Michigan is emblematic of what’s happening across the country year-round, and why the industry thrives even as legalization spreads. Forlorn hopes that Democratic-controlled Washington could loosen decades-old restrictions on the drug have given way. market congestion and a sharp drop in prices that put many businesses at risk of collapse.
Prices in Colorado have fallen 51 percent over the past two years, according to BDSA, a cannabis research firm. The price of a pound of weed dropped 36 percent in Massachusetts and 46 percent in Missouri, according to LeafLink, which tracks wholesale deals.
In Michigan, the price drop is even more extreme. Over the past two years, the price of weed in the recreational market has fallen about 75 percent, from nearly $400 to less than $100 an ounce.
The decline in Michigan is messy enough that some industry officials are calling for a moratorium on cultivation licenses three years after the state launched a recreational market.
“With oversupply and so many licenses, it’s setting up businesses to fail,” said Beau Whitney, an economist who focuses on the hemp industry, speaking of the Michigan market. “Nationally, very few people are making a profit in this industry.”
Those market dynamics exacerbate an already bleak financial outlook for weed companies, even as sales are expected to reach roughly $30 billion this year, more than double what they were three years ago.
Companies face high taxes because they are treated as illegal drug dealers. And failure of bipartisan efforts A move in Congress this month to make it easier for marijuana businesses to access mainstream banking means they will continue to face exorbitant interest rates to raise cash to run their operations. With Republicans retaking the House of Representatives, that dynamic is unlikely to change anytime soon.
Amidst all the market turmoil, there is one big winner: weed buyers.
“What you’re seeing is the market working,” said Michael DiLaura, chief corporate officer of House of Dank, which has 10 retailers in Michigan. “The Michigan consumer is now getting perhaps the best weed in the world at the best prices in the world.”
The Michigan weed market has been a huge success in many ways.
Sales in the adult market are expected to reach $2 billion this year, roughly four times the sales volume in 2020, the first full year of operations. In just the past year, the number of retail locations where anyone at least 21 years old can buy weed has grown nearly 50 percent to 600 stores statewide. According to the Michigan Cannabis Regulatory Agency, nearly 30,000 workers were authorized to work in state-licensed cannabis businesses as of the end of November.
But by all accounts, the state is also struggling to crack down on the still-vibrant illegal market. Just 30 percent of cannabis sales were made through licensed retail establishments, whether medical or recreational, in 2020, according to a study by Anderson Economic Group commissioned by the Michigan Hemp Growers Association. The rest of the deals were either done through illegal channels or through the state’s “caretaker” market, which was developed before recreational legalization to serve drug addicts.
Most observers say the biggest problem is illegal cannabis entering the market from other states. Oregon, Oklahoma, and especially California are often cited as sources of illegal products that end up in Michigan weed shops.
“There’s a lot of foreign products hitting the shelves of dispensaries in Michigan,” said Jeff Korff, CEO of Cannabis Cultivation and Retail, which has started operations in the state. last year.
Michigan is hardly alone in its fight against the Union illegal market. The vast majority of sales in California still come from illegal sources nearly five years after the state established its recreational market. New York City has seen a massive proliferation of illegal retail outlets as it prepares to begin adult sales. Nationwide, Whitney Economics an estimated 75 percent of cannabis sales in the United States were illegal in 2021.
Michigan officials are now vowing to crack down on cannabis. In September, Democratic Governor Gretchen Whitmer appointed Brian Hanna as the new head of the state’s cannabis regulatory agency. Hanna’s background is in law enforcement, including serving as an Intelligence Analyst for the Michigan State Police and a Kalamazoo County Sheriff’s Deputy.
He made it clear that fighting fraudulent businesses is the No. 1 priority.
“We have heard [about] a lot of illegal market stuff is making it into the regulated market,” Hanna said in an interview. “We want to discover it, and we want to find it and discover it.”
To ease that pressure, the regulatory agency is hiring 11 additional staff, including six investigators.
But some industry officials are calling for a more aggressive tactic to put a moratorium on new processing licenses. The CRA held a public meeting in September to discuss the possibility, and many business owners expressed support for the idea.
“What you tend to see is a race to the bottom at this point in the market,” said Narmin Jarrus, executive director of the Michigan Hemp Business Association, which has not taken a position on a possible moratorium. “What people are doing is they’re just trying to put each other down.”
But the prospect of a moratorium on cultivation anytime soon seems far-fetched. The regulator says it needs legislative authority to adopt even a temporary moratorium on cultivation licenses. It would require the approval of three-quarters of lawmakers in Congress and the Senate, and Democrats are poised to gain control of both chambers.
“The idea of a moratorium is out there, but I don’t necessarily know that it has momentum,” said Shelly Edgerton, president of the Michigan Hemp Growers Association, who previously served for 16 years. the state senate. “The Democrats haven’t been in control for years, 40 years, and so they’re going to have a lot on their agenda, probably outside of cannabis.”
Democratic state Sen. Jeff Irwin, who previously served as political director for the 2018 recreational legalization campaign, argued that the industry’s fight in Michigan has gotten too much attention for the market, which is only three years old. He is concerned about illegal products entering the market and the lack of consistent product testing, but doesn’t think major changes are needed at this time.
“We’re working on a market that was completely illegal for decades and decades and decades,” Irwin said in an interview. “I think sometimes we miss how much progress has been made over the last few years in growing the legal market.”
Michigan’s weed glut will reshape the industry in the coming months. Struggling businesses are likely to either collapse or be disrupted by larger, better-financed competitors.
“We’re starting to see a lot of people wanting to sell,” said Corbin Yaldu, president of C3 CRE, a real estate firm based in Bloomfield Hills that focuses on commercial hemp properties. “And there’s going to be a lot of opportunity for well-funded, good operators to get people on the cheap for them.”
Common Citizen is one of the businesses looking to take advantage of that opportunity. The company currently operates approximately 200,000 square feet of land in Marshall and seven retail locations serving the medical and adult markets.
Common Citizen CEO Michael Elias predicts the company will look radically different a year from now as it prepares to go shopping. It expects earnings to double this year, largely due to acquisitions, and projects they will double again in 2023.
“I actually like the fact that it’s so unsettled because I’m taking retail from the price of a year ago,” Elias said. “It’s a buyer’s market.”
A similar dynamic is expected across the country, with analysts predicting a wave of mergers and acquisitions in 2023, in part because there are so many struggling businesses, from mom-and-pop retailers to large public companies.
“More consolidation is coming, and we’re going to see it accelerate next year,” said Jonathan DeCourcy, a BTIG analyst who follows the cannabis industry.
Elias and many others remain in the Michigan market for the long term. Most market observers believe there is still considerable room for growth, especially in some of the state’s major cities; most notably Detroit — yet to license any recreation business.
“Anyone who has the stomach for it, it’s time to get in,” Elias said.