Adult-use cannabis was first legalized in 2012 in Colorado and Washington. Since then, adult-use cannabis has been legalized in various jurisdictions throughout the country, opening up opportunities for entrepreneurs interested in entering the legalized cannabis market. Unfortunately, there was too much interest in this relatively new market, and now we are faced with an oversupply of cannabis, causing prices to decline rapidly. Who knew that too much of a good thing would be, well bad?
Several states are feeling the brunt of the problems caused by excess cannabis production. For example, in Michigan, the number of adult-use cannabis operations has grown exponentially in the last few years, causing a price drop in some areas up to almost 75%. According to the Michigan Cannabis Regulatory Agency ("CRA"), as of December 2022, there were just under 1,900 active cannabis licenses throughout the State of Michigan, including the 33 adult-use cannabis retail licenses that the City of Detroit issued on December 22, 2022. The price decrease—combined with the 16% sales and excise tax— has put Michigan cannabis growers and retailers in a tough spot.
Michigan is not alone – prices for adult-use cannabis have likewise dropped in California, Colorado, Massachusetts, Missouri, Oregon, and many others. To explain the present climate, some point to simple economic principles that were gleaned from half-listening to your Economics 101 professor: when supply is greater than demand, the price drops. Others think that perhaps the novelty of adult-use cannabis has worn off and will be viewed more as a commodity akin to beer or liquor in the future. It is also essential to consider that cannabis customers are not only reaping benefits from lower prices but will likely be negatively impacted by lower state revenues available to fund public programs. For example, the California Department of Tax and Fee Administration reported a 7% decline (roughly $23 million) in cannabis tax revenues in the first quarter of 2022 compared to the last quarter of 2021.
What we do know, however, is that new industries generally start off hot and stabilize over time. Several states passed legislation legalizing adult-use cannabis and/or began the sale of adult-use cannabis in 2022— including New Jersey and Rhode Island— and several more states are slated to open up retail markets in 2023. In addition, the Food and Drug Administration ("FDA") has recently made public its intention to pass regulations in conjunction with Congress pertaining to cannabis-containing products, which could significantly affect the overall cannabis market. All this shows that the nationwide adult-use cannabis market is still in flux and probably will be for some time.
Isaac Newton has taught us that what goes up must come back down. But who's to say it doesn't eventually bounce right back?