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What (Realistically) Happens to The Industry When Cannabis Prices Drop?

Price of cannabis
Written by Sarah Friedman

Cannabis prices are dropping, but confusion remains in the legal market; even as the answer is clear

What started as a massive tax-grab by governments, is now a scramble by operators to stay in business. As the higher-than-necessary prices that were first instituted, fall due to overproduction and competition, the industry is worried. But should it be? Is it really that bad if cannabis prices drop?

Problems in the cannabis industry

It’s not that some cannabis operators are doing great while other ones fail; its really that every operator is having problems. The big companies are still able to remain afloat – at least for now; but even for them it’s a tight situation. The big ones need sales so badly, some are throwing their money directly into legalization efforts to expand markets. Like in Florida. In that state, Trulieve, the biggest provider, is currently funding a huge part of Smart & Safe Florida’s push for a recreational ballot measure in 2024.

We also see it in other places, though not everyone knows of each little extra cost that businesses are subject to. Like slotting fees; a fee paid to have a product on a shelf, sort of like shelf rental space. The problem? This tactic employed by supermarkets is simply meant to ensure that a new product has selling power since the public isn’t familiar with it yet. But these fees are meant to be one time. The product proves itself and stays, or doesn’t and gets removed. The idea that dispensaries are employing these fees on an ongoing basis implies a need for money that isn’t coming in through standard means.

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Plus we see it in product quality. I never had issues with vape carts before, even those bought off the street. Five months ago I bought five carts from a Las Vegas dispensary and was told if I had issues with the carts, I could send them to the company for replacement. Not the dispensary, but the company. For an on-demand product, it’s strange to offer something that will take time, and a process, to complete.


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Vegas is a city of tourists, so once out of state, that offer is useless. And who would do it anyway? The warning made me uneasy, and was followed up by problems with almost all the carts. They knew I wouldn’t send anything back; and that I’d be more likely to return to a dispensary to buy more; which increases sales. I left the state and did not; but if I had stayed and wanted more, I admit I would have. Jury’s out on if the carts are made shoddier to break on purpose, made shoddier out of cost necessity, or messed with before sale. Something is definitely up, and it almost doesn’t matter which answer is correct.

What other problems are there?

And then there are all the layoffs and restructuring activities at nearly every big company. From Canopy Growth to Clever Leaves Holdings to Curaleaf, the common headline in today’s news, is which cannabis companies are suffering losses. Aurora Cannabis even got warned by Nasdaq recently for its stock price falling below the limit to stay on the exchange; something Aurora must fix within a few months if it doesn’t want to lose its standing.

All this is related to the industry seeing lower and lower sales, which is often looked at by governments as lower tax revenue. Not only are governments not able to collect as much as they want, but companies are professing major losses in general. California was the first to actually lower the insane taxes as a result of overproduction, in order to help operators. And that took many months from the problem starting.

The thing is, we know that high taxes and overly strict regulation are the main culprits for all this. Sure, there’s a huge competitive black market, but perhaps the legal market could be competitive without the weight of the taxes or intense (and costly) regulatory procedures. It’s been spoken about in places like this TIME interview; but somehow, despite the writing on the wall, its taking way too long for governments to act appropriately.

So, what happens if cannabis prices drop?

The thing about the black market, is that it reminds people what they should pay. And this is useful when legal markets overcharge. Realistically, black markets are also affected by things like overproduction; they just drop prices more easily because they aren’t beholden to crazy government taxes and regulation. Black market overlords still want to earn; but they seem to understand better than governments what must be done to stay competitive. Bottom line: if black markets can lower prices and remain profitable, then legal markets can as well.

In a recent article by MJBizdaily, Beena Goldenberg, the CEO of Organigram Holdings, a cannabis producer out of Canada, stated that “many producers have discussed not wanting to participate in a race to the bottom, we are seeing the opposite in the market.” She warned that super low prices will affect sustainability, and hurt the industry. She went on to point out that an ounce of cannabis is now regularly under CA$100.

Cannabis prices drop
Cannabis prices drop

Then she said something interesting that shows just how senseless the legal markets are; and that the knowledge is there, though clearly not focused on. She said, “Large-format pricing in some markets has reached the point that, considering the cost of production and the excise tax burden, the products are being sold at a loss.”

Does this woman make sense? That last part only. Let’s remember, the black market also pays to produce products, so if it can do it, a legal market can too. If the price of production is too high, it refers to the price when dealing with overly strict regulation; not the actual cost of production. Plus the excise tax burden, which is just governments being greedy. Should they reduce this tax drastically, then prices lower. Some states have excise taxes over 30%, while lower ones are still around 15%. And a lot of this is for sin taxes. Fix the problem? Get rid of the extra taxes and stop making companies jump through stupid and unnecessary hoops. Viola!

What’s the reality here?

So, when Beena Goldenberg says its unsustainable if cannabis prices drop, what does this mean? It can’t mean its unsustainable for the whole market; if it was, the black market would suffer as well. Which means what its unsustainable for, are legal markets that adhere to government regulation and taxes. How she misinterprets this is unclear to me, especially when she does point out the burden of these costs. Of her own company she says the:

“low-cost structure allows us to compete at these reduced prices” but that even so, the company has “not matched the aggressiveness of our competitors and have seen some market share erosion in our large-format flower.” She reminded MJBizdaily, “we just won’t compete at the very low prices, it’s just not sustainable.”

So, she points out that her competition is able to stay afloat by lowering prices. She talks of a general structure that doesn’t support growth. And then instead of attacking the issue of all these unnecessary costs, she makes it sound like other companies are just getting cheap. She goes as far as to say her company won’t stoop to that level to survive. Truth is, either that statement won’t actually be true, or the company will go under. In the Canadian market, Organigram is the #3 licensed producer. It posted losses of CA$7.5 million for the last quarter.

How to actually solve this problem

Now, I’m no genius, and I’m not saying I am. Even for an experienced weed writer, I have no economic or legal training. But I do have a ton of common sense. And sometimes that goes pretty far. This whole problem seems like a common sense breach, for which the answer is face-palmingly obvious.

Drop in cannabis prices
Drop in cannabis prices

Should weed be sold like other products that are not subject to insane excise taxes, or other unnecessary taxes; that allows the customer’s price to go down, without making operators lose money. The government is cool not collecting such extreme taxes on most items, so its no massive leap in understanding that they don’t have to apply here. I mean, are sin taxes ever necessary? Really just sounds like governments making excuses to overcharge for products they deem fit…and collecting the reward.

The same idea can be applied to the grossly over-regulated system, which costs producers so much, leading them to need to up the price. This recently came up in Canada in light of the market downturn. Canada’s government is now looking at recovery moves, which include possible restructures to regulatory laws. In its notice posted March 25th, which comes with a consultation period until May 24th, it stated:

“Health Canada recognizes there may be regulatory measures that could be made more efficient and streamlined without compromising the public health and public safety objectives in the (Cannabis) Act,” and that this could improve “administrative and regulatory burdens where possible.” The only thing not touched on by the notice, is government taxes. Which shows the government desperately wants things to do better, but won’t yet sacrifice potential income. Of course, not accounting for this, automatically means it likely will, by continuing to tank out its own industry.

So, does legal operators allowing cannabis prices to drop threaten the legal industry? No, no it actually works to save it in the end, despite what is essentially government cruelty towards it. It might threaten a specific company’s ability for profit under current laws, but it doesn’t mean the industry can’t survive. If anything, it just sets a new and more realistic pricing standard, that governments will eventually have to conform laws to. If Beena Goldenberg wants to fight to keep prices up instead of focusing on these factors, she can. And she can drive her company into the ground doing it.

Conclusion

The silliness of the cannabis industry today is that its run by governments which aren’t seeking to effectively keep it going; and its full of operators who aren’t focusing on the reality of the situation. And rather than have realistic conversations about this, and why problems exist; there are instead weird ideas put out there that if cannabis prices drop, everything is over. If that line were true ever, we wouldn’t have black markets.

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About the author

Sarah Friedman

I look stuff up and and write stuff down, in order to make sense of the world around. And I travel a lot too.