The continued free fall of retail marijuana prices in Michigan is good for customers, tough for business.
Profit margins look set to shrink even more, at least in the short term, as a surplus of freshly harvested marijuana enters both the legal and illegal markets during what the marijuana industry calls “croptober,” the outdoor harvest season. Croptober triggered a drop in price per ounce of $30 month-over-month in 2020 and $13 in 2021.
In an economy experiencing significant inflation—grocery prices rose 13% in the past year—marijuana is an anomaly.
Marijuana insiders point to the growing amount of marijuana produced by companies licensed for nearly 1.5 million plants at any given time in a state where only about 200 of 1,773 communities have chosen to allow recreational sales.
“That’s what’s causing the race to the bottom,” said Harry Barash, who runs the 8,000-member Michigan Cannabiz Professionals Facebook page and works as a cannabis industry specialist for Southfield-based real estate firm NAI Farbman. “If you can’t get your price per pound down to a number that’s financially viable, you better have a much higher quality product to compete.”
He believes Michigan’s marijuana industry is moving in the direction of beer and spirits, where customers are offered low-priced products produced by massive manufacturers with deep pockets alongside “top shelf” specialty drinks bottled in lower quantities at higher prices.
In some respects, he said, it is already there. “I would guess that maybe 60% to 70% is bottom shelf, maybe 10% middle shelf and 20% top shelf.”
According to the latest data from 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 drop from the cost of cannabis flower at $393 per ounce in September 2020, and a 46% drop since marijuana sold for $394 per ounce a year ago.
Look on the shelves or online menus of most pharmacies and it is not uncommon to find even lower prices. Ounces of marijuana with names like Vanilla Gorilla, Cheesequake, and many other highly potent strains approaching 20% THC can be purchased for $100, sometimes less.
While prices are falling, overall sales are still increasing. The state in September reported a record $195 million in recreational sales, a pace that, if sustained, will approach $2.5 billion over the next year, including sales of medical marijuana.
How far will prices fall?
Barash does not believe the price of marijuana has bottomed out and said there is still room for prices to drop. 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 of an ounce of marijuana is about $36.
“The benchmark for many indoor growers is to produce flowers for about $500 a pound,” Barash said. “So there’s really so 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 $18.
Barash said the falling prices make growing marijuana less attractive, eventually leading to less production and price stabilization, as seen in other states, such as Washington and Oregon, with older markets.
“Based on the cost of entry today, it takes a lot longer to recoup your investment, which really doesn’t make it such a good business model anymore,” Barash said. “Washington and Oregon have already gone through the bottom and they are on the rise.
“Those markets are much more stable now. We’re kind of right behind them. It’s going to get worse, then it’s probably going to get a little bit better and stabilize.”
Despite less revenue going to companies, there has not been an increase in companies exiting the market.
One casualty is Grand Rapids-based Terrapin, a growing and processing operation that opened a 35,000-square-foot facility in 2020 and was eventually licensed to grow up to 10,000 plants. In July of this year, the Detroit Free Press reported that the company was operating with a skeleton crew after laying off nearly 42% of its staff. The business is now closed and the licenses are invalid.
Lume, which is driving growth and one of the largest retail chains in the state, closed four stores in July but said plans to open stores in three new cities remained on track.
“There’s been a lot of layoffs in the industry,” Barash said, “and there’s been a lot of consolidation. People are trying to figure out how to reduce their costs.”
Barry Goodman, owner of Freddie’s, a retail, 7-acre growing and processing business in Clio, believes the market is bottoming out.
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 could soon change.
“Detroit, for example, will opt in with 60 recreational licenses,” said Goodman, who also owns the Southfield-based Goodman Acker personal injury law firm. “It takes some of the excess that lowers the price.
“And then other cities across the state will come into the market. They see that it’s actually a blessing because there’s more money for public safety, there’s very little crime and the appeal is high. They look like Starbucks, jewelry stores , that sort of thing.”
Detroit’s plan to allow recreational sales has been upheld in court since 2020 after several 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 talks to agree “that we hit rock bottom.”
“I think the price will go up by 30% in the spring when there are more pharmacies out there,” 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.”
Beyond the visible market forces, there is an unlicensed marijuana market that puts price pressure through competition that is nearly impossible to quantify. A study issued by the Anderson Economic Group in 2021 estimated that only one-third of all marijuana purchases are made through licensed commercial sales.
“There’s so much outdoor crop done illegally by a million different people,” Goodman said. “I think law enforcement would help address this issue, but they don’t seem to be involved in the illegal growth.”
However, there are indications that law enforcement and regulatory agencies are stepping up efforts to eradicate black market marijuana from the illegal and licensed markets.
The CRA this month fined and suspended a Detroit medical marijuana dealer after an inspector in May 2021 observed backpacks and duffel bags filled with unlabeled marijuana at the store; and state police raided a cannabis farm and CBD store in Grand Traverse County on suspicion of operating as an unlicensed marijuana operation.
Several industry insiders called for greater enforcement during the CRA’s quarterly meeting in September.
At that meeting, Allison Arnold with the Cannabis Attorneys of Michigan said there aren’t enough growers in the licensed market to supply the amount of marijuana distillate on the shelves, suggesting some of it comes from black markets.
“Illegal sales remain the primary means for Michiganders to obtain their cannabis” and “there is also a growing number of licensed cannabis operators providing illegal or unproven products,” Shelly Edgerton said in an MCMA statement after the quarterly meeting. “We can help address these two pressing issues by cracking down on the illegal market and increasing enforcement across the country.”
Despite problems, Barash said the industry is “not going anywhere.”
“The Michigan market will likely mature into a $3 billion industry, is what the CRA is telling us, but it’s definitely going to go through a lot of corrections and adjustments,” he said. “People will have to continue to evolve, pivot and get creative to be effective, because we all know that profit margins are not what they used to be.”
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