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When recreational adult-use was authorized in Michigan in 2019, purveyors of cannabis and investors alike raced to seize the budding opportunity to enter the market and capitalize on the potential of the new industry. As of January 2020, retail prices for an ounce of adult-use recreational flower were as high as $512.05
Since then, retail prices per ounce have fallen to $323.68 in 2021, $152.74 in 2022 and all the way down to $80.16 as of January 2023. With the steep drop, a lot of cannabis companies were forced to close their doors, put off expansion plans, or be acquired by larger players. For some, it spells the end of entrepreneurial, and for others, it offers a major opportunity for growth at a relatively low cost.
Entering the cannabis market, like any investment, came with risks and was initially thought to be crippled by licensing requirements, strict compliance, and a watchful regulatory body. However, those companies with adequate resources and sound legal and financial advisors to assist in the launch and licensing processes were able to enter and operate successfully, even though that success has been slowed by a variety of factors as the current market continues its decline.
Current state of the Michigan cannabis market
Retail price for ounce of cannabis is down 495% since January 2020
Any favorable margins enjoyed in the early stages have been eviscerated. The steep drop in prices is attributed to illegally grown flower entering the market but that doesn’t quite tell the full story. Prices fall even further when larger operations expand and push more product into the market, and it becomes a race to the bottom and a race to stay relevant.
Prices rise temporarily
As of February 2023, the average retail price for an ounce of flower rose to $86 pausing a pricing free-fall since dispensaries opened in December 2019. While that is a small bit of good news, it’s up for debate whether or not it’s actually positive sentiment.
Currently, it’s more expensive to grow marijuana than to outsource that supply from competitors for use in in their own recipe of edibles and oils, which has reduced the number of grow operations and plant inventory. It’s like this is playing a major factor in the price rebound since less plants will enter the market, decreasing supply as demand remains high. A decline in active plant growth typically happens over the winter month and historically recovers by the start of the following year, but plants being grown for recreational adult-use has dropped 20.5% since September according to the Cannabis Regulatory Agency.
To some, the price increases can be attributed to increased enforcement and regulation. Those that are not a fan of stricter regulation may not agree that the rise in price is necessarily positive. Enforcement in this situation refers to the Cannabis Regulatory Agency (CRA) recent crack downs on illegal practices, forcing some reduction in the recreational supply.
Efficiency is critical
In speaking during the Crain’s Detroit Business Cannabis Industry Forum, CEO of grower Glacial Farms Andrew Sereno put it bluntly saying, “the writing is on the wall. You either need to be efficient or get out."
Vertically integrated operations have strongest outlook
Companies that have been vertically integrated will have the most staying power and will likely have opportunities to buy distressed companies, allowing them to grow while others are shutting down. Vertically integrated companies with more control over their own supply chain shield themselves from some of the risks other companies are facing.
In late 2022, the CRA took questions on whether industry pundits would support a temporary license moratorium. The industry was torn with some saying that it would simply be a matter of price control and others saying it would slow the expansion in cities that had just started issuing licenses. Look for this topic to arise again as a solution is sought to stop the bleeding.
Limiting ‘black market’ supply into the adult-use market
Despite all of the regulation and the testing requirements, non-regulated, untested and potentially “dangerous” cannabis products continue to enter the market, tacking additional strain onto prices. Criticism of the previous CRA regime has been that they never paid attention to the black market, that their “enforcement” was empty threats and all talk and no action. Violations would occur with no real consequences.
Since the change in CRA leadership, there have been actual penalties handed out in a strong first step toward increased enforcement. Proper enforcement will be vital to maintaining market integrity and revitalizing the ailing industry.
Compliance is still extremely important
The February rise in price could signal that the market has already bottomed out and is on its way to recovery and it’s important not to let compliance go by the wayside. The industry is still riddled with tails of mismanagement, financial foul play, and other offenses. Our team of cannabis specialists have assisted clients in all phases of managing a cannabis operation. Fill out the form on this page to contact our cannabis practice.
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