The Impact of Regulations on Price
By Yona Torres, New Frontier Data Contributing Editor
In the 16 months since California legalized marijuana, cannabis prices in some California market sectors have plummeted 75%, according to the Washington Post. This steep decline, paralleled in Colorado, Oregon and Washington, is a product of the number of newly-licensed cultivators and the regulations that guide them.
The increase in competition was not a surprise to veteran cultivators who previously serviced the illicit market and, for a time, the deregulated legal market. They expected an influx of new growers to the once esoteric industry. When discussion of state regulations began, a financially-motivated frisson over the “green rush” galvanized entrepreneurs and investors to purchase land and await licensing guidelines. According to the same Washington Post piece, more than 600 growers have been issued over 2,000 licenses in California. The CalCannabis Cultivation Licensing agency only began accepting applications on January 1, 2018.
How did the market become super saturated?
Beau Whitney, Sr. Economist at New Frontier Data explains, “As new markets deployed, each state adopted different regulatory and licensing regimes based on individual state policy considerations. Both the new regulations, and the licensing processes had profound effects on pricing. Left unchecked an open number of available licenses increases the number of cultivators which raises the risk of oversupply creating price declines that could in turn have negative impact on cultivators and the market in general.”
For example, Oregon’s regulations do not limit the amount of cannabis each cultivator may grow. Each license permits a prescribed square footage of canopy space under which mature flowering plants may be grown. While on its face, this may seem to limit the quantity of total cultivation, the regulations do not limit the number of licenses per cultivator, nor do they limit the number of plants that may be grown under each canopy.
In California, the Department of Food and Agriculture (CDFA), which oversees cannabis licensing agencies, also does not restrict the total number of cultivation licenses an individual may hold. Unlike Oregon, California imposes a total acreage cap of four acres. Nonetheless California also faces an oversupply of cannabis and prices have dropped.
In Colorado, the average bud rate dropped from $2,007 per pound on January 1, 2015 to $1,012 per pound on April 1, 2018. This 50 percent drop, compared to California and Oregon, reflects a relatively buffered decline, owing to, in part, an incremental approach in its cultivator-licensing provisions.
“Colorado’s regulations initially placed a cap on the canopy. Cultivators could then increase their canopy over time if they could demonstrate that there was enough demand for the amount of supply that was produced. This strategy, enabled the supply to increase along with the regulated demand. Therefore, there is not nearly the excess supply that Oregon, Washington and California are experiencing, and, as a result, prices are less volatile,” said Whitney. The proliferation of greenhouses and relative maturity of the market, could also account for the more moderate price fall that Colorado, the longest regulated adult-use market, experienced.
Yona Torres is a contributing writer/editor for New Frontier Data. An attorney in Washington, DC, Yona has worked in corporate defense litigation for 11 years. She has also been a freelance writer for several online and regional print publications such as Washington Life and DCSTYLEMag.com.