California's Wholesale Cannabis Market Is About To Be Disrupted

It’s a good thing to be a cannabis grower in California these days. The wholesale prices are settling above the U.S. Spot, which is a phenomenon not seen over the past 18 months according to a new report from Cannabis Benchmarks. However, growers can’t rest easy because the market is about to be disrupted as new regulations take hold.

The Mid 2017 Cannabis Benchmark report noted that California’s spot index opened 2017 at $1,413 per pound and has tracked higher for the first half of the year. Prices peaked at $1,724 per pound just popping above the U.S. average price of $1,614. Unfortunately, prices are still lower than 2016. The average price for the first half of 2017 was $1,525 per pound, a drop of 12.2%

Outdoor growers are getting the worst prices for their crops. Those prices  have averaged $1,133 per pound, plunging 27% from 2016. Indoor and green-house grown products fell 8% and 7.4% respectively. This signals trouble to the analysts at Cannabis Benchmarks. According to the report, this trend is troubling for existing outdoor farmers hoping to enter California’s imminent licensed system. Such operations can require significant capital to come into compliance with the state’s extensive water and environmental quality regulations.

For 20 years, California has been allowing the legal sale of medical marijuana in an unregulated environment and that will change in January 2018. State and local officials are now tasked with bringing in line all of the players that have operated without any oversight. According to cannabis benchmarks, the reason prices have been climbing is that growers are working to hold onto the current value of their crops knowing that it will be expensive to operate in compliance with the new rules. He believes that prices in the California market could become erratic as the year-end approaches.

The black market that operates in the state mostly exports their crops. However, the Cannabis Benchmarks report noted that illegal cannabis has been finding its way into the legal market and vice versa. The historical lack of stringent tracking and reporting in California’s medical cannabis program has allowed the black market and legal market to essentially maintain an equilibrium, with supply and demand shifting between the two to maximize revenue for sellers and minimize price for buyers.

The report suggests that many farmers will probably continue to operate outside of the regulated market at least through the fourth quarter and possibly into the first quarter of next year. Compounding the switchover to regulation is that the five largest cities in the state have only permitted a small number of retailers and two of the five cities have rejected adult-use marijuana completely. On the one hand, prices could rise as there are fewer options for trading and a fragmented retail market.

However, growers that need thousands of dollars to comply with environmental and water quality standards may find themselves dumping large supplies in the market for fast cash. This could put pressure on pricing. Since the black market is well-established and thriving, these growers may decide to roll the dice on getting caught and continue to operate making the switch to a regulated market even more challenging.

Debra Borchardt

Debra BorchardtDebra Borchardt

Debra Borchardt is the CEO, Co-Founder, and Editor-In-Chief of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Masters degree in Business Journalism from New York University.


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