Entering Q4 2018, America has had an opportunity to learn how various regulatory approaches in states like Colorado, Washington, and Oregon have performed, positively or negatively, post enactment. Business owners and citizens across the nation are seeking answers to determine how regulations will impact the future of this burgeoning industry. Do tighter regulations make markets more competitive? How do more relaxed regulations create over saturation and downward economic pressure? Let’s look at how each state has rolled out legalization and how each of their policies have created unique economic environments.
Oregon
Oregon’s regulations has put pressure on many small capacity producers by permitting an excess of cannabis inventory to come to market. Simply put, supply has outpaced demand. Within a few harvests post-legalization, producers in Oregon saw the price per pound to drop by more than 50%. The current price is now around $600-$700 per pound.
The state produces 10x the amount of cannabis it consumes each year, which has put downward pressure on pricing not only at the wholesale level but also at the retail level. This is a bad economic environment for cultivators, but great for consumers who are chipping away at a 1-million pound agricultural surplus.
Washington
Washington limits the number of licensed cannabis producers and processors to no more than 1,200 statewide, and each licensee is limited to a 30,000 square foot canopy space. The state also has nearly 5x the number of compliance officials dedicated to enforcing cannabis regulations compared to Oregon.
But Washington’s tighter approach to cannabis policy hasn’t kept the bottom from falling out. Higher barriers of entry for retailers and “local obstructionism” from dry counties have left Washington’s producers squeezing into hotspot locations where regulations are easier to comply with and oversupply saturates the states’ “patches of availability”. 2017 figures show the volume of sales increased 105%, yet at the same time prices declined by 23%.
California
California’s legendary medical market recently opened its doors to adult-use cannabis, but expensive taxes and onerous regulations have made it hard for new businesses to gain traction and for established brands to produce profits.
Compliance testing can cost tens of thousands of dollars per month and building compliant facilities can cost hundreds of thousands of dollars, according to multiple sources at MJbizdaily.com.
Compounding this challenging financial environment are constantly changing rules about packaging, industrial zoning, and supply chain uncertainty.
According to Cannabis Benchmarks, California’s wholesale price per pound for producers is dropping swiftly. Yet established brands with trending strains have been able to command a premium for their flower, while new farms are finding it harder and harder to compete.
Nevada
Nevada, on the other hand, has seen a powerful cannabis industry model that boasts a steady wholesale price around $1,800 per pound, almost double the price of California.
Nevada cannabis businesses are able to command premium prices at wholesale and retail levels. County population has determined the number of licenses given out in any given city.
Only medical marijuana certificate holders have been exclusively permitted to enter the Nevada market, but the state has plans to open up licensing to all applicants November 16th.
We are still in the early days of the cannabis industry development. So far capping the number of licenses issued by a regulatory agency can help stabilize a market, but too much restriction and the industry stifles, expansion is limited and pricing gets overheated. Cannabis is a hot industry and participants are realizing that larger, well-capitalized players who can grow by acquisition are dominating the field.
Regardless of state regulations, there is one large ominous cloud that looms over the industry and that is federal prohibition. If cannabis eventually is federally decriminalized, the market would expand rapidly and oversupply issues would be eliminated.
However, industry analysts have already suggested that the cannabis industry will be a race to the bottom, and current pricing trends seem to support that theory. While much of the nation gazes north to Canada’s provinces, as they roll out new legalization framework, many industry participants will use this as a harbinger for America’s cannabis future.
Until federal law changes, larger companies will continue to battle for market share, while smaller mom and pop organizations seek to differentiate themselves in a highly competitive market.
