By Jacques Santucci
The industry is maturing and so should your understanding of profitability.
We recently read a post from cannabis accounting firm Bridgewest outlining industry trends that are causing prices of fall, narrowing cultivation margins1. They point out that as new legal markets come online, an inflow of new cultivation businesses is crowding a once profitable scene, driving prices to less than $1,000 for indoor cultivation, down from almost $2,000 a year ago. Importantly, those prices do not include taxes that are then imposed on the seller. In this competitive market it is more important than ever to know your costs and realize efficiencies in the cultivation process to make sure you stay financially viable by maintaining profitability.
Over-supply of Wholesale Cannabis
Prices have seen particularly dramatic decreases in Oregon and Washington, with prices down over 50% in late 2018 from the same time in 20172. California, Colorado, and Nevada saw similarly large decreases, and in states that haven’t seen huge decreases (like Arizona and New Mexico) prices have been stagnant; hardly a recipe for growth. In Oregon3, over-supply of wholesale cannabis has led dramatic price decreases; producing over 10 times the annual demand in the state. As cannabis is increasingly part of the larger American agricultural system more farmers will join the industry, further suppressing wholesale prices, eventually turning into a run of the mill agriculture commodity like soybeans.
Future Trends for Cannabis Pricing
Forbes notes that these small trends are just a beginning4. As states experiment with legalization and begin to open their markets to more cultivators (as Colorado has done with over 1,300 cultivators) prices will only fall further as increased supply puts a further strain on the prices cultivators can realize for their harvest. Looking even farther into the future this trend will only grow as international markets open, with Colombia and Mexico primed for lower cost growth options if international import agreements are realized.
Coupled with rising production costs, these trends should be concerning to anyone with a stake in the cultivation side of the industry. Joshua Haupt, an industry cultivation expert from Colorado, notes that falling prices mean cultivators need to find ways to reduce average cultivation costs from the current $800-$1,000 range per pound to around $400 a pound to remain competitive in the market5. Cultivators need technology that keeps them updated in real time on their cost information at every step of the process to ensure they are identifying ways to reduce costs. Every step of the production process represents an opportunity to reduce costs, but only if you have the information necessary to identify those opportunities. By tracking costs and staying aware of industry performance standards, cultivators will be better equipped to compete in this rapidly changing market.