Ohio has plenty of medical marijuana but not enough people buying it.
Levels of marijuana flower ready for sale as well as bulk flower held by suppliers — bulk material could be sold as flower or processed into other products — have each about doubled in the year between June 2022 and June 2023, according to figures from the Ohio Department of Commerce.
Operators say they don’t need to see the exact numbers to know that there’s too much product now, because they’re experiencing the signs of an oversupplied market firsthand.
“There is definitely an oversupply in the market across all categories,” said Andy Rayburn, CEO of Buckeye Relief, an Eastlake marijuana company with cultivation, processing and retail operations. “There are suppliers unloading product at deep discounts to avoid expiration dates and to cut inventory levels. As a result, cultivation and processor license holders are moving substantially more product through their companies for substantially lower sales levels.”
Wholesale prices on cannabis sold from cultivators to independent processors in Ohio plummeted 78% from an average of about $769 per pound in the first quarter of 2021 to $168 per pound in the fourth quarter of 2022, according to data tracked by the state.
The legal marijuana industry across the U.S. has been grappling with a downturn amid economic turmoil and surging inflation. Several markets are oversupplied, particularly those that — unlike Ohio — haven’t placed a cap on cultivator licenses. Plunging prices, fire sales, employee layoffs and company failures have been occurring in past months in states across the country, including nearby Michigan.
And while lower prices are good for consumers, they portend greater issues for marijuana companies, some of which are being forced to sell products at a loss.
“There are producers lowering prices in some states to that point where they’re taking less than it costs to make the cannabis they’re selling,” said Jeremy Unruh, senior vice president of public and regulatory affairs for PharmaCann Inc., a Chicago-based multistate operator with cultivation, processing and three dispensaries in Ohio. “If it costs eight, and they need 10, they’re selling at eight, seven or six now because it’s better than zero.”
Ohio’s marijuana program is one of the most tightly regulated in the country. While this degree of regulation can be obnoxious to companies — which are effectively prohibited from advertising, using product images online or engaging in patient education or outreach — the state’s limited-license dynamic is a key reason why this market hasn’t been adversely impacted as much as others where nascent marijuana industries have expanded quickly without the same caps.
But challenges have been mounting in the Ohio market as economic factors couple together with underwhelming consumer demand.
“We know that processors have already cut production lines, and some cultivators have shut down some of their grow rooms to slow production and reduce overhead, all due to this stagnant patient population,” said Matt Close, executive director for the Ohio Medical Cannabis Industry Association.
Buckeye Relief has paused on expanding grow space at its facility. And Rayburn said that while he hasn’t laid anyone off, his company is reducing some headcount through attrition by not filling some jobs when people leave.
He said the company was prepared for price contractions, but it has been happening “more aggressively” than was anticipated.
“We are also noticing a slowdown in payment time by many of our dispensary customers because things are tougher on them right now,” Rayburn said. “A lot of them are brand new and in a very costly startup space.”
PharmaCann has had eyes on acquiring a couple other dispensaries, but it’s holding off on that or other growth plans. It’s also not operating at full capacity.
“We are being somewhat cautious in terms of expansion activities because we don’t think the market requires that right now,” Unruh said.
While Ohio’s marijuana companies are at less risk of outright failure right now, sustainability is a concern.
“Seeing the state numbers in terms of capacity levels, flatlining patient numbers, prices dropping, this is a critical time for the industry and patients in Ohio,” Close said. “I have heard concerns from members of the industry about the ability to stay afloat as a confluence of these factors.”
State of Oversupply
There are more than 14,500 pounds of flower on hand for sale at dispensaries across the state, an increase of 125% compared with midyear 2022.
Another 53,000 pounds of bulk flower and 40,000 pounds of plant shake/trim are being held in inventory by suppliers. That amounts to increases of 91% and 41%, respectively, compared with this time last year.
About 168,000 pounds of flower alone have been purchased by consumers since retail sales first began in January 2019.
Ohio regulators are monitoring the growing cannabis supply, but they’re not overly concerned about the buildup at this time.
State officials point to the swath of new retail shops coming online following the awarding of dozens of new dispensary licenses last year, which will grow the number of medical marijuana stores in the state from fewer than 60 to about 130. At least 87 of those are operational today.
"The (Medical Marijuana Control Program) consistently reviews key program metrics, including product pricing, product inventory and cultivation capacity," said Jennifer Jarrell, spokesperson for the Ohio Department of Commerce. "Several additional dispensaries have become operational recently with more on track to open in the next couple of months. Additional dispensaries could increase demand for medical marijuana as the new dispensaries will provide patients with greater access to products."
While more stores have been needed to improve access, there's sort of an "if you build it, they will come" mentality here in terms of the hope that having more shops will result in more customers and greater sales. Whether that trend actually plays out is to be seen.
More retail shops have come online in the past several months, yet the medical marijuana patient/consumer pool is not growing to levels that industry players have anticipated.
This is likely due not just to access, but to a host of other issues.
Product affordability and the lack of employment protections for medical consumers were among patients' top areas of dissatisfaction with the state's medical marijuana program in 2022, according to surveys conducted by Ohio State University's Drug Enforcement Policy and Research Center. There also are concerns with the annual costs of being a registered patient.
Poor access and high costs were highlighted as issues with Ohio's marijuana program in a report earlier this year by Americans for Safe Access (ASA), a Washington, D.C., nonprofit that advocates for the therapeutic use and research of medical marijuana.
These consumer concerns seem to point to some of the reasons why Ohio's medical patient count has leveled off around 172,000 active participants. That pool as grown by just 6% compared with the roughly 162,000 active patients reported last fall.
The active patient count also represents just 50% of the more than 338,000 residents who have purchased medical marijuana at an Ohio dispensary at least once.
In other words, half of the people who joined the medical program at some point in its relatively short life so far have already dropped out.
That stagnating patient count is what worries Ohio's marijuana suppliers. More stores may improve access. But customers can only buy so much. And there simply needs to be more of them.
"Until patient numbers grow we will not see much impact on the current state of oversupply," Close said.
Senate Bill 9
These dynamics also underscore issues that some industry players have with Ohio Senate Bill 9, a piece of legislation intended to reform the state's medical program in a wide variety of ways.
On one hand, that bill could reduce the number of regulatory agencies marijuana companies deal with from two to one, loosen some advertising restrictions and clear physicians to recommend medical marijuana at their discretion for any debilitating condition. Under current laws, patients can only qualify for the medical program if they have one of a list of 25 approved conditions.
All these things could have a net benefit for an industry clamoring for more customers.
On the other hand, SB 9 could make additional cultivation licenses available for standalone processors and enable smaller Level 2 cultivators to expand cultivation space to 15,000 square feet. Under current laws, Level 2 cultivators begin with 3,000 square feet of growing space but may apply to scale up to 6,000 and 9,000 square feet.
Even if those measures were passed into law, the bill would require any new cultivators to hold off on growing anything for a couple years.
But officials at large companies such as Buckeye Relief and PharmaCann bristle at the idea of bringing more cultivation online when the market is feeling oversupplied.
Furthermore, existing license holders are using only a fraction of the grow space they're permitted to use, and the market already is grappling with a mismatch in supply and demand.
According to state records, just 25% of a maximum 1.85 million square feet of combined marijuana cultivation space permitted by current law is in use. Another 15% of that has been authorized for use but is not operational.
That leaves somewhere between 60% to 75% of total industry cultivation space permitted under current regulations unused.
"You have 60% of the lawful canopy not even being used. And all of a sudden with SB9, we are going to quadruple canopy size? That just doesn't make sense," Unruh said. "If you have an imbalance between supply and demand, you could reduce or increase supply, but why not go after the other side of the equation and increase the number of patients materially to make up the imbalance? We need to improve the consumer side first."
At this time, many marijuana companies are just circling the wagons and trying to get by until business conditions improve. That could play out in a number of ways, including passing the SAFE Banking Act, eliminating federal marijuana prohibitions and the 280E tax penalty, expanding the medical marijuana patient pool or legalizing recreational marijuana — which Ohioans are likely to vote on this November.
"I do think a lot of us are hunkering down right now," Unruh said. "I think those of us that are still growing know that this is a long, hot summer we're in. It's going to drive a lot of operators out of business. And nobody wants to be on that list."