There is an 800-pound gorilla in the middle of a room filled with cannabis. What is this big, hairy beast that’s threating myriad stakeholders’ plans to make significant strides in health and wellness and generally improve the versatility of this clever little plant we’ve only just started to scratch the surface of?
It’s the unspoken but serious need to limit the number of licenses distributed on a state level.
This isn’t a new topic, but the need to address it is increasingly urgent as the likelihood of national cannabis legalization grows more real. As a licensed producer in Michigan, I think every state that legalizes cannabis should limit the number of licenses it awards. We can avoid the race to the bottom in the competitive cannabis marketplace with this one relatively simple step.
Let’s put it into perspective
Recreational cannabis was legalized in Michigan in 2018. Once fully matured, estimates suggest the state’s adult-use cannabis market will generate $3 billion in retail sales and create about 24,000 jobs annually. By comparison, Colorado’s adult-use industry, approved by voters in 2012, generated about $2 billion in retail sales last year and employs more than 35,000 people, according to the 2021 Leafly Jobs Report.
In Michigan, the state has licensed cultivators to grow a total of more than 511,000 plants. This figure accounts for a quickly escalating number of grow licenses being approved in both the medical and adult-use markets. That translates to approximately 400,000 pounds of usable cannabis. Supply will far exceed demand if states don’t run the numbers to determine exactly how many licenses are required to support existing or expected consumer product needs. It could be setting cannabis companies up for a crash before they ever harvest a single plant.
There is enough available data to suggest that states can hamper their entire industry by failing to limit the number of licenses at the cultivation and retail levels. Look at Oregon, a pioneer in the cannabis market that can teach us about the perils of oversaturation. Market saturation in Oregon has already driven prices below some cultivators’ ability to be competitive. In 2019, the state had 1 million pounds of unsold cannabis surplus, causing prices to fall to the lowest in the country and a number of growers to go out of business. Newly legalized states like Michigan need to be cautious in their approach to cannabis supply.
Competitive Balance
Competition is good for all businesses, but too much competition can be harmful. Without limits, no one should be surprised when cannabis companies become unprofitable, which could lead to mass consolidation in the years to come. At the current pace, Michigan is creating an influx of cannabis providers, which could lead to the same oversaturation that Oregon experienced. There is no doubt you’ll see the bigger guys come in and knock out the little guys. Some might say that’s just capitalism, but is it really creating a competitive market? No. It’s commodification. If we allow that to happen, many enterprising, fledgling cannabis businesses will topple or be gutted before they have a chance to reap the rewards of their efforts.
And the licensing issue is really just a symptom of a much larger issue. It’s extremely difficult to regulate growth without putting a cap on licenses. A laissez-faire approach to regulation could result in an explosion of unregulated cannabis oversaturating the market. Now is the time for policymakers to listen to industry leaders and regulate appropriately before they essentially open the floodgates of federal legalization.
The stigma surrounding cannabis no longer poses the greatest threat to operators. Now it’s the black market. The anticipated consumer shift from illicit to legal markets is not happening as fast as many predicted it would. State regulators have to start thinking in longer terms and create regulations and standards that allow safer production and distribution, while making it easier to remain compliant.
Regulators have an important task beyond enabling legal access to cannabis. They must remain consistent when enforcing industry compliance. This will help new and existing consumers understand the benefits of cannabis products, further improve education around the market and facilitate safer, controlled, market-driven expansion.
In December 2019, the first adult-use cannabis stores opened in Michigan. One of the state’s goals was to move cannabis off the black market. But illegal sales haven’t stopped — and licensed stores are having a tough time getting enough cannabis to meet demand. Limiting licenses could help that tremendously.
Without them we face significant, interrelated challenges in the cannabis industry.