Cannabis prices have been eroding for two years running. That’s great news for those inclined to smoke or ingest pot, but for investors Mary Jane has been one expensive date.
The upshot: Declining weed prices are forcing cannabis growers and dispensaries to shelve expansion plans. Intensifying the situation are rising interest rates, making borrowing increasingly expensive. Another never-ending malady exacerbating the situation is the lack of federal regulatory reform, particularly regarding cannabis players’ access to the banking system.
Some cannabis companies have turned to consolidation to help remedy at least some of those problems.
And yet, there is another headwind blowing in the face of cannabis investors, according to McAlinden Research Partners, and that is persistent and significant oversupply of product, a situation consolidation will do nothing to alleviate.
One might think that shrinking prices would encourage more consumption and shrink the nation’s oversupply of the commodity but, as Real Assets Adviser reported in March 2020, the legalization of recreational and medical use of cannabis in Canada and several U.S. states had not created the expected demand.
Though the U.S. market is largely segmented on a state-by-state basis, since the federal prohibition on cannabis remains intact and interstate commerce involving the product can oftentimes constitute a violation of the law, nearly all jurisdictions where cannabis farming and sales are legal have faced a glut of supply, McAlinden specifies. In Michigan, one of the states where anyone 21 years or older with a valid government ID can purchase cannabis products, the number of active marijuana plants now exceeds 1.2 million, roughly six times the volume grown in 2020. Politico notes that such supply may be equivalent to three times as much weed as the state’s consumers are buying. As a result, the state’s pot prices plummeted by 75 percent from nearly $400 an ounce to less than $100 between 2021-2022.
Amid California’s cannabis glut, The Santa Barbara (Calif.) Independent writes that the prices for wholesale cannabis flower have plunged from their peak of $1,400 in 2020 to about $660 per pound. Much like Michigan, the state is believed to be producing three times as much pot as residents can consume. Growers with permits to farm hundreds of acres across California’s North County region have abandoned operations and withdrawn applications for business licenses in April. They’re not alone, as the number of active cannabis cultivation licenses in the state has fallen by 20 percent since early 2022.
As of February, the Oregon Liquor and Cannabis Commission reported marijuana businesses were sitting on about 3 million pound of unused cannabis, as well as 75,000 pounds of concentrates and extracts.
These are just a few examples cited by McAlinden regarding the persistent and widespread problem afflicting the cannabis business and its backers. Hence, growers are slashing new cultivation of the crop.
According to the U.S. Cannabis Spot Index, the national cannabis price was gauged at $1,033 per pound in the week to May 5. That’s down more than 16 percent from the same time a year ago, and the implied forward curve suggests a further decline to $1,010 per pound through November.
As a result of this implosion, fewer research analysts are covering the U.S. marijuana industry, which experts say reflects the challenging economic headwinds facing the industry, including high taxes, high interest rates, rock-bottom stock prices and the slow pace of federal MJ reform. MJBizDaily reports that New York-based Cantor Fitzgerald and Cowen are among the more notable financial-services firms that have dropped coverage of U.S. plant-touching cannabis companies.
“It speaks to the unhealthy state of our industry,” Jesse Redmond, the managing director of the cannabis sector and head of research at Florida-based Water Tower Research, told MJBizDaily.
It’s not just marijuana that is feeling the squeeze, but other breeds of the cannabis sativa as well, reports McAlinden. In particular, U.S. plantings of hemp, which is used for the procurement of cannabidiol, a non-psychoactive cannabis derivative more commonly known as CBD, were nearly cut in half in 2022, with just 28,400 acres dedicated to growing the plant. The USDA valued hemp production in 2022 at just $238 million, down 71 percent from $824 million in 2021.
If cannabis investors are feeling high these days it’s not based on ROI, but perhaps from a helping of their surplus product.
Mike Consol (m.consol@irei.com) is senior editor of Real Assets Adviser. Follow him on Twitter (@mikeconsol) and LinkedIn (linkedIn.com/in/mikeconsol) to read his latest postings.