Ask Our Experts 1/13/2019
Ask Our Experts: The Impact of Excess Cannabis Inventory in Oregon and Other Regulated Markets
By Beau Whitney, Senior Economist, New Frontier Data
Q: I am seeing a lot of news about excess inventory in Oregon and other regulated cannabis markets. What is the impact of this excess inventory, and what can be done about it?
A: Excessive inventories in Oregon have resulted in falling prices at both the wholesale and retail levels. Consequently, higher-cost suppliers have either been driven out of business or into consolidation with healthier or better-funded companies. There is not much that regulators can do in the short run to address the excess supply, given that each state has a closed system where all cannabis produced must be sold in that state.
In Oregon’s case, the regulatory structure did not limit the number of producers’ licenses issued, so excesses were inevitable as businesses rushed into the market. At one point, Oregon had over 21 million square feet of canopy (i.e., growing space) under license, more than enough to satisfy any potential demand among Oregonians. As it stands, with the state having more than 1,100 growers (and nearly 1,000 others in the application queue), issues and fallout from oversupply will intensify before they improve.
With such excess inventory in place and increasingly more coming to market, suppliers are having trouble finding retailers willing to buy it. The limited shelf space leaves Oregon’s market hypercompetitive, making retailers demand ever-lower prices. Cultivators are thus forced to compete on price or to sell into the still lower-priced extraction market. Oregon is not unique; based on sales data from Colorado, retail prices for flower there have dipped below $800 per pound for the first time since legalization, and bud for extraction is now down to $200 per pound wholesale. Small or inefficient producers who expected legalization to earn them a fortune are finding themselves in jeopardy, with the competitive situation in Oregon even more dire.
Faced with falling prices and tight-to-negative margins, some growers now look to convert their crops to industrial hemp, given the new, more favorable regulatory environment from the 2018 Farm Bill. Other growers are looking closely at the cost structure of their supply chains to become more price-competitive. Many others are selling to extraction companies to generate short-term cash flow, despite still-lower margins.
From a legislative or regulatory perspective, options are limited for addressing excesses and stabilizing prices. One option is to reduce the permitted canopy, which would reduce output but nevertheless impact individual growers’ business models, potentially to the detriment of the industry overall. Another option is to implement caps on licensing, thereby increasing the value of each license over the long run, though that would do nothing in the short run to address the supply pipeline and falling prices. One more suggestion gaining popularity in Oregon is to allow suppliers in one market to export to another state which allows importation: While that would increase the total demand, absorb more supply, and stabilize prices, it would also be accompanied by myriad issues to address at both the state and federal levels.
As described, there is little to be quickly done to address excess in a market once it arrives, so the near-term outlook is for continued price declines, supplier consolidation, and exceedingly high inventories for both flower and oil. The issue will be an intensely debated topic in the state legislatures throughout the 2019 legislative season, one which could reshape the cannabis landscape for several years to come.