The Elephant in the grow room
As you can guess, I’ve had plenty of opportunities to visit some pretty diverse marijuana grows over the course of the past year. I’ve seen everything from scraggly, scrawny, pathetic little weeds to huge green towers of power. I’ve also seen plenty of indoor and outdoor (or sun-grown) operations. Almost without exception, the operators have been friendly folks who are more than willing to allow outsiders to see their plants, and most of the people growing seem to have a good handle on the process.
One thing seems certain: In 2015, there’s a lot of legal marijuana growing in all corners of Washington State (and probably a lot of illegal marijuana too). So, what’s going to happen this fall? Last year, prices in Washington dropped by around 50% immediately after the sun-growers got their fall crop dried and processed. Furthermore, I’m guessing that in 2014, there were only about a half-dozen outdoor growers who managed to get licensed, and their plants in the ground early enough to have a substantial crop.
This year, based on what I’ve seen, information from TetraTrak, and people in the field, there will be more than 50 major outdoor growers all producing substantial quantities of high-quality sun-grown cannabis. If each of those producers grows an average of 1,500-2,000 plants on their 21,000 square feet and if each of those plants yields just one pound (453 grams) of bud, the Washington outdoor harvest could be in the neighborhood of 40-60 tons this year! That’s between 34 million and 54 million grams of bud.
Or, to put it another way, if the recreational store count stays at around 170, which is where it is now, that’s between 470 and 705 pounds of outdoor flower for each store in the state. I don’t want to sound alarms, but if that much weed tries to find a home in a meager 170 stores, the prices in late 2014 are going to seem positively decadent compared to a few months from now.
What to do? If I’m right, the market is going to be saturated for months, and prices will drop dramatically. What this means in practical terms is simple: The growers and processors who survive are going to be the ones who plan carefully, and who manage to keep their costs as low as possible by searching for efficiencies wherever they can. I believe that the fall of 2015 is going to put to rest the idea that everyone in the state “grows the best marijuana” (I’ve heard that already from just about every grower I’ve ever met), and this will be the year in which the dreaded Budweiser model will prevail. Don’t get me wrong, I’m not suggesting that the survivors will be creating poor quality marijuana. Not by any stretch of the imagination. However, I what I am suggesting is that the cost of goods (COG) delta between hand-trimmed, indoor-grown, AAA+ marijuana and outdoor-grown, machine-trimmed, AAA marijuana is going to become so much greater than the quality delta (or perceived quality delta anyway). Unless the top-shelf indoor guys really get their costs in line in a hurry, it’s not going to be pretty.
A few months ago I suggested that a good CFO is probably going to be a lot more important than a “master grower” as this business matures, and if I were to make a prediction, it would be that late fall of 2015 is when it’s really going to become a reality.
While the above scenario is a prediction about the state of affairs in Washington, and specifically concerns fall and winter of 2015, it’s quite likely going to be similar for the rest of the country as other states like Oregon and Alaska normalize recreational marijuana sales and move toward a normal supply/demand model in which prices will be dictated by consumers, retailers and manufacturing costs.