Calls are increasing among marijuana growers to stop licensing new cultivation businesses in more established recreational cannabis markets including Colorado, Michigan and Oregon.
Marijuana growers in those states and others in the industry are appealing to their regulators and lawmakers to help cultivators struggling financially because of overproduction of flower and depressed prices on the wholesale market.
They argue that too much production makes it impossible to survive as a cannabis grower.
Others contend that artificial controls such as licensing moratoriums stifle competition and prevent the market from taking its natural course.
“We cultivate and certainly want to see the free market do its work,” said John McLeod, co-founder and head of markets at Cloud Cannabis Co., a vertically integrated cannabis company based in Troy, Michigan.
“We think that people putting out the best product will be able to be successful. But we also don’t want to see people fail.”
Oregon set the tone
Cannabis operators in Colorado and Michigan are following the lead established by Oregon, which earlier this year passed legislation requiring regulators to stop issuing marijuana business licenses to applicants who submitted applications after Jan. 1.
These states also don’t have license caps, unlike programs in other markets, such as those on the East Coast.
Under the new Oregon law, applications for producer, processor, wholesaler and retailer licenses submitted after Jan. 1, 2022, will not be approved.
The licensing moratorium will last until March 31, 2024, at which time licensing will resume.
That moratorium comes after the state issued a “pause” on approving new licenses in 2018 that lasted until November 2021.
Mark Pettinger, spokesperson for the Oregon Liquor and Cannabis Control, said that initial pause was implemented because the state needed to work through a backlog of business license applications.
He added that the pause wasn’t directly related to oversupply concerns.
The new law, however, is directly tied to overproduction.
“This time around, the issue is more of what can the market bear?” Pettinger said. “We have considerably more producers now than we did back then.”
Oregon has 2,855 total marijuana licensees, with 1,407 producers and 826 retailers.
Michigan matures rapidly
In Michigan, prices of wholesale recreational marijuana have fallen as low, or lower, than those in older adult-use states, with some industry officials saying cannabis flower is available for less than $1,000.
This level of price compression took less time to develop than other mature recreational marijuana markets.
And as more growers ramp up production and build out their facilities, the supply of cannabis is only going to increase.
That also doesn’t account for this year’s October outdoor harvest, which should flood the market with cheap flower in a couple of months.
As a result, lobbyists for Michigan’s largest marijuana companies are pushing state lawmakers to enact a moratorium that would bar the Michigan Cannabis Regulatory Agency from approving new cultivation licenses.
For that to happen, three-fourths of Michigan legislators would have to vote for the moratorium, because the 2018 ballot proposal that legalized recreational marijuana did not limit licenses, the Detroit Metro Times reported.
“There’s a push to do that because the wholesale price of cannabis obviously crashed quite a bit,” McLeod said.
“And it seems like there’s been a new cultivation popping up almost every day.”
McLeod said more than 1 million outdoor-grown marijuana plants currently are tagged for harvest in the state.
“That’s a lot of flower,” he added. “At what point in time do you say, ‘We just don’t need that much more.'”
To McLeod, the issue is two-sided: He sees how the industry wants to support the existing businesses, but “we don’t want to exclude people that just haven’t had the capital or the resources to get up and running yet. It’s a free-market industry.”
Arun Kurichety, founder and chief operating officer of Petalfast, a sales and marketing agency for the cannabis industry based in Irvine, California, and with operations in Michigan, noted the retail landscape needs to be considered.
Many Michigan municipalities don’t allow recreational marijuana retail stores, which means that in many parts of the state the illicit market is still thriving.
“If you were to increase the number of retailers, then you have more areas where that supply could go to rightfully service a larger consumer base,” Kurichety said.
Colorado tries to protect its companies
When the COVID-19 pandemic first began and people were stuck at home with stimulus money in their pockets, Colorado’s cannabis sales were setting record highs month after month.
But that’s slowed considerably as people went back to traveling and spent their money on other entertainment. Also, inflation surged and the stimulus checks stopped.
Total cannabis sales in Colorado reached only $150.4 million in August, a 2.2% decline from the previous month.
It was the eighth month in a row where sales were flat or down from the previous month.
Colorado has also seen neighboring states such as Arizona and New Mexico legalize recreational marijuana, so it’s no longer the only legal adult-use market in the region and marijuana tourism has suffered.
In response, a coalition of 30 marijuana growers and dispensary owners crafted a letter to the state’s Marijuana Enforcement Division (MED) in September saying that, “for the first time since legalization was implemented, marijuana sales and the revenue generated from marijuana taxes will be substantially lower than the previous calendar year.”
The letter also noted that more marijuana licenses are being issued, adding additional supply to a saturated market.
Denver alt-weekly Westword first reported earlier this month that the state has 798 active recreational marijuana licenses, up from 716 in 2021.
Meanwhile, the price of marijuana flower has dropped nearly 62%.
That’s why the group of businesses are proposing a two-year moratorium on cultivation licenses.
The moratorium would exempt social equity licenses. Also, medical cultivators could continue to apply for recreational cultivation licenses.
The coalition, in a separate memo, also asked the MED to implement a tax holiday for the 15% excise tax imposed on wholesale cannabis.
“Suspension of the retail excise tax will allow state and industry stakeholders to collaborate on next steps without continuing to levy an unfair and impractical tax against struggling businesses,” the letter notes.
Alex Rubin, regulatory analyst for Denver-based cannabis compliance company Simplifya, said he sees the importance of stabilizing the market when there’s so much supply in Colorado when demand has dropped.
“Prices and profits have been going down with more states legalizing,” he said.
“Less tourists are going to be coming to Colorado and other legal states as more states legalize.”
However, not everyone agrees that a moratorium is the best approach to ensure the success of the existing cannabis businesses.
Chris Becker, head of revenue and partnerships for Denver-based cannabis brand The Honeybee Collective, said advocating for moratoriums is “short-sighted and a poor use of limited resources.”
“We ought to be building markets based on competition, that create strong businesses and brands that consumers really want to buy from,” he added.
To Becker, a more effective strategy would be to limit production capacity, where the number of plants a grower could produce would be constrained.
Another possible solution Becker floated would be to increase patient access and allow medical marijuana patients to buy more cannabis.
Ultimately, Becker said a moratorium won’t ease oversupply dynamics in the near future.
“It’s unlikely to produce any real positive effects on the market price,” he added.
“It maybe does a little bit to preserve some value in the license. But … there’s still three years’ worth of weed sitting in people’s vaults.”
Bart Schaneman can be reached at bart.schaneman@mjbizdaily.com.
