent to 40 percent from 2020, he said.

Embarc’s Moore said despite the low prices farmers are receiving for their cannabis, dispensaries costs haven’t gone down significantly because distributors and manufacturers are still charging large markups.

He said increased competition from marijuana brands and farmers is resulting in an average 10 percent price reduction at his retail stores.

“What we’re seeing today is we’re seeing a lot more farmers and brands desperate to get on shelves,” he said. “So they are reducing their pricing in order to get on our shelves. And we’re passing those discounts on to customers.”

It remains to be seen whether declining tax revenue from legal marijuana will spur state lawmakers to take action to change the state’s legal cannabis system. A host of proposals by lawmakers do everything from allowing farmers to sell directly to consumers at farmers markets to reducing the tax burden they face, but there is little consensus on a course of action.

The retail taxes alone on legal marijuana sales along with markups from distributors and dispensaries can double the cost of buying the product legally, creating a large illegal marketplace that never disappeared despite legalization.

California’s top cannabis regulator Nicole Elliott, who is director of the Department of Cannabis Control, said lowering the price of legally sold marijuana at the retail level is key to expanding the state’s legal market. However, Elliott wouldn’t take a position on any of the bills proposed by state lawmakers, such as cutting the 15 percent excise tax distributors collect from retail operations. The tax is usually passed on to consumers in the form of higher prices by dispensaries and delivery services..

Elliott said she is concerned about the collapse in the prices farmers receive for their cannabis..

“In he agricultural market more broadly, you always see fluctuations in that market.,” she said. “This is an extreme amount of fluctuation. I will acknowledge that.”

The state of California has yet to release taxes it collected for marijuana cultivation and sales for the first quarter of 2022, the three months from January 1 through March 31.

But total cannabis tax revenue has been on a downward trend since the beginning of the second half of 2021.

The $322 million collected in the three months ending September 30 was down 6.6 percent from the second quarter of 2021. In the last three months of 2021, fourth quarter collections dropped to $308.6 million, down 7.6% from the prior quarter.

Sacramento is also being affected by a downward revenue trend. The 30 Dispensaries in Sacramento must pay their own 4 percent tax on gross revenue from sales.

It totaled $25.3 million in the 12-months ending June 30, 2021. However, figures for the first eight months of the new fiscal year that begin on July 1 show only $15.4 million collected.

If the tax collections continue at that level, taxes could be off by almost $3 million this fiscal year compared to last.

What’s clear is that farmers are seeing the biggest hit from the oversupply.

While there are no tallies as of yet, some farmers are starting to leave the marijuana business because they can’t make a profit.

Farmer Robert Kolosick is in the process of renting out his farmhouse near Willets in Mendocino County because he’s moving to Sonoma County to start a job installing solar energy systems in the next month or so.

The 35-year-old started his own farm in 2016, first with medical marijuana, and then continuing when the crop was legalized. Business was good for the most part after legalization. He netted several hundred thousand dollars a year for farming the cannabis crop on the maximum 10,000 square feet of land he was allowed under Mendocino County law.

Since August 2021, his profits have disappeared.

“It’s not ever possible to do it, ‘‘ he said of making money cultivating cannabis. “It is impossible.”

The prices he is offered for growing a pound has dropped as low as $250, down from an average $1,000 a pound a year earlier. He said the $250 figure was after paying a state mandated cultivation tax of around $150 a pound, a cost imposed after a distributor acquires the marijuana and performs quality tests.

Kolosick said, however, he was left with $100 a pound after paying costs for trimming and packaging the marijuana, which is a money losing proposition.

Concerned about the oversupply of cannabis, Kolosick said he reduced his output last year to 500 pounds from more than 1,000 in 2020.

He’s glad he did it because more money-losing pounds would have deepened his financial troubles. He said it also gave him more time with his infant son.

Another Mendocino County farmer, Blaire AuClair said she and her husband Daniel are struggling financially from the $250 to 300 a pound of cannabis they are receiving from selling their crop.

“We have a crazy oversupply issue here,” she said. of the state’s excess marijuana. “It’s a race to the bottom.”

AuClair is still going ahead with plans to grow 500 pounds of marijuana this coming year, the same as in 2021.

“She and Daniel are hoping prices will go up this year. AuClair said she sees no hope of getting into the black without enough pounds to sell.

Distributor Nick Smilgys of Mendocino Cannabis Distribution said some farmers have been forced to sell marijuana pounds recently as low as $175 a pound.

He said some farmers are taking illegal deals because they are desperate.

“People are going to do a cash deal if they have to,” he said.

He said he bought from one farmer recently 81 pounds of marijuana for $11,475 but once he ended up paying $150 a pound trimming and manufacturing fees, his profits were gone.

Smilgys said he felt so bad he waived his distribution fee, which can cost the farmer 10 percent of the cost of the marijuana sold. He said two years ago, the farmer would have received $80,000 to $85,000 for his cash crop.

“Seeing that invoice I gave to the farmer,” he said, “made me sad.”

This story was originally published April 20, 2022 9:05 AM.

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Randy Diamond is a business reporter for The Sacramento Bee.



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