Crash or Cash: What’s Happening to California Cannabis Prices?

(vitormarigo/iStock)

SAN FRANCISCO — At a high-end dispensary in San Francisco, the self-proclaimed center of all things disruptive, staffers are debating if the time is right to unleash onto the market something never before seen, something they believe could revolutionize California’s multibillion-dollar marijuana industry.

They’re wondering whether they can charge $90 for an eighth of an ounce of cannabis—and if customers will still buy it.

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“People don’t blink at $75 an eighth,” said one of the dispensary’s buyers, who requested anonymity in order to speak freely. That, in turn, is fueling the high-roller’s urge to push the stakes even higher. “Is $90 an eighth insane?”

Market forces in the country’s largest marijuana marketplace are still very much adapting to the new legal era.

Square this scene, if you can, with the doom-and-gloom scenario described last month just 90 miles away from the “how high can we go” casino game, in the state capital of Sacramento. At a panel meeting, Hezekiah Allen, executive director of the California Growers Association, proclaimed that the marijuana industry is sliding towards an inevitable bust.

“It’s a circus. Legalization is not going well,” Allen told Leafly in a recent interview, ticking off his reasons why. “There are way too few retailers in the state. The regulated market has actually contracted, while, at the same time, regulated supply has expanded.”

Then he dropped the bombshell. “I think our oversupply problem,” he said, “is worse than Oregon’s.”

Barely six months into the era of retail cannabis sales in California, a few things are clear. Investors are still pouring money into the state’s multibillion-dollar cannabis industry, entrepreneurs are still launching new brands, and existing cannabis businesses are still trying to hang on—all with varying degrees of success.

In other words, market forces in the country’s largest and oldest marijuana marketplace are still very much adapting to the new legal era. And at this still-early stage, there is enough uncertainty for vastly different messages to be preached simultaneously—one that envisions the state’s cannabis market crashing out, and another centered around industry operators cashing in.

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So which way is California headed? Record-breaking retail prices that leave consumers pining for the bygone days of medical marijuana’s gray market? Wholesale prices so low that growers are forced into foreclosure as big brands dominate the market?

Could it be both?

California’s Complicated Cannabis Hierarchy

The stark contrast in market predictions reflects the level of uncertainty in California’s newly legal cannabis market, as the state adjusts to state-regulated sales and prepares to institute a tracking system aimed at following every crumb of legal cannabis from seed to sale.

It also reflects the multitudes within the market itself, and the vast gulf that can divide businesses ostensibly in the same industry.

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Yes, observers and growers point out, California does produce far more cannabis than the state’s consumers could ever consume, as a study commissioned in 2016 by the state Department of Food and Agriculture pointed out. But that data, some of the only hard figures available, misses the point: Much of that cannabis was never intended for the in-state market in the first place. Exact figures vary, but there seems to be near-universal agreement that growers in California supplied most of the country’s black-market marijuana.

To say California has a cannabis surplus is oversimple.

There’s also still no universally agreed upon figure for the size of California’s appetite. The state has 39.5 million residents and another 250 million annual visitors, meaning the market patterns in Oregon and Washington, with fewer people and fewer visitors, may not be replicated here. “There is a much deeper reservoir of customers than there are in Oregon, let alone in Seattle, to purchase cannabis,” said Sean Donahoe, a Bay Area-based cannabis consultant with clients across the Golden State. “We have a much more balanced marketplace in California.”

To say the state has a cannabis surplus, in other words, is oversimple. It also ignores key differences within California cannabis production.

First and foremost, not all marijuana is grown equal. Most of the rapid expansion in production capacity in recent years has been among large-scale greenhouses or outdoor farms, such as those in Monterey and Santa Barbara counties. That cannabis is most likely headed to the extract market, to be used as oil in vaporizers or edibles. It thus commands a much lower price than products grown indoors from proprietary genetics. It’s this connoiseur-grade cannabis that would become the $90 eighths sold to scooter-riding hipsters in San Francisco.

 

A recent analysis by Green Road Consulting, a Humboldt County-based compliance and engineering firm, gives a snapshot of the regulated market. It found that licensed growers in the state had the potential to produce 178%—nearly double—the amount of cannabis that Californians are expected to consume. But it also illustrates the complexity of that oversupply issue, and why statements like “we have too much weed,” while true, are oversimplifications.

“We all agree that cannabis done right, indoors, is the kind of weed we want to smoke.”
Graham Shaw, founder and owner, Graham's Brand

As of April 6, the California Department of Food and Agriculture (CDFA), which regulates the state’s cannabis growers, had indeed granted enough permits to produce almost twice as much cannabis as the state market demands. But of that production capacity, more than 80% was among outdoor and greenhouse grows—not the top-shelf, indoor-grown cannabis that enterprising dispensary buyers want to put on store shelves for eye-popping prices.

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Growers of that high-grade indoor cannabis say they’re confident not only that they’ll be in business for the foreseeable future, but also that they’ll be selling their product at consistently high prices despite cratering wholesale values elsewhere in the market.

“We all agree that cannabis done right, indoors, is the kind of weed we want to smoke,” said Graham Shaw, founder and owner of Graham’s Brand, high-end indoor cannabis sold for $65 or more per eighth in San Francisco and Los Angeles. “The only reason people aren’t smoking that is because it’s not available, or too expensive.”

Shaw claims to sell wholesale pounds of Berryessa Blue Dream and other strains for around $2,500 a pound—a price that’s stayed steady for several years, he says.

A Seller’s Market—for Some

With a dearth of licensed, lab-ready cannabis on the market, old paradigms have been flipped on their heads. Instead of dispensary buyers having so many options that they can lowball growers, buyers in search of limited-supply, high-end products to anchor their menus have found themselves in bidding wars, Shaw said, driving up prices as dispensaries compete for premium product.

greenhouse-cannabis-grow
Most newly licensed cannabis farms are growing plants outdoors or in greenhouses, as seen here, despite typically higher prices for indoor-grown cannabis. (RylandZweifel/iStock)

The markup may be a luxury enjoyed only by established brands with in-demand genetics, however. “I think the greenhouses are really going to serve the high-end extracts,” Shaw said. “Outdoor will serve the market for low-end extracts—and indoor will supply the flower.”

That sounds straightforward enough. But in practice, the cannabis being grown isn’t yet lining up with demand. So much less marijuana was sold so far this year at California’s licensed dispensaries than expected, in fact, that last month Gov. Jerry Brown had to revise state budget plans. Lower-than-expected sales also led some lawmakers to renew calls to lower California’s cannabis taxes—some of the highest in the United States, and, many speculate, the source of sticker shock that’s keeping consumers in the illegal market.

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Meanwhile, regulators have gone ahead and added even more supply capacity—possibly doubling the state’s production potential, according to Allen’s estimation. And product from some of the state’s largest cannabis grows—including 200 acres under cultivation in Santa Barbara County, where enterprising growers took advantage of a loophole in state law and amassed 800 grow permits—has yet to even reach the market.

Another clear market inefficiency has already revealed itself: There’s a marked shortage of shelf space for what product is available. According to findings released May 13 by Assemblyman Rob Bonta (D-Oakland), state regulators issued more than 1,000 cultivation permits in March alone—yet during the same period gave out just 150 retail permits.

“We’re halfway into the year,” said Donahoe, the Bay Area–based consultant. “Are we halfway into licensing for the retail? I don’t think so.”

It’s hard, however, to blame the state for the slow licensing rollout. Large areas of California have declared themselves off-limits to commercial dispensaries, where demand is either serviced by old-school, medical-style collectives—which lose their legal protection in January—or under-the-radar delivery services. Whether customers in those regions are willing to travel another jurisdiction to visit a regulated storefront remains to be seen.

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Hovering over all of this is the question of quality control. It’s far from clear how much of California’s existing or future cannabis will pass laboratory testing, which ramps up later this year, and qualify to be sold on the regulated market. “There’s a ton of weed, but not a ton of really good weed,” the San Francisco-based buyer said.

Some growers of high-end product tell Leafly that there is such a lack of supply—at least of high-end, lab-certified cannabis with which consumers are familiar—that they’ve been able to negotiate even higher prices for a wholesale pound at the exact same time many outdoor farmers are crying poverty.

One of the biggest problems with much of the new cannabis now flooding the market—and why some craft growers say it poses no threat to their top-shelf prices—is quality, Shaw said, sharing a story from a recent visit to a black-market cultivator’s grow facility.

In the cultivator’s warehouse grow, “It was really, really humid,” Shaw said. “So I asked, ‘What do you do for powdery mildew?’ And he’s like, ‘I spray Eagle-20,’” name-checking the well-known fungicide that contains a chemical that turns toxic when heated and has therefore been banned for use on cannabis.

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How much of California’s traditional “oversupply” looks like this—and thus isn’t eligible for the regulated market? How many former black-market, pesticide-reliant growers are adapting? How many will succeed, and what will they present? These are the open questions that need to be answered before predictions of crashes or spikes can reliably be made.

As for Shaw, his jaw dropped after the reveal, but his friend “just carried on the conversation,” he said. “I was like, ‘Holy shit, maybe the regulated market isn’t such a bad thing.’”

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Correction: An earlier version of this story misquoted Graham Shaw in his anecdote about visiting an illicit cannabis grow. He asked what the grower used to control powdery mildew, not pests.