It has been a tumultuous year for marijuana in Michigan. Since the state legalized the recreational use of cannabis in 2018, the industry has seen a glut of applications for new facilities. The vast majority have been approved.

As new players entered the market, production increased while demand stayed relatively stable. As a result, sellers have been forced to offer competitive pricing. In October 2021, the average price per ounce for medical marijuana was $195.78, with recreational product costing an average of $203.81 per ounce. In October 2022, those figures sat at $109.40 and $102.65, respectively (source: Cannabis Regulatory Agency).

The oversupply of marijuana to the recreational and medical systems has particularly impacted companies at the grow level, where new cultivators have flooded the field. That same pattern has echoed across the other legal cannabis markets in the U.S. Still, no state was harder hit than Michigan, where the surplus was exacerbated by a bumper crop this fall.

With product outpacing demand, prices have fallen dramatically — a trend yet to show signs of slowing.

A Shifting Map

One possible source of relief for Michigan business owners is in licensing approvals. With prices plummeting, the savings consumers have been enjoying could have a knock-on effect on the revenue that the state draws from its 6% sales tax and 10% excise tax on recreational sales. If that happens, the Cannabis Regulatory Agency may slow license approvals narrowing the competitive field for existing players.

Regional politics is changing the shape of the developing industry, too. While recreational marijuana is legal at the state level, each town must decide whether to allow or prohibit facilities from operating — and what restrictions to place on the number and nature of the businesses. The November midterms saw new municipalities open their doors to cannabis sales, expanding the scope of potential real estate available to business owners.

With existing markets tapped, some chains are already taking the opportunity to realign their presence to more populated areas. Others may choose to migrate warehouse facilities to more affordable districts, allowing operators to reduce operational costs and relieve some of the pressure.

A Maturing Industry

Despite slimmer-than-ever profit margins, the past year has seen the industry evolve and mature. A year ago, only a handful of institutions in Michigan were providing financial services to businesses in the field.

As a growing cohort of companies seeks to make a name for themselves, the demand for professional services has increased. Over the past twelve months, the number of credit unions and banks serving commercial marijuana ventures has expanded. More prominent institutions have emerged alongside some regional players with much smaller footprints. As a result, cannabis brands are much better positioned to find a banking partner.

However, with an increasingly competitive landscape to operate in, those companies are now clamoring for investment — a gap that many institutions are still unwilling to fill. With demand at the retail level relatively stable since legalization, businesses will need to find new ways to distinguish themselves and stay ahead of the pack.

As the current reality sets in, companies will likely begin the consolidation process. Prominent players may pick up smaller cultivators, processors and dispensaries to enhance their footprint in the marketplace. Others may look to build new facilities with the same goal.

Filling a Need

As demand for capital surges, financiers have a new opportunity to grasp — if they are bold enough to take it.

The most prominent companies in the market are likely to have the means to raise capital independently. With interest rates rising over the past few months due to inflation, more sophisticated players will turn to debt investors — or their own profits — to finance their business development.

For mid-level players, though, commercial loans could be a lifeline. To survive the pricing slump, smaller brands will need to find ways to differentiate themselves: whether thats by providing a top-shelf product, staking their claim in uncharted waters or expanding their footprint to challenge major chains. That takes significant investment.

By partnering with these companies, financial institutions can help them navigate the headwinds as the crowded marketplace regulates.

Accelerating Growth

Consolidation is coming to the Michigan cannabis market. But that is a natural phase for any emerging industry to move through. And despite some turbulence, the field has all the ingredients it needs to thrive. Demand is steady, product is healthy, and, increasingly, local voters are opening their arms to the blossoming market.

While the coming year will inevitably present challenges, there is plenty of potential for financiers willing to enter the space. Today, both boutique firms and established names in financial services are expanding their offerings to meet the banking needs of the states developing marijuana market. Financing is the next logical step.

As opportunities for investment become available, ambitious businesses will have the chance to grow, while less viable players may choose to close or sell up. That activity will ultimately lead to a healthier, more sustainable marketplace.

This is not just good for business — it is good for Michigan. As the industry matures and regulates, it will generate new revenue, provide a steady source of jobs and pour new resources into our communities.

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Source: Cannabis Regulatory Agency. Marijuana regulatory agency statistical report. SOM – State of Michigan.
Retrieved November 21, 2022, from https://www.michigan.gov/cra/resources/cannabis-regulatory-agency-
licensing-reports/marijuana-regulatory-agency-statistical-report