Recent pricing data from the US is not painting a pretty picture of what could be in store for marijuana growers in Canada.

Doesn’t matter if it’s Colorado, Oregon, Washington or even California, marijuana flower prices are falling in every state that has gone legal and the declines are accelerating.

Marijuana prices in 2017 showed consistent declines across the US, led by Colorado which is now 4 years into recreational marijuana sales.

Over the last two years prices fell 45% in Colorado, 26% in Washington and 25% in California, even though California still hadn’t legalized recreational sales.

In 2018 so far, prices are down 36% in Washington, 35% in Oregon, 8% in Colorado and 3% in California compared to the fourth quarter of 2017.

 

Why This Matters to Canadian Producers

The analyst community is basing their price targets on a retail marijuana price that only falls to $6/gram by 2022, a 4% yearly decline.

In the US pricing has declined 20%-30% a year in every state that legalized recreational marijuana.

In the US pricing is declining 20%-30% a year in every legal state. Price declines of this magnitude in Canada would absolutely crush richly valued stock prices.

In this report we explore what the latest trends are in the U.S. and list reasons supporting and refuting why Canada will share the same fate.

 

Wholesale Prices by State Through 2017

Source: Cannabis Benchmarks

Price Collapse Accelerating in 2018

 

Washington

Prices in Washington are down 36% quarter over quarter through March. Since legalization began in July 2014, wholesale prices are down 73% or 20% a year, falling from $3,000 per pound to $800 per pound. Retail pricing is worse, down 82% or 23% a year, falling from $25 per gram to $4.50 per gram recently. Pricing varies depending on where the product is grown, but the premium for indoor marijuana continues to compress against outdoor supply. Across the board prices are behaving like marijuana is a commodity. 

Wholesale Pricing by Grow Type (Indoor is Better than Outdoor)

Source: Cannabis Benchmarks

Colorado

Wholesale prices are down 8% year to date in 2018 after falling 15% in 2017. Some growers say they’re selling product for as low as $600 a pound. Since legalization in January 2014, wholesale prices are down about 74% or 18% a year from $4,000 a pound to $1,060 a pound and retail prices are down 80%, or 20% a year — in line with Washington.

Colorado Wholesale Prices

Source: Cannabis Benchmarks

Oregon

Oregon is a state drowning in marijuana and is seeing the worst price deflation of all recently. Pricing held up in 2017 due to a slow licensing process, but as the number of licensed producers increased, prices have been falling off a cliff so far in 2018, down 35% quarter over quarter. According to some industry sources, Oregon produces three times as much marijuana as the state consumes, indicating prices will continue to fall in the near future.

Oregon Wholesale Prices

Source: Cannabis Benchmarks

Will the Same Fate Happen to Canada

Arguments for YES 

  1. Canadian licensed producers have even more capital than US producers and are currently building greenhouses that will produce at least 1.5 times as much supply as Canadians can consume.
  2. Canada has a thriving black market like western US states, meaning legal producers will be fighting for market share in a fully supplied market.
  3. Health Canada has no limit on the amount of cultivation licenses it will issue.
  4. There’s no difference in cultivation practices, intellectual property or consumer buying patterns between the US and Canada.
  5. Strict branding and marketing rules in Canada will make it very difficult for different suppliers to stand out to consumers. Without effective marketing consumers historically prefer the lowest priced and strongest option.

Arguments for NO

  1. Canada has only issued 97 cultivation licenses with 4 months to go before recreational legalization, compared to 1,000-2,000 licenses in legal US States just before they went legal.
  2. Legal producers in Canada are signing export agreements that will allow them to export excess supply to other parts of the world.
  3. The government has been slow to approve new permits and will artificially limit legal capacity to avoid an oversupply.
  4. Producers in Canada don’t have the expertise to scale effectively so will build greenhouses much slower and produce way less supply then they are planning.

Bottom Line

Unless the government restricts legal supply for the next 3-4 years, the marijuana oversupply is inevitable. 

Unless the government decides to limit cultivation and sale licenses and artificially restrict legal supply (overtly or by pointing to the inexperience of growers as a reason to deny licenses) there’s going to be too much marijuana produced in Canada.

Canadian producers have billions more in capital and easier access to the banking system than their US counterparts and are ramping up legal capacity much faster than Colorado, Oregon or Washington did historically and those states still saw prices fall 20%-30% per year.

Growers would have to completely drop the ball and produce 50% of planned capacity to avoid a market swimming in marijuana. Growers, investors and the government need to buckle up, they may be in for a bumpy ride.

Cultivation Licenses at the Launch of the Recreational Market