Nowhere to go but Up

Wholesale prices in Washington are on the rise but processor margins are on the decline

For years, cannabis producers in Washington have been negotiating prices with hat in hand. The oversaturated market, among other factors, allowed retailers to drive down the price of flower and gave processors the opportunity to buy trim in bulk for pennies on the dollar.

But that might finally be changing — albeit slowly. Some producers and wholesale cannabis buyers have reported that prices are rising.

“It feels like the market is finally turning in our favor,” says Shawn Montgomery, vice president of Legacy Organics, a Tier 3 producer/processor in Eastern Washington. “Now we’re actually able to get paid what we deserve for our flower.”

For the first time since the early stages of recreational sales in Washington, the weight of the market is shifting. Many believe processors will be the next businesses in Washington to feel the squeeze of dwindling margins.

“Now we’re in this pickle where there’s not enough product on the market right now to sustain us throughout the year,” says Tim Humiston, the owner of Canna Organix, a producer/processor in Sequim. “It’s tough going out there, in general. We’re literally scraping the bottom.”

Oversupply has been the headline in the Pacific Northwest for years, and the slight spike in prices could be attributed to the fact that hundreds of farms have closed up shop.

“The most important thing that I can’t wait for everyone to understand is that the farms have to be paid enough to be sustainable,” says Dori Patrick, the general manager at Two Heads, a wholesale processor in Raymond. “I don’t think we’ve seen that yet in Washington. We’re squeezing somebody out along the way in the race to the bottom.”

Washington farmers now fear that the sudden increase in prices might spur idle licenses to rejoin the industry. Photo courtesy of Natural Mystic Farms.

Bouncing Back

The race to the bottom in 2017 and 2018 had many producers competing against farms that had little hope of surviving another season. Out of desperation, some farms were willing to sell their crops below the cost of production, as well as offloading the remaining surplus from past years. At one point, wholesale cannabis could be found for roughly 10 cents a gram.

According to Cannabis Benchmarks editorial director Adam Koh, the average price paid by retailers rose from $661 per pound in July 2018 to $769 per pound in July 2019 (a composite price for indoor, outdoor and greenhouse-grown cannabis).

Processors like Canna Organix have also seen a steady uptick in wholesale prices. In June, Humiston bought 200 pounds of 2017 trim for 10 cents per gram. Two weeks later he went back to buy from the same supplier and the price doubled to 20 cents. By July, the price increased to 35 cents per gram.

“I don’t think anyone expected it,” Humiston says. “The scary part going forward is that this year with the drought we’ve cleared out years of backlog and people had old material that had been sitting there since 2017. That’s been bought up now.”

Will Carter, the vice president of strategic accounts at Seattle-based Tamerlane Trading, has seen the same trend. In addition to other supply chain services, Tamerlane Trading brokers producer-to-processor sales for clients including Legacy Organics, Natural Mystic Farms, Two Heads and Canna Organix. In March, Tamerlane was selling leftover trim from 2018 at 12 cents per gram; by June, the same lot was going for 43 cents a gram.

“We have made a living by selling 25-cents-or-less product that was two years old to distillate manufacturers,” Carter says. “That product doesn’t exist anymore.”

“Last year it had gotten to a point for me where the prices were so low, the bids were so weak, you ask for a price and buyers would just automatically try to beat you down another $25 on the pound,” says Mike Graham, the owner of Natural Mystic Farms, a Tier 3 farm in Ellensburg. “I don’t think they even needed to be doing that, but a lot of people would sell for virtually any price.”

Now wholesale buyers are taking product off Graham’s hands at his asking price.

“Unfortunately, we only have so much inventory at the moment,” he says. “We’re just trying to replenish here.”

Montgomery says Legacy Organics entered the market in 2016 with 800 pounds of outdoor flower and falling prices.

“When the market crashed [in 2016], I was selling flower for 50 cents [per gram],” Montgomery says, adding that was Legacy Organic’s last outdoor harvest before the company moved to a light-deprivation greenhouse facility near the Tri-Cities.

This year Legacy Organic is getting $2 per gram, twice what the company was getting last year, Montgomery says.

Some people believe the increasing prices is due to a shortage of flower on the market. However, according to Jim MacRae, Ph.D., the market analyst and owner of Straight Line Analytics, there’s more than enough flower, but not enough buyers willing to pay for it.

“Nothing I see in the data is consistent with the notion of there being a shortage of product to supply this market. Nothing,” MacRae says. While processors are paying more for extraction-ready plant material, “they are raising their prices to an amount that four years ago most producers would never believe that they would sell for.”

Rising tides in Oregon

The slight surge in wholesale prices isn’t limited to Washington. Oregon growers have also seen a bump in prices recently.

Wholesale prices hit a low of $350 per pound in October 2018 and began rising in the spring, according to Brad Bogus, vice president of marketing and growth at Confident Cannabis, a provider of wholesale trading and testing software in Oregon. Based on sales data from more than 200 growers working with Confident Cannabis, he says prices haven’t dipped below $500 per pound since May.

“All indicators say that the price is going to continue to go up,” Bogus says.

Cannabis Benchmarks has also measured a year-over-year price increase, but not nearly as dramatic as projected by Confident Cannabis. According to Cannabis Benchmarks, the average price paid by retailers rose from $876 per pound in July 2018 to $891 in July 2019.

According to data from the METRC tracking system that was recently published by the Oregon Liquor Control Commission, Oregon’s market has nearly 700,000 pounds of useable cannabis. Cannabis Benchmarks editorial director Adam Koh says most of the surplus cannabis is leftover plant material that isn’t what people want.

“There’s a shortage of high-quality, desirable products even though there’s a lot of stuff out there,” Koh says. “Demand in Oregon is way up this year.”

Adult-use sales in Oregon for edibles, concentrates and usable marijuana reached an all-time high of approximately $73 million for July 2019. Koh says demand for useable marijuana is up by roughly 40%, but production capacity has leveled off.

Source: OLCC.

Bogus says reports of oversupply and too many licensed producers drove the value of wholesale prices down to a level that many felt was unsustainable, leading some to shutter their operations or convert production to another commodity such as hemp.

The OLCC’s 2019 Recreational Marijuana Supply and Demand Legislative Report stated that “the recreational market has 6.5 years’ worth of theoretical supply.” Bogus says the OLCC wasn’t incorrect in its reports, but its calculations left large margins for error and gave media outlets too compelling of a headline to ignore.

“It took six to nine months for the market to correct itself and now we’re having a hard time finding product for our buyers,” he says.

The OLCC report came out January 31 and addressed data from June 2017 to July 2018.

“The fault in relying on regulatory bodies to be this sole source of information when it comes to supply and demand is that by the time they published, the information the time period they’re reporting on is absolutely irrelevant,” Bogus says. “A lot more will change as more information is available.”

— Patrick Wagner

Although wholesale prices are rising retail prices haven’t reflected the change and processors are the ones footing the bill. Photo courtesy of Two Heads.

Turnover and Transparency

A primary factor causing wholesale prices to increase is probably the number of idle licenses.

In 2017 and 2018, the Washington State Liquor and Cannabis Board attempted to collect data from 1,155 licensed producers, but found that 254 of them were not growing cannabis; another 109 licensees did not respond to the agency’s requests for information (the Washington State Liquor and Cannabis Board currently lists 1,005 “active” producer licenses on its website).

It’s likely that more growers have ceased operation since that report, but according to Liquor and Cannabis Board spokesman Brian Smith, it’s hard to track how many producers are currently growing and selling cannabis in the state.

“It’s difficult to be able to track now because we’re not requiring that producers and processors post their sales to us because of where we are between traceability systems,” Smith says. “We only require the retailers to do that.”

Of the 792 growers surveyed for the Canopy Report, they were only using an average of 38% of their licensed canopy, indicating growers still have room to expand. It’s clear the supply-demand pendulum is still far from swinging back in favor of farmers, but the market appears to be inching toward a more equitable balance. Even with producers using only 38% of their allotted canopy, MacRae says his research suggests that should be more than enough to satisfy the market.

Carter has noticed a massive number of dormant producer licenses, much of which he attributes to inexperience at running a business. Tamerlane Trading co-founder and managing partner Jhavid Mohseni agrees but says the competition also led to consolidation and streamlined businesses.

“The tough times have made people good at being efficient,” Mohseni says.

Humiston hopes the recent bump in prices will spur producers to expand their canopy. If that doesn’t happen then he wants the state to reopen licensing.

“The reason why people weren’t expanding that canopy was because it’s a massive investment in infrastructure and labor to do it and there just wasn’t money to support it with the direction prices were going,” Humiston says. “If people have confidence, then I think we’ll see that canopy expand. But if we don’t get more people in the game or people expanding their canopies, this next September and October could really be quite a bear.”

Meanwhile, growers like Montgomery want to keep licensing closed.

“It’s not fair to us as growers for someone to sit on the sidelines and once the market goes back up, they start growing again,” Montgomery says. “We’ve worked our asses off. I think if you shut down, you should lose your license. It’s gone, bye-bye, and there’s no more to give out.”

Another factor that could be affecting prices in Washington is the advent of retailer-sponsored pesticide tests. Uncle Ike’s, one of the state’s top-grossing retailers, started its OK Program to randomly test products for pesticides in the fall of 2018; other retailers have since joined the program or began conducting their own tests, in lieu of state-mandated pesticide testing.

For the past five years, many growers could cut corners on growing practices and pest-control methods.

With more transparency and accountability regarding pesticides, Graham says the cost of production is only going to increase.

“It takes knowledge, effort and money to grow clean,” Graham says. “If people say they can buy it elsewhere for 10 cents less per gram, well, it’s probably contaminated.”

Dori Patrick at Two Heads says pesticide-laden plant material is abundant right now.

“In the last probably 10 days, a good portion of the input I’ve received is very low quality and riddled with pesticides, and we don’t process pesticide-filled material,” Patrick says. The result, she says, has been “a lot of returns and trying to get refunds happening.”

Since 2016, the Liquor and Cannabis Board has announced 15 voluntary product recalls due to pesticides; 13 of them have come in the past year. The OK Program has identified 12 products that failed testing.

Searching for Solid Ground

Two Heads (pictured here) has recently had to shutdown at least one day a week due to the shortage or usable flower. Photo courtesy of Two Heads.

Although wholesale prices have increased over the past year, processors are still getting the same rates from retail buyers, according to Liz Connors, the director of analytics for data firm Headset. Connors says retail profits on cannabis-infused product have also been steady over the past year, leaving slim margins for processors.

However, the latest data about prices comes from the end of summer, before outdoor harvests hit the market. Many processors hope that this fall’s harvest will yield enough flower to sustain their businesses through the year and that more plants will be in the ground in 2020.

“As an industry, if we go into next year producing similar amounts as what we’ve done this year, we’re going to have even less product because they’ve cleaned out these old backlogs,” Humiston says. “We’re really going to be operating off of what was produced this outdoor season.”

Although processors may be facing slimmer margins in the coming months, Graham believes the “quick-buck processors who bled weak farmers and producers dry” will move on to greener pastures and leave less competition for those businesses focusing on the long term. Graham hopes the increase in wholesale pricing will last, but he says Washington’s industry will need a change at the retail level before the market stabilizes.

“I think at the end of the day there’s no reason why we need $50 ounces (at retail),” Graham says. “Why do you always need something cheaper? Why don’t people sell beer for 25 cents a can? I suppose you could but nobody’s making any money.”

After crunching some numbers, Patrick says a 10% increase from retail buyers would balance out the rise in wholesale prices.

“The stores have to pay enough to sustain the whole line down, which puts it on the consumer to pay an appropriate price to maintain a sustainable level,” Patrick says. “The rest of it is whether or not you can run a business correctly.”

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