Oregon marijuana supply glut, Too much of a good thing in Oregon as cannabis businesses adapt to flooded market

There’s one major pain point for Oregon marijuana business owners that eclipses all others: a supply glut caused by too much cannabis and insufficient demand.

The surplus of wholesale cannabis has shifted the dynamics of the state’s MJ industry. It has forced growers to cut costs and eliminate staff. And it has created a buyer’s market for retailers stocking up on low-priced product.

“It used to be a grower’s market,” said Shane McKee, chief cultivator of vertically integrated company Shango, based in the Portland area. But with today’s supply glut, the leverage has shifted in favor of the buyer.

In addition, the surplus has caught the eye of the U.S. Justice Department.

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Licensed marijuana businesses and state regulators in the Beaver State are operating under the watchful eye of U.S. Attorney Billy Williams, who has vowed to crack down on out-of-state diversion of cannabis, and they’re feeling the pressure.

The Oregon Liquor Control Commission, which regulates the cannabis industry, has stepped up enforcement measures to – at the very least – give the appearance of trying to prevent a flood of product from leaving the state.

Those efforts include calling for onsite inspections during marijuana harvests.

“The only reason we’re going through all of this is because the Oregon Liquor Control Commission (OLCC) wants to prove it’s not legal cannabis that’s going over state lines. It’s illegal cannabis,” said Donald Morse, chairman of the Oregon Cannabis Business Council.

A buyer’s market

Oregon has more than a thousand licensed recreational marijuana growers, with roughly 900 more in the queue to receive licenses. There’s one licensed cultivation operation for every 19 consumers.

Add to that the black market, with hundreds of growers – if not more – that have been operating for decades and aren’t licensed, or have no plans to do so. A recent study showed that from 2011 to 2016, such unlicensed operations produced $2.1 billion worth of cannabis.

The market has become so competitive that some Oregon cannabis farmers are laying off staff to cut costs, said Jesse Peters, a Canby-based grower and director of operations for C21 Investments.

Matthew Schwimmer, owner of Ivy Cannabis, a retail cannabis store in the Portland suburb Jantzen Beach, reports:

  • It is buying indoor-grown pounds of cannabis flower for $300-$1,800, down as much as 50% from last year.
  • It will pay as much as $2,900 for a pound of premium, craft cannabis flower.
  • Outdoor grown cannabis flower is selling for $150-$500 per pound on the wholesale market, depending on quality.

Schwimmer said he must limit the amount of time he spends taking calls and in-store visits from wholesale flower sellers because he’d lose too much of his day if he entertained every one.

There are too many growers looking to offload product, and, according to Schwimmer, they often have to swallow their pride to make a sale.

Ivy Cannabis is selling outdoor-grown ounces of recreational flower for $50, and $350-$400 for an ounce of high-quality indoor grown adult-use flower. A top-shelf ounce could fetch at least $450 an ounce last year, Schwimmer noted.

While being vertically integrated is still a desirable business model, Schwimmer said he doesn’t need to grow cannabis to succeed as a business owner because there’s so much product already.

A grower trying to sell to dispensaries “is the worst job to have” in the industry, he added.

Lower cost of production

On an outdoor cannabis farm near Boring, about 20 miles from downtown Portland, Shango’s McKee is trying to get his cost of production down below $50 a pound for outdoor-grown flower.

He’s looking to Big Ag practices for inspiration, including planting directly into the soil.

“That’s really the name of the game for me,” McKee said. “Getting a high yield versus the cost of production.”

For his indoor-grown cannabis, McKee is “trying to be as high end as possible.”

The segment of growers who are the most desperate to sell product right now are the ones growing low-quality or merely good cannabis, he said. McKee’s goal is to prove his reputation for consistent quality.

When “B” buds – or lower quality, underdeveloped flower – fetch only $500 a pound or less on the market, quality is paramount.

“No one’s pro forma accounts for $500 pounds versus $2,000,” McKee said.

But if he can grow top-tier indoor cannabis, he can still command $2,000-$2,200 a pound for flower.

According to McKee, other key issues include:

  • An overstretched OLCC. He said it will take four to five months to gain the necessary regulatory approval to convert part of his property to another use; in this case, he wants to add shipping containers for curing.
  • A coming change in packaging requirements this fall. “I’m scared to death,” McKee said, who’s concerned the new requirements will be expensive to comply with, could slow his flow of production – costing him lost revenue – and will have an unrealistic time frame.
  • Encouraging the Oregon Legislature to create a mechanism to sell licenses so struggling or failing businesses could at least recoup some of their costs.
  • Capping the number of available licenses, which would also be done through the Legislature.
  • An ability to increase the size of each grow, rather than having to secure a license for different grows. “(The OLCC) should adjust canopy according to what people can sell,” he said.

Pivot to extraction

Morse is consulting on a cultivation operation near Canby that has about 1,200 plants outdoors but plans to expand the farm to 5 acres with another 30 acres in hemp.

All the marijuana flower is planned to be sold for extraction. The owners are hoping to get $400-$500 a pound while keeping production costs low by skipping the trimming, curing and storage stages.

Morse said it’s easier to secure a buyer this way in a highly competitive, oversaturated market.

“We’re not going to make as much money as if we sold it for flower,” he said.

Morse estimated the grow site could fetch roughly $800-$1,000 a pound for flower. “But we don’t have the same (production) costs.”

He’s also learned that solely growing cannabis is an untenable position.

“The real way to survive is to grow, extract and sell,” Morse said. “You can’t just grow it.”

From Morse’s perspective, the tax dollars the marijuana program generates could be handled better and used to bolster the Oregon Liquor Control Commission’s resources.

“The OLCC is under a tremendous amount of pressure to prove that legalized marijuana is not going over state lines,” he said.

He would like to see local law enforcement and state police allocated more resources to police the unlicensed growers.

“Imagine if all the bootleggers in Kentucky and Tennessee were allowed to keep bootlegging after alcohol prohibition,” Morse said. “There would be stills everywhere … They need to go after the people who don’t follow the rules.”

Bart Schaneman can be reached at barts@mjbizdaily.com