Parsing Some Differences in Product Demand and Oversupply

By J.J. McCoy, Senior Managing Editor, New Frontier Data

When New Frontier Data released its free market update to the industry last fall, 2018 Cannabis Industry Trends Report: Market Insights offered a look into the growing demand for non-flower products.  

In Illinois, for example, monthly revenues from dispensary sales had increased by 54% over a 12-month period (April 2017 to April 2018), though growth had not been found equal across all product categories. Even as flower sales increased 40% year over year, revenues from edibles and concentrates meanwhile grew by 71%, demonstrating a markedly stronger demand for these value-added products.

Even more recent indicators have reinforced the dynamic. In Oregon this month, industry stakeholders reiterated their concerns about oversupply.

As Adam Smith, founder and director of Craft Cannabis Alliance (a small business association in the state) told Rolling Stone magazine, “We’re looking at hundreds of millions of dollars of local capital that is at imminent risk… Many of these businesses are growing some of the best cannabis in the world, as efficiently as anyone anywhere. It matters that we understand that this is not an oversupply problem, it’s a political problem, a market access problem and a prohibition problem.”

Oregon’s legal adult-use market opened for sales in 2016, after the regulatory Oregon Liquor Control Commission began issuing licenses to anyone who qualified. At first, the lack of any cap on licenses was not a problem: The legalized supply was low, popular demand was high, and business was booming. By October 2017, however, the fall harvest produced more than double the cannabis yield of the previous year, though demand within a state of 4 million people had not changed.

Consequently, according to New Frontier Data’s Senior Economist Beau Whitney, prices for flower are expected to decline another 35% to 50% due to oversupply.

“Oil-extracting companies are making a killing right now based on low wholesale prices for flower and trim,” he explained. “Their margins increased because cultivators are desperate for cash and selling biomass to the extractors at low, low prices. Other cultivators are growing only for extraction and not even selling into the flower market.” The result leads to downward pricing pressure on cultivators who want to sell into the flower market.

“Expect to see flower prices declines in California as well once the rules settle a bit,” Whitney added. “Right now, I could see outdoor in the near term going for less than $250 a pound, trending much farther below that in the longer term.”

According to the California Department of Food and Agriculture, the state’s growers produced up to 15.5 million pounds of cannabis while consuming just 2.5 million pounds (or 16%) of it, leaving a surplus equal to 13x of Colorado’s total production ripe for diversion eastward, where wholesale prices can fetch 3x higher.

Meantime, local regulatory debates in California cities and towns that do not welcome cannabis businesses have been more common than expected, adding to low prices and extreme competition which will force many of the state’s smaller companies out of business.

Takeaway: Investors will want to be particularly wary of markets characterized by unlimited licenses and chronic oversupply. Whitney notes that Canada has more planned capacity than it needs, so it will see falling prices once that capacity comes online.  “Once that hits, their only outlets will be the export markets in the European Union and elsewhere,” he said. “Prices across the U.S. depend on the regulatory structure, but as prices go down out west, it will put downward pressure on the entire market.”