Will the nationwide legalization of cannabis in the United States lead to falling cannabis prices? According to a recent report published by the financial services company Stifel Financial Corp., the answer is yes. Published on May 30, 2018, the report details various market pressures and predictions regarding how the legal cannabis market will over the next several years.
According to the report, there is a strong possibility for price compression in the cannabis market, particularly dried cannabis, for several reasons. The first reason is that the highly attractive economics of cannabis will lead to an influx of actors hoping to cash in on the industry, which will lead to oversupply; citing Canada as an example.
Set to legalize adult sales of cannabis this summer, Canada is set to face an oversupply in the coming years. Another report, issued by BMO Capital Markets, found that although the Canadian cannabis market only needs about 11 million square feet of grow space to support demand, the top three growers are already on their way to having approximately 8 million square feet themselves.
When you figure in all of the other cannabis cultivators in Canada, it is easy to see how the market could become saturated. Likewise, permissive licensing structures in the United States has led to an abundance of cannabis cultivators. The most significant barrier to entry as a cultivator is capital; and with deep-pocketed investors flooding the market, capital is readily available to those that seek it.
Additionally, lower prices will emerge as a necessity to encourage users to abandon the black market in favor of the legal cannabis market. Daily cannabis users, which are predicted to account for the majority of national cannabis sales, are sensitive to price. According to an analysis by the Canadian Parliamentary Budget Office, only 61% of daily users would be willing to pay a 20% premium for legal cannabis products compared to the illicit market.
For cannabis operators, this means having to make a choice between maximizing profitability or volume. Profit maximization would most likely occur through the creation of value-added cannabis products; such as extracts and edibles. Using Colorado, Washington, and Oregon as a model; the Stifel report predicts that the national market would initially favor volume over profitability.
Once again drawing from Colorado, the report predicts that a national cannabis industry would most likely see cannabis sell for a wholesale price of $2.00 per gram and a retail price for $3.50 per gram for medicinal and $5.50 for recreational. Dried cannabis would be hit the hardest, while value-added cannabis products would retain a slightly higher price. Currently, the Cannabis Wholesale Benchmarks has cannabis priced at $1,247 per pound for the spot index in June. Cannabis calculates 448 grams per pound putting the current price at $2.78 and so its forecasted drop would be roughly 28% from today’s prices.
In the BMO report the wholesale price of cannabis, at least in Canada, is predicted to be much higher. Wholesale prices for dried cannabis are predicted to hover around C$4.00, while oil/gel capsules would go for C$6.00 per gram, and value-added formats would sell for approximately C$15.00 per gram.
With regards to cannabis taxation, the Stifel report favors the Canadian tax model, which includes a 10% ad valorem tax with a C$1.00 minimum and the ability for provinces and localities to impose their own taxes. Using a similar 10% ad valorem tax, along with a 10% tax imposed by the states, and a 5% local tax; it is estimated that the United States could generate up to approximately $12 billion in cannabis taxes annually.