California cannabis cultivation capacity is down significantly from early 2022, with some growers choosing not to plant or renew their licenses because of low wholesale prices and tough economic conditions.
The reduction in canopy is leading to wholesale price stabilization – and might even result in a slight increase in pricing – following months of declining prices in the nation’s largest marijuana market, according to some industry officials.
Cannabis wholesale technology platform LeafLink reports that the total square feet of cultivation canopy in the state has dropped about 15% from a year ago, to around 68 million square feet versus roughly 80 million square feet at this time last year.
Jason Vegotsky is among those who sees wholesale prices starting to level off.
The CEO of Petalfast, an Irvine-based sales and marketing agency for the cannabis industry, said there are simply fewer players in the market, which means prices have stopped tanking and might be coming up slightly.
“I think that trend will continue over the next six months,” Vegotsky said.
“I’m expecting a really nice, second half of the year for the folks who make it through the first half.”
By nice, he means he expects businesses to have an ability to make money with margin expansion, “rather than this margin decline that we’ve seen across the whole supply chain for really the last 18 months.”
Ryan Smith, co-founder and CEO of New York-based LeafLink, believes farmers are choosing not to plant or renew their cultivation licenses because:
- Pricing for outdoor bulk cannabis is lower than the cost of production.
- A weak retail sector makes it difficult to sell branded products in the state.
“Put together, these factors illustrate that grow operations do not have the margin or capital runway to make it through the current ‘down cycle,’” he told MJBizDaily via email.
Other factors at play
That down cycle he’s referring to is highlighted by the wholesale flower market.
According to LeafLink data, a pound of packaged flower is wholesaling in the $1,200-to-$1,400-a-pound range compared with $1,700-$1,900 a pound at the beginning of 2022, a year-over-year decrease of about 25%-30%.
Bulk outdoor flower has remained in the $200-$400-a-pound range in the post-harvest period of fall and winter the past couple of seasons, according to LeafLink.
“California produces more than three times as much legal cannabis than the total addressable market can consume, largely a result of uncapped cultivation licenses and limited retail capacity,” Smith said.
With only 50-100 more retail locations slated to come online in the state this year, Smith expects more growers will likely have to reduce capacity to balance the market.
Other factors are at play aside from the amount of production and retail capacity.
The devastating conditions of heavy rain and wind in early January might have an impact on the supply in the near future, for one.
On the flip side: A change in the law governing cultivation could add capacity to an oversupplied market.
Effective Jan. 1, the state Department of Cannabis Control began accepting applications for large cultivation licenses.
Those licenses are for cultivation sites with more than 22,000 square feet of canopy.
Some of Scott Solomon’s cultivation clients were reporting a bleak scene about 18 months ago, but the situation is improving.
The CEO at Operational Security Solutions, headquartered in Fresno, said prices started dropping “pretty hard” about a year and a half ago.
“We have a revenue model that’s based off of the volume of cash that these businesses are generating,” Solomon said. “It impacted us significantly.
“In some instances, we had clients, cannabis businesses, that said the price dropped essentially 80% across some of their products.”
According to Solomon, the pricing picture started to improve somewhat last September and has begun leveling out.
Still, businesses are building out more cultivation capacity on the potential of future growth of the industry in event of federal legalization or other reform, he said.
Solomon’s seeing more grows developing from Fresno down through Bakersfield and toward Los Angeles.
The picture is even rosier at vertically integrated California cannabis company Glass House Brands.
Graham Farrar, president of the Santa Barbara-based business, said pricing went up by about 13% from the third quarter to the fourth quarter of 2022.
“I think what’s starting to happen is that the market is rationalizing that the pricing was so low that it was destructive to everybody,” he added.
“Eventually, if you’re growing product for more than you can sell it for, you quit doing that. And we can see that happening pretty drastically.”
Farrar is quick to point out that an uptick of three or four months isn’t enough to call it a trend.
“But even to see stability at this time, I think is a positive sign,” he added.
But not everyone is seeing the situation in such a positive light.
Doug Chloupek, the CEO and founder of Juva Life, a cannabis grower and life science research company with a cultivation arm in Stockton, said the market is confused about what defines good marijuana.
“The market has been driven by influencer hype,” he added.
Consumers are paying a premium for purple flower that tastes of fuel or fruit and tests at 30% or more THC content, according to Chloupek.
“The reality is that there is some phenomenal cannabis that is just not being received by the market because the market’s too naive to know what’s actually really good,” he added.
Anecdotally, Chloupek’s seeing green flower selling for $800-$1,000 a pound wholesale, while purple flower can fetch another $100 a pound or more. He said the same flower was selling for $800 more a pound last year.
The overall cost of production, including steep taxes and regulatory fees, is one of the leading factors driving cultivators to not renew their licenses, according to Chloupek.
He said some growers are going back to the unlicensed market because they were making a comfortable living before they tried to go legit.
An illicit market grower can make $150,000-$200,000 a year and not have to worry about their margins being eaten up by taxes and fees, according to Chloupek.
“It’s kind of a doom-and-gloom picture I’m painting, which I wish it wasn’t,” he said.
“But that’s a pretty stark reality of where things are in California right now.”
Bart Schaneman can be reached at email@example.com.