Race to the bottom? Plummeting Michigan marijuana prices great for buyers, bad for business
As first reported by : Gus Burns | fburns@mlive.com
Correction: This originally included incorrect price-per-ounce calculations that have been revised.
The continued free fall of retail marijuana prices in Michigan is great for customers, tough on business.
Profit margins look to cinch even more, at least in the short-term, as a surplus of newly harvested marijuana enters both the legal and illicit markets during what is known in the marijuana industry as “croptober,” harvest time for outdoor farms. Croptober sparked a $30 month-to-month, price-per-ounce decline in 2020 and $13 in 2021.
In an economy that’s experiencing significant inflation – grocery prices are up 13% in the last year – marijuana is an anomaly.
Marijuana insiders point to the growing glut of marijuana being produced by businesses licensed for nearly 1.5 million plants at any given time in an state where only about 200 of 1,773 communities have opted to allow recreational sales.
“That’s what’s causing the race to the bottom,” said Harry Barash, who operates the 8,000-member Michigan Cannabiz Professionals Facebook page and works as the cannabis industry specialist for the Southfield-based NAI Farbman real estate firm. “If you can’t get your price per pound down to a number that’s economically feasible, you better have much higher quality product to be able to compete.”
He believes Michigan’s marijuana industry is headed the direction of beer and liquor, where customers are offered low-priced products produced by massive deep-pocketed manufacturers alongside specialty, “top-shelf” liquors bottled in lower quantities at higher prices.
In some regards, he said, it’s already there. “I’d guess maybe 60% to 70% is bottom shelf, maybe 10% of the mid-shelf and 20% top shelf.”
As of 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.
That’s a 73% price decline from the $393 per ounce cannabis flower cost in September 2020 and a 46% dip since marijuana retailed for $204 per ounce a year ago.
Peruse the shelves or online menus for most dispensaries and it’s not uncommon to find prices even lower. Ounces of marijuana with names like Vanilla Gorilla, Cheesequake and many other high potency strains approaching 20% THC may be had for $100, sometimes less.
While prices drop, total sales are still increasing. The state in September reported a record $195 million in recreational sales, a pace that, if maintained, will approach $2.5 billion over the next year with medical marijuana sales included.
How far will prices drop?
Barash doesn’t believe marijuana pricing has hit rock bottom and said there’s still room for prices to decline. Retailers MLive spoke with said the wholesale price per pound of marijuana flower, which was nearly $3,500 two years ago, now ranges between $1,000 and $1,500. At $1,000, the wholesale cost for an ounce of marijuana is about $62.50.
“The benchmark for many indoor grows is to produce flower for about $500 a pound,” Barash said. “So there’s really that much room for a producer to be able to make money.”
At $500 per pound, the cost to produce an ounce of marijuana is about $31.25.
Barash said the falling prices make growing marijuana less enticing, which eventually translates to less production and price stabilization, as seen in other states, like Washington and Oregon, with older markets.
“Based on the entry cost today, it takes a lot longer to recoup your investment, which really makes it not such a great business model anymore,” Barash said. “Washington and Oregon have already kind of been through the bottom and they’re on the upswing.
“Those markets are a lot more stable now. We’re kind of right behind them. It’s gonna get worse, then it’s probably going to get a little better and stabilize.”
Despite less revenue going to businesses, there’s not been a surge of businesses dropping out of the market.
One casualty is Grand Rapids-based Terrapin, a grow and processing operation that opened a 35,000-square-foot facility in 2020 and was eventually licensed to grow up to 10,000 plants. By July of this year, the Detroit Free Press reported the business was operating with a skeleton crew after laying off nearly 42% of its staff. The business is now closed and the licenses void.
Lume, which operates grows and 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 were still on track.
“There have been a lot of layoffs happening in the industry,” Barash said, “and there’s been a lot of consolidation. People are trying to figure out how they can reduce their costs.”
Optimism
Barry Goodman, the owner of Freddie’s a business with a retail location, seven-acre grow and processing facility in Clio, thinks the market is hitting bottom.
Right now, he said growers are consistently lowering their prices to compete. There are too many growers and not enough retailers to sell it, he said. But that may soon change.
“Detroit, for instance, is going to opt in with 60 recreational licenses,” said Goodman, who also owns the Southfield-based Goodman Acker personal injury law firm. “That’ll take some of the surplus that’s reducing the price.
“And then other cities across the state are going to be entering the market. They’re seeing that it’s actually a boon because there’s more money for public safety, there’s very little crime and the curb appeal is high end. They look like Starbucks, jewelry stores, that kind of thing.”
Detroit’s plan to allow recreational sales has been upheld in court since 2020 after multiple lawsuits accused the program of unfairly giving preferential treatment to longtime Detroit residents. The city now expects to begin issuing retail marijuana licenses in 2023.
Goodman said other marijuana business owners he speaks with agree “that we bottomed out.”
“I think by spring when there are more dispensaries out, I think the price will go up 30%,” he said. “So instead of $1,000, $1,200 (per pound), I’m thinking anywhere from $1,200 to $1,800, depending on the quality.”
Enforcement
Beyond the visible market forces, there’s an unlicensed marijuana market putting pressure on prices through competition that’s nearly impossible to quantify. A study issued by the Anderson Economic Group in 2021 estimated only a third of all marijuana purchases are conducted through licensed commercial sales.
“There’s so much outdoor crop illegally done by a million different people,” Goodman said. “I think law enforcement would help getting at this issue, but they don’t seem to be getting involved in the illegal growth.”
There are, however, indications that law enforcement and regulators are stepping up efforts to eradicate black-market marijuana from the illicit and licensed markets.
The CRA this month fined and suspended a Detroit medical marijuana retailer after an inspector in May of 2021 observed backpacks and duffel bags filled with untagged marijuana at the shop; and state police raided a Grand Traverse County cannabis farm and CBD shop on suspicion that it was operating as an unlicensed marijuana business.
Numerous industry insiders called for greater enforcement during the CRA’s quarterly meeting in September.
At that meeting, Allison Arnold with Cannabis Attorneys of Michigan said there are not nearly enough growers in the licensed market to supply the amount of marijuana distillate available on shelves, indicating that some of it comes through black-market sources.
“Iillicit sales remain the main way Michiganders get their cannabis” and “there is also a growing number of licensed cannabis operators providing illicit or untested product,” Shelly Edgerton said in a statement issued by the MCMA following the quarterly meeting. “We can help address these two pressing issues by cracking down on the illicit market and ramping-up enforcement statewide.”
Despite issues, Barash said the industry “isn’t going anywhere.”
“The Michigan market is likely going to mature at a $3 billion industry, is what the CRA tells us, but it’s definitely going to go through a lot of corrections and adjustments,” he said. “People are going to have to continue to evolve, pivot and get creative to be efficient, because we all know the profit margins are not what they used to be.”
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