Michigan recreational marijuana prices rose in February – reversing a price free fall since Michigan dispensaries began selling in December 2019 – as growers appear to be growing fewer plants to prevent losses and state regulators up enforcement efforts.
For many producers, it’s more expensive to grow marijuana than it is to buy surplus from competitors for use in their own recipe of edibles and oils, resulting in a slowdown of new plants in grow houses, local experts told Crain’s. The decline in plant inventory is likely aiding the price rebound, as less marijuana will enter the market and reduce supply even as demand remains high.
Prices rose to $86 per ounce of flower last month, from $80.12 per ounce in January, according to data from the Michigan Cannabis Regulatory Agency.
“… for vertically integrated with focus on edibles, oil, and other processing, that makes a lot of economic sense,” said Lance Boldrey, partner at Detroit-based law firm Dykema Gossett PLLC and part of the legal team that designed the legalization framework. “I’d be surprised if it wasn’t happening.”
The number of plants actively being grown in the state for adult-use recreational consumption has plummeted 20.5% to just over 1.2 million since September, according to CRA data. The numbers typically fall off in the months following the October harvest of outdoor grows, but have historically recovered by the start of the new year.
Proof in point: the numbers of plants being grown between September 2021 and February 2022 rose by more than 2%.
Dave Marrow, CEO of Troy-based Lume Cannabis, confirmed to Crain’s the company does outsource some of its growing, but said the decline in plants being grown is also due to black market marijuana not counted in the state’s regulated system being blended into the market.
“If you are blending, you need to pay for fewer (plants being grown).”
(Note: KC Crain, president and CEO of Green Market Report’s parent company Crain Communications Inc., is an investor in Lume.)
Mike Elias, CEO of Marshall-based Common Citizen, said his company has not reduced plant count but his operations are at capacity, and economics are not favorable to expand.
“New grows don’t stand a chance,” Elias said. “The (capital expenditures) and operational risk associated with new cultivation facilities relative to current market pricing results in an unattractive risk/reward ratio for investors in this market.”
Andrew Sereno, CEO of Manchester-based Glacial Farms, said smaller, independent grow operations like his are benefiting from larger operations reducing their grows due to rising cost pressures.
“There’s just a lot of moving parts and high overhead, pest/disease pressure, turnover in staff that accumulates over time,” Sereno said. “It’s hard to maintain quality, especially against many other operators on the market right now, so it’s just easier to outsource.”
The industry has been plagued by steep price declines since the recreational industry’s inception.
At least five Michigan marijuana companies are currently under the authority of a court-ordered receiver, including one of the state’s largest cultivators and retailers. Lansing-based Skymint, which primarily operates under the parent company of Green Peak Innovations Inc., owes more than $127 million to Canadian investment firm Tropics LP, according to a lawsuit filed in the Ingham County court on March 3.
The lawsuit alleges Skymint was burning through $3 million in cash per month and generated only $110 million in revenue in 2022, $153 million below its forecast of $263 million in sales for the year. A second lawsuit was filed concurrently in Oakland County Circuit Court by New York-based cannabis investment firm Merida Capital Holdings and its affiliates against Green Peak and its executives alleging misrepresentation of financials and mismanagement.
Margins were all but eliminated due to declining prices brought on by an oversupply of product — recreational marijuana retail prices were $512.05 per ounce in January 2020, or more than 495% higher than they are today.
“It’s just bad out there right now,” Doug Mains, principal and co-leader of the cannabis practice for Detroit law firm Honigman LLP, told Crain’s earlier this month. “Everyone is struggling to pay bills and negotiating lending extensions.”
The industry is likely breathing slightly easier seeing the prices rise, but it depends on whether you’re a target of increased regulatory scrutiny, said Rick Thompson, executive director of Michigan NORML, the local advocacy group of the National Organization for the Reform of Marijuana Laws.
“The temporary price hike is partly a response to enforcement,” Thompson said. “After the CRA raided (TAS Asset Holdings) and exposed their use of illegal distillate, everyone got scared and tightened down their ship.”
The Cannabis Regulatory Agency alleges TAS, which processes product under a licensing agreement with Ferndale-based Fwaygo Extracts, stored and interchanged legally regulated marijuana flower, distillate, concentrates and THCa powder with the illegally produced product. The state has suspended the group’s license until a judge rules on whether the ban can be permanent.