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Free-falling retail marijuana prices in Michigan are good for consumers, hard on business.
During what is known in the marijuana industry as “Croptober,” profit margins appear to be shrinking, at least in the short term, as newly harvested marijuana enters the legal and illegal markets. Croptober has resulted in a $30 per month, price-per-ounce reduction in 2020 and $13 in 2021.
In an economy plagued by high inflation — grocery prices rose 13 percent last year — marijuana is a rarity.
Marijuana insiders point to a growing appetite for marijuana, which is being produced by nearly 1.5 million licensed businesses at any given time in a state where only about 200 of the 1,773 communities have chosen to allow recreational sales.
“That’s what brought the competition down,” said Harry Barash, who runs the 8,000-member Michigan Cannabis Professionals Facebook page and works as a cannabis industry specialist at Southfield-based Nai Farbman Real Estate. “If you can’t get your cost per pound down to an economically viable number, you’ll have a product that’s too high quality to compete.”
He believes Michigan’s marijuana industry is moving in the direction of beer and liquor, where customers are switching from specialty, “top-shelf” low-volume, high-priced products produced by big-box producers.
In some cases, he is already there. I would guess that it is probably 60 to 70% bottom shelf, maybe 10% middle shelf and 20% top shelf.
According to the latest data provided by the Michigan Cannabis Regulatory Agency (CRA) in September, the average retail price for an ounce of marijuana — enough to pack a pipe 56 times — was about $110.
This is a 73% decrease from the $393 per ounce of cannabis flower in September 2020 and a 46% decrease from when marijuana retailed for $394 a year ago.
Peruse the shelves or online menus for most dispensaries and it’s not uncommon to find even lower prices. An ounce of marijuana with names like Vanilla Gorilla, Cheese Shake, and other high-potency brands of up to 20% THC can cost $100, sometimes less.
While prices are decreasing, overall sales are still increasing. In September, the state reported a record $195 million in recreational sales, which, if adjusted for pace, will reach nearly $2.5 billion next year, including sales of medical marijuana.
How far will prices fall?
Barash doesn’t believe marijuana pricing has fallen and says there’s still room for lower prices. Retailers MLive spoke to said the wholesale price of a pound of marijuana flower, which was nearly $3,500 two years ago, now ranges from $1,000 to $1,500. At $1,000, the wholesale price of an ounce of marijuana is around $36.
“The benchmark for many indoor growers is to produce a flower for about $500,” Barash said. “So there’s only so much room for a producer to make money.”
At $500 per pound, it costs $18 to produce an ounce of marijuana.
Barash said falling prices make growing marijuana less attractive, which ultimately translates to less production and price stabilization in other states like Washington and Oregon with older markets.
“Based on today’s entry price, it takes a long time to recoup your investment, which really makes it no longer a very good business model,” Barash said. “Washington and Oregon have already passed through lows and are on the way.
“Those markets are very stable now. We are kind behind them. It gets worse, then maybe it gets a little better and calms down.
Despite the small amount of revenue going into the business, not many businesses are seen going out of business.
One such victim is Grand Rapids-based Terrapin, which opened a 35,000-square-foot facility in 2020 and was eventually licensed to grow up to 10,000 plants. In July of this year, the Detroit Free Press reported that the business was operating with a skeleton staff after laying off nearly 42% of its employees. The business is now closed and the licenses are void.
Lume, one of the largest retail chains in the state, closed four stores in July but said plans to open retail locations in three new cities are still underway.
“There’s been a lot of layoffs in the industry, and a lot of consolidation,” Barash said. People are trying to figure out how to cut costs. “
Optimism
Barry Goodman, co-owner of Freddie’s, a retail, seven-acre grow and processing facility in Clio, thinks the market is bottoming out.
Currently, growers are constantly reducing their prices to compete, he said. There are too many growers and not enough retailers to sell to, he said. But this may change soon.
“Detroit, for example, is going to vote on 60 recreational permits,” said Goodman, who owns the Southfield-based Goodman Acres personal injury law firm. “This will take away some of the profit from reducing prices.
“Then other cities in the state are going to enter the market. Because there’s so much money for public safety, there’s so little crime, and the curb appeal is so high, you’re seeing that it’s actually worth it. They look like Starbucks, jewelry stores, that kind of thing.”
Detroit’s plan to allow recreational sales starting in 2020 has been held up in court after several lawsuits accused the program of unfairly treating longtime Detroit residents. The city now expects to begin licensing retail marijuana in 2023.
Goodman said other marijuana business owners he talks to agree that “we can do it.”
“I think in the spring when a lot of distributors come out, I think the price will increase by 30%,” he said. “So instead of $1,000, $1,200 (per pound), I’m thinking $1,200 to $1,800 depending on the quality.”
Execution
Beyond observable market forces, there is an unlicensed marijuana market with unmeasurable competition putting pressure on prices. In the year By 2021, a study by the Andersen Economic Group found that only one-third of marijuana purchases will be through licensed commercial sales.
“There’s an enormous amount of illegal cultivation by a million different people,” Goodman said. “I think law enforcement will help get to the bottom of this, but they don’t seem to be involved in the illegal development.”
But there are signs that law enforcement and regulators are stepping up efforts to eradicate black market marijuana from the illegal and licensed markets.
In the year The CRA fined a Detroit medical marijuana retailer this month after an inspector in May 2021 noticed bags and duffel bags filled with unlabeled marijuana in its store. And state police raided a Grand Traverse County cannabis farm and dispensary suspected of operating an unlicensed marijuana business.
Several industry insiders called for more enforcement during the CRA’s quarterly meeting in September.
At that meeting, Allison Arnold with Michigan Cannabis Advocates said there aren’t enough growers in the licensed market to supply the amount of marijuana distillate on the shelves, indicating that some of it comes from black market sources.
“Illicit sales continue to be the main way Michiganders obtain cannabis,” and “an increasing number of licensed cannabis operators are offering illegal or untested products,” Shelly Edgerton said in a statement released by MCMA following the quarterly meeting. By controlling the illegal market and strengthening enforcement across the country, we can help address these two pressing issues.
Despite the challenges, Barash said the industry is “not going anywhere.”
“The Michigan market could mature into a $3 billion industry, that’s what the CRA tells us, but it’s definitely going to go through a lot of corrections and adjustments,” he said. “People have to keep evolving, innovating and innovating to be efficient because we all know that profit margins aren’t what they used to be.”
More about MLive:
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Michigan is poised to ramp up marijuana enforcement.
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