New Mexico set to launch $400 million adult-use marijuana market likely to attract Texans

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Chart looking at New Mexico's adult-use marijuana market

New Mexico is set to roll out the nation’s newest adult-use marijuana market on April 1, with a focus on providing plentiful opportunities to small local businesses in the first state to establish an adult-use industry next to Texas.

Sales are expected to hit $400 million within five years, with New Mexico marijuana businesses likely benefiting from neighboring Texans driving across the border to buy recreational cannabis products.

The nation’s second-most-populous state is a veritable marijuana desert, with a small, limited medical marijuana market.

By contrast, New Mexico’s adult-use launch comes one year after state lawmakers passed a recreational legalization bill.

All licensed businesses can start sales on April 1, although many new producers and retailers are still building out their operations or getting municipal approvals.

As a result, the adult-use rollout for newly licensed businesses is expected to be more gradual than for existing medical marijuana operators.

New Mexico’s program features unlimited licensing, microbusiness categories and a license-fee discount for retailers that accept cannabis products on consignment from a microbusiness producer.

The program also has provisions to protect the environment in an arid state where water is considered particularly precious.

License applicants must prove they have a water source or rights to meet their needs, and state officials said energy-efficiency rules are in the works.

But the state’s social equity program isn’t yet in place, and, as in other new adult-use markets, concerns persist about potential supply shortages.

MJBizDaily projects that adult-use sales will build gradually from $100 million-$125 million in the first year to $325 million-$400 million by the fifth year of the program.

Texans are expected play a key role in powering sales. New Mexico retailers have set up shop near the Texas border.

“Our studies show that 40% to 42% of all adult-use cannabis will be derived from out-of-state purchases, particularly Texas,” Duke Rodriguez, CEO of the state’s largest cannabis company, Arizona-based Ultra Health, told the Santa Fe New Mexican last year.

The state had 38 million visitors in 2019 before the COVID-19 pandemic.

Small business focus

Kristen Thomson, director of New Mexico’s Cannabis Control Division, said the state’s strong microbusiness focus “means you’ve got small local businesses in the game.”

“We are here to facilitate an industry that is focused on the values of New Mexico and focused on startup businesses,” she said, while at the same time ensuring that the state’s 35 vertically integrated legacy medical cannabis operators are supported.

“We’re making space for businesses of all sizes,” she added.

Reflecting that mix, new licensees approved as of last week included 35 producers and 35 micro-producers. A micro-producer is limited to 200 plants.

“Overall, New Mexico has done a great job developing regulations and moving forward in a thoughtful manner,” said Jordan Wellington, an attorney with Denver-based Vicente Sederberg and a partner at the firm’s policy and public affairs affiliate, VS Strategies.

“They’ve been thoughtful across the board on how to balance interests to create a policy to the benefit of New Mexicans.”

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For example, the fact New Mexico doesn’t have a state cap on licenses “will allow greater entrepreneurialism and opportunities for everyone in the state,” Wellington said.

“Microbusiness licenses and consignment have the potential to lower barriers to entry, and lowering barriers to entry will improve social equity.”

The social equity program is designed to help eligible microbusinesses to have startup funding, but a plan isn’t in place yet.

Lawmakers earmarked $5 million for a microbusiness loan and grant program and required the state to come up with a social equity plan.

However, the New Mexico Finance Authority, which will disburse the funds, is still working out the details.

Supply concerns

In addition, some are concerned New Mexico’s adult-use program will initially experience supply shortages and retail saturation.

In efforts to meet anticipated demand, state cannabis regulators issued an emergency rule in January that doubled plant-count limits.

But industry officials say it will take some time for growers to expand their facilities and ramp up their production.

Ultra Health, the state’s largest medical cannabis operator, said it is “cautiously optimistic about the long-term benefits of cannabis legalization in New Mexico.”

“However, we’re expecting the short term to be quite ugly given supply constraints and the oversaturation of the market in terms of retail,” said Ultra Health’s chief marketing officer, Marissa Novel.

Novel noted that, as of last week, legacy MMJ operators had 171 dispensaries in New Mexico.

Ultra Health alone has 29 of those dispensaries, with plans to have 33 in outlets by the time adult-use sales launch on April 1.

In addition, the state approved 69 new retail licenses as of last week, according to Thomson.

“Retail is saturated, especially Albuquerque,” Novel said, noting that building out greenhouses and warehouses is a “long-term play.”

Thomson views the situation differently.

She said the Cannabis Control Division doesn’t expect product shortages or empty store shelves but noted that safeguards are in place if supplies do run short.

“If there’s going to be a shortage, supply goes to medical patients first,” Thomson said.

She said regulators will work out the details of how to implement those controls with industry officials.

Equity program pending

“We anticipate that on April 1, the industry will look much like it does today,” Thomson added.

“What is exciting is what it will look like six months to a year from now when small craft producers and small retail stores open across the state.”

Wellington said he doesn’t know whether Albuquerque will have too many stores, “but I think some of the concerns we often hear about market oversaturation are overblown.”

The crux of the U.S. economic system is that the market will decide, he noted.

“Having ‘too many’ businesses can create a challenging business environment, but having too few also creates significant issues by opening the door for the illegal market to persist.”

The owners of Carver Family Farm, a microbusiness in northeast Albuquerque, are confident of their ability to carve out market share.

The three partners – Matt Muñoz, Erika Brown and her husband, Andrew Brown – are focusing on producing craft cannabis.

They have an integrated microbusiness license, meaning they also can process and operate a retail store on their 6,500-square-foot site.

They have grown their first harvest, are in the process of trimming and said they will open their doors to customers on April 1.

They plan to add a kitchen later to produce infused products.

Facilities were hard to come by, and the three don’t know yet if they will be able to take advantage of the state’s social equity program.

The partners said their business focus is on breeding their own organically grown, hand-trimmed strains and enhancing the customer experience with events.

They said some of their artist friends are helping conduct the opening.

“We want (customers) to get the full experience,” said Erika Brown, the company’s chief operations relations officer.

Success will come from the “product and ability to brand,” added Andrew Brown, the chief cultivation officer.

The Browns grew medical marijuana for more than a decade with a personal production license.

“We didn’t want to compete (with the Ultra Healths of the world),” said Muñoz, chief innovation and finance officer.

“They’re kind of the Bud Light market, while we’re the microbrewery market.”

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