Montana prepares for Jan. 1 launch of $325 million adult-use cannabis market

Montana cannabis, Montana prepares for Jan. 1 launch of $325 million adult-use cannabis market

 

Montana cannabis businesses are gearing up for the scheduled Jan. 1 launch of the nation’s newest adult-use program, with major changes in store for how companies operate and concerns about shortages in a market projected to top $300 million in annual sales by 2025.

The Western state has a population of only 1.1 million, but substantial demand is expected to come from tourists. In 2020, 11.1 million people visited the state, according to a University of Montana study.

The MJBizFactbook projects that recreational marijuana sales will reach $90 million in 2022 and $325 million by 2025.

In the near term, however, some industry officials are worried that existing cultivation and processing capacity might be insufficient to meet adult-use demand.

It’s an issue that has plagued other legal state markets as they got off the ground.

“The industry has only been able to expand about 30%” so far while it will need to boost capacity multifold, said Pepper Petersen, a legalization advocate who is now CEO of the Montana Cannabis Guild, an industry organization.

“I’m struggling to see that there will be enough flower to meet demand for residents, much less for the tourists,” Petersen said.

Industry officials said edibles and vape products especially could be in short supply for tourists.

Others, though, caution it’s too early to predict whether shortages will occur.

Structural shift

The most significant business change is the transition from a vertically integrated model to a horizontal system.

Businesses will be able to be only cultivators, processors or retailers if they choose.

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Companies also will be able to purchase products on the wholesale market rather than just sell what they grow and manufacture.

Already, some existing medical cannabis operators are changing their business model, while cannabis groups and entrepreneurs are building online wholesale commerce platforms to support and take advantage of the change.

Here is a summary of the adult-use legislation, which advocates complain is a “watered-down” version of what voters approved in November 2020:

  • A THC potency cap on flower of 35%.
  • A cap on edibles of 100 milligrams per package.
  • A 20% tax on product sales, with an optional local tax of 3%.
  • A delay in the adult-use start from Oct. 1, 2021, to Jan. 1, 2022.

Petersen said he supported the cap on edibles.

“I wanted to make sure we kept a pretty tight lid on edibles,” he said, “because that seems to be the place where the most problems take place, because ingestion (effects) are delayed.”

Existing medical marijuana businesses will get an 18-month head start to sell adult-use cannabis products before new entrants can qualify.

On the surface, there’s plenty of MMJ businesses: 437 licensed dispensaries, 392 cultivators and 208 processors, according to the state’s September market report.

But many are individual operators who grow for family or friends or who are licensed to cultivate only up to 1,000 square feet, according to industry officials.

About half of Montana’s counties have opted out of adult use, but the ones that have opted in constitute most of the state’s population and MMJ licensees.

The state has designated the counties that opted in as “green” counties and the ones that opted out as “red counties.”

Montana’s Cannabis Control Division, which is under the state Department of Revenue, recently sent letters to existing licensees notifying them whether they are in a green county and are able to start adult-use sales Jan. 1.

Montana had 54,875 registered medical cannabis patients as of September, according to state data. Like other adult-use states, MMJ sales are expected to flatten, if not decline.

“I don’t think we’ll see a collapse in the system, but I think we will see a reduction of users of up to 30%,” Petersen said.

Kate Chowela, government affairs director for the Montana Cannabis Industry Association, another industry group, has a different view of what might happen under recreational sales.

Chowela noted businesses have some “ramp-up time” between now and the tourist season.

“All sorts of things could happen,” she said.

“I don’t think we’ll experience any immediate issues, but it’s possible with the tourist season that there could be a shortage. But I just don’t know how we can predict that.”

For example, she said, there is an exception allowing MMJ cultivators in the 1,000-square-foot tier 1 category to boost capacity to 5,000 square feet starting Jan. 1. The majority of licenses are in that tier, she said.

On the other hand, companies face added restrictions. For example, any licensee that produces more than 15 pounds of concentrate must pay an additional $1,000 per pound, according to the most recent revised regulations.

“It adds a significant cost to the production of concentrate, so that could affect that market,” Chowela said.

But she also noted rules could be modified.

Finalizing rules

In fact, Montana has been scrambling to finalize the rules for the adult-use market.

Those final rules were expected to be completed by Oct. 1.

Significant changes are occurring to the packaging and labeling regulations, Chowela said.

She understands that companies will have a grace period before having to meet those new requirements.

State officials didn’t respond to an MJBizDaily query for information about the adult-use launch.

Perhaps the biggest business change is that Montana will no longer require companies to operate under a vertically integrated business model.

Marc Lax, CEO of Spark1, one of the state’s biggest medical cannabis operators, already has changed his business model in response to focus on wholesaling.

“We recently shut down three of four retail locations,” Lax said, noting that the Missoula dispensary will remain open. “They all went to different existing provides who kept the employees.”

The decision “makes financial sense and gives us an opportunity to be a wholesale provider,” he added.

“We’re a well-recognized brand best known for our high-quality flower,” and the company wants to take more advantage of that, Lax said.

He said Spark1 is in the process of maxing out its top-tier license of 50,000 square feet, but that process will take 12-18 months.

Like Petersen, Lax said he believes Montana’s marijuana market will undergo shortages.

“I think it’s going to take 18 to 24 months to adjust to demand” based on projections that the demand will require “all of us to scale up roughly by three times.”

Petersen said basket sizes are increasing as some medical cannabis consumers are stockpiling in anticipation of possible shortages next year.

Lax is seeing some of that in Spark1’s Missoula dispensary. “There’s a little more panic buying,” he said.

Chowela said there’s been a lot of merger and acquisition activity, in part because of the shift from a vertical to horizontal structure.

Some companies are buying tier 1 cultivation licenses that allow capacity to be boosted to 5,000 square feet, she said.

Others are letting go of their business of making concentrates because of the high costs.

“It’s still entrepreneurial, but all markets move toward consolidation,” Chowela said, “and that will probably continue.

“There are big changes. We’re taking a vertical system and turning it into a wholesale system.

“We’re going to see business models emerge not anticipated by the law that was passed.”

Jeff Smith can be reached at jeff.smith@mjbizdaily.com.