In 2016, California legalized the use of recreational cannabis, and the future looked very bright for the industry. Unfortunately, high taxes and expensive licenses have caused the cannabis industry to suffer.
Fast-forward to 2021 and cannabis cultivators are seeing a massive decline in California’s wholesale market prices. As of June 2021, prices have dropped by about 60% — with outdoor growers being hit the hardest. Indoor growers have borne an average decline of 15% in prices, indicating that they are faring slightly better. However, a 15% drop is still a cause for concern.
Traditionally, wholesale production of cannabis is at its peak in the fall, causing prices to drop. The winter months do not provide optimal growing conditions for outdoor cannabis. This seasonality leads cultivators to stockpile their fall crop and sell it in the spring or summer.
Wholesale cannabis prices typically peak in the spring and summer because of less supply. The shortage provides growers the opportunity to sell off the leftover fall harvest at a higher rate.
However, prices did not spike in the spring and summer of 2021. As crops are at their peak in the fall, wholesale prices for this year are likely to continue on a downward trend.
Why Are Prices in California’s Cannabis Wholesale Market Falling?
The answer to this question is complex, but the main culprit is that California has too much legal, wholesale cannabis. The wholesale supply is far exceeding the current shelf space at retail dispensaries , and there are simply not enough retail stores in California to keep up with the production. Some experts estimate that the number of licensed production operations is 12 times more than the amount of licensed retail dispensaries.
Alternatively, some industry experts claim that the high wholesale prices of 2020 were a fluke due to the Covid-19 pandemic. Accordingly, the industry is just seeing a normal “correction.”
Production vs. Licensed Dispensary Sales
During the 2020 pandemic lockdowns, California’s wholesale cannabis prices reached record highs. Many cultivators decided to invest the additional profits back into their business by expanding their cultivating operations.
In addition to established cultivators, new investors flocked to California to begin their cultivation business. The cumulative surge has led to production outstripping licensed dispensary sales.
California’s Cultivation Cap
Currently, California does not have any cap on cultivation licenses. Some experts indicate that the amount of grow licenses issued in the first half of 2021 has increased by about 22%.
In 2017, the Department of Food and Agriculture failed to establish a cap on maximum yield per acre. Without a cap, the California cannabis market has been readily taken over by large growing operations. Consequently, the smaller premium cannabis operations are struggling to keep up.
High Tax Rates
California imposes some of the highest taxes on cannabis in the country, including excise tax at a hefty 15% of the average market price. In addition to high state tax, cultivators must pay federal taxes. Moreover, they are not eligible for federal tax breaks because cannabis is still classified as an illegal Schedule I drug.
Cannabis businesses also pay heavy banking fees because banks must follow federal laws. However, the House of Representatives recently approved a legislation that allows banks to provide services to legitimate cannabis businesses.
Illegal Market vs. Legal Market
Due to the strict regulations and expenses involved in running a legal operation, illegal operations dominate California’s cannabis market. The illegal market is estimated to generate two to three times more revenue than the legal market.
The penalties for growing and selling cannabis illegally to adults are not severe. Most penalties are charged as that of misdemeanors, which amount to a fine of up to $500 and a maximum jail time of 6 months. Selling to a minor, however, is a felony charge that can come with a seven-year prison sentence.
California’s Cannabis Wholesale Future
Growers are hoping that the state will suspend the cultivation tax this year — or even permanently. This move would help smaller cultivation businesses survive the market crash for now. Currently, the cultivation tax in California is charged at a flat rate depending on the type of product. If prices continue on a downward trend, the cultivation tax could end up exceeding the selling price.
One possible solution would be for the state to change the cultivation tax to a percentage of revenue. Such a cultivation tax would be more reflective of the market, and growers would not have to worry about paying a tax that is higher than their income.
Many small growers continue to call for a cap on cannabis acreage. As the state has failed to regulate acreage for grow operations, growers are petitioning for their local counties to implement acreage and licensing caps.
When recreational cannabis was first legalized, the state promised that cultivation would be limited until 2023. With the market already saturated, small growers fear that they will be put out of business quickly if unlimited cultivation is allowed.
If new regulations are not implemented to stop massive grow operations in California, smaller cultivation businesses will continue to struggle — or go out of business.
One of the biggest financial challenges the cannabis industry faces is not being compliant on a federal level. As long as cannabis is a federally illegal Schedule I drug, growers will continue to miss out on tax breaks.
However, there is hope. As more states legalize cannabis, the pressure increases for the federal government to legalize it too. The bipartisan bank bill has already been approved by the House and is waiting to be passed by the Senate.
Meanwhile, the Senate is working on a draft to legalize cannabis for adults. This bill would allow American adults to legally possess up to 10 ounces of cannabis.
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M Consulting Experts have been in the cannabis industry since 2015. Our experts have experience in every aspect of the cannabis industry and can help you achieve your goals. Our services include Cannabis Distribution Consulting and Cannabis Supply Chain Consulting.
Contact us for more information about what you can do to increase the earning potential of your business.