More than half of the state’s registered merchants are working with UBaked Cannabis Company’s 4,500 recreational marijuana plants at their permitted facility in Burton. Still, Robert Dodge is having difficulty competing because of the overcrowded market. Licensed marijuana cultivators outnumber recreational stores in Michigan by 35% (711 vs. 526).
Due to an overabundance of the drug on the market, wholesale and retail prices have fallen precipitously. Often, prices are even lower than in states where cannabis has been grown for a decade. Marijuana production in the state has increased by 71% since January, with 1,285,248 recreational marijuana plants grown by licensed facilities totaling over 63,200 pounds.
From 449 to 526, the number of retailers grew by 17%, while the number of growers grew by 34% during the same period. This market imbalance is squeezing profit margins, and many in the industry are wondering how long they will be able to keep going. According to Dodge, the greatest difficulty for him and other farmers is the falling price of cannabis, which has decreased by 45 percent in less than a year, from $222 per ounce in August 2021 to $122 per ounce in June of this year.
This statistic decreased after the legalization of recreational marijuana for adults in Michigan in 2019. While there were 26 legal dealers and just 13 licensed producers, marijuana was selling for over $500 an ounce at the time, with barely 4,000 plants growing statewide.
“The biggest challenge is trying to figure out how to maximize a gram of marijuana and get the most out of it,” he said. “I hope cannabis prices are at rock bottom prices right now, but I still think we have another three to four months before we really see the bottom. We’re really struggling as a company with the state issuing more grow licenses. Our revenue is down 60% month over month and we’re just trying to get out on the other end of this.”
Adversities that comes with maturation
According to Andrew Brisbo, executive director of the Michigan Cannabis Regulatory Agency, the number of grower licenses in Michigan has increased dramatically. Licenses are issued and regulations enforced by the state’s Cannabis Regulation Authority (CRA), a state-level government entity.
“The grower side is expanding much more quickly, without the parallel increase in the number of retailers, which is contingent upon new municipalities opting in,” he said. “As the pace of new retailers and opt-in communities of that has slowed, the growers have not slowed their expansion efforts.”
According to state statistics, 68 grower licenses were awarded in June, while just 20 retailer licenses were issued. Adult-use marijuana companies are currently permitted in 123 communities in Michigan, up 13% since August 2021. Meanwhile, 1,384 communities have elected to opt out of the program, a 1% drop in the same period.
A 150 percent rise in growers has occurred in the state in the last year, but only a 75 percent increase in retailers has occurred. “If policy keeps chasing the short-term trends in the industry, then equilibrium might never be achieved,” said Brisbo.
“At this time, if the supply side continues to grow short of more retail locations, this is sort of what the market situation is going to be for the short-term. I think we’ll see that it starts to even itself out over time.”
Mark Jerant, the owner of Epic Roots, a pot farm in Warren, Michigan, says that competition is beneficial but that the current state of the market is not sustainable for small farmers. “I think you’re setting up a lot of people for failure with the number of licenses and the supply being so high,” he said.
“We’re kind of teetering at the point of having too many licenses, but it’s really hard to put a finger on what the best solution is because you don’t wanna kill competition.” With the price of cannabis continuing to fall, Jerant said his sales have decreased as more shops establish their growers and processors.
For growers, the CRA’s regulatory fees, which Brisbo said have been reduced yearly since the program was introduced, are providing relief. “We’re always looking at the regulatory landscape and trying to address concerns,” he said. “We can make changes to improve the business climate as long as it’s not sacrificing the health, safety, and welfare of the public.”
A year ago, Dodge had a $30,000 to $40,000 sale, but now it is a $6,000 sale because of the oversaturated grower market. “With the supply being so high, growers are struggling to pay their bills and are willing to sell their product at such a low price just to keep their lights on.”
Overhead costs of $500,000 have reduced his sales from $1 million to $400,000 and $500,000 a month. “Quite frankly, if someone made an offer on our business, we’d probably sell it,” he said. “I don’t want to scare anyone out there, but it’s that fight or flight thing right now.”
a statewide monetary limit.
A statewide cap on the number of licensed growers of recreational marijuana might help the market stay balanced.
Where do retailers and producers stand on this issue?
There is no statewide limit on the number of licenses that can be given for recreational and medical marijuana businesses in Michigan. By establishing a local ordinance, cities, villages, and townships that voted to allow for the operation of marijuana companies can limit the number of licenses that can be issued.
Oakland County’s opt-in communities include Hazel Park, Ferndale, Lake Orion, Madison Heights, Orion Township, and Walled Lake, as well as the cities of Pontiac and Royal Oak. The cities of Clare, Mount Pleasant, and Wise Township in the mid-Michigan region have legalized recreational marijuana.
The Michigan Cannabis Regulatory Agency does not have the constitutional authority to implement a statewide cap as described in the 2018 voter-approved Michigan Regulation and Taxation of Marijuana Act, which legalized recreational marijuana for adults over 21. Legislators in Lansing must ratify a constitutional change to impose a statewide licensing limit.
However, Brisbo did not say whether or not he would support a statewide cap because he believed that the constitutional amendment voted by voters intentionally created a free market system. “I don’t think it was anticipated that municipalities would sort of coordinate across the state to identify market trends and appropriate balance of that,” he said.
Retail sales of cannabis for adult use are expected to exceed $3 billion by 2022, according to the Michigan Cannabis Manufacturers Association. More than $2 billion in retail sales are anticipated in California this year. “So, there’s still room for market capture,” said Brisbo. “That puts us on a much better track than similarly situated states.”
Supply is abundant, and the big firms are attempting to squeeze out the smaller producers, making it a race to the bottom in terms of what the product can be sold for, says Jerry Millen, proprietor of The Greenhouse, a licensed merchant in Walled Lake. “There is too much product in the system and it’s only getting worse,” he said.
“People can’t afford to pay their bills because the profit margin in the cannabis industry is not what people think. Everybody thinks you get rich overnight. No one gets rich overnight except lottery winners. And we know what happened to lottery winners, right? They go bankrupt within a year.”
Because the price of marijuana has fallen 30 percent in the last year, Millen’s business still makes money with 1,200 to 1,600 consumers daily. The notion of a statewide license cap may have to be considered in the future, even though he opposes it. Growers like Dodge say a statewide license cap is needed because the market is saturated, and “corporate weed” would eventually take over the industry.
“The multi-state operators are coming in, have extremely deep pockets, and are able to wade this storm out by dropping their prices,” he said. “That’s just crushing the little guys. We’re in discussions with groups in other states to expand our brand, but in Michigan we’re just getting crushed.”
Adding that a license cap would “change everything very quickly,” Dodge asserted that the state is in charge of this industry’s future. “The companies that are going out of business, and there are a lot of them, are now dumping off their inventory for pennies on the dollar to these dispensaries, which are holding up orders on our end,” he said. “The state just keeps issuing licenses and we have to readjust our businesses.”
Various other issues to consider
Additionally, the absence of banking resources, tax laws at the federal level, and the lack of access to government grants and loan options that other firms in different industries enjoyed during the COVID-19 pandemic continue to be obstacles for producers. “I’ve heard from folks that are paying 60 to 70% federal tax rates because they can’t write off normal business expenses as other types of industries can,” he said.
“From the start, these cannabis businesses are going to be put at a disadvantage in terms of profitability so that causes folks to try and insulate themselves in ways that other businesses don’t have to from tax liability. These are things that Congress could take advantage of in order to make these legal businesses more competitive, efficient, and profitable.”
Right present, a very competitive business model is required for farmers to remain in business and be profitable. “Congress has the opportunity to make these legal businesses more competitive, efficient, and profitable.” It is difficult to run a firm like any other in an industry where there are minimal tax write-offs and a high federal tax rate, according to Jerant.
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“We can’t write off so many things that any other normal business would be able to do,” he said. “It makes it really hard to pay for things having the tax burden that we do. At the federal level, the taxes are still so high and so difficult. Right now, it’s really a whole new ballgame with how we have to meet our margins now. “
Previously, Dodge said, he paid his employees well and provided comprehensive healthcare benefits for them and their families. Still, the industry’s current environment and lack of resources have changed things. “The multi-state operators are coming in, have extremely deep pockets, and can wade this storm out by lowering their prices,” he stated—what a disaster for the tiny guys.
Even though we are talking to groups in other states about expanding our brand, we are getting smashed in Michigan. Adding that a license cap would “change everything very quickly,” Dodge asserted that the state is in charge of this industry’s future.
According to him, many enterprises that have been forced to close their doors have been selling off their inventory to dispensaries for pennies on the dollar, causing a backlog of orders for the company. When the state continually issues new licenses, “we must adjust our businesses.”
“We are all forced to apply for private equity loans at high interest rates,” he said. “There’s going to be a mass default in the next 12 to 24 months and it’ll just squeeze out more companies from this industry. Frankly, we’re on the cusp ourselves. We’re just so concerned about the future.” Millen wants to be regarded like any other corporation regarding tax deductions.
“If you knew what I paid in taxes the past three years, your jaw would hit the floor,” he said. “I’m considered illegal by the federal government, but they take my tax money happily. This just makes my profit margin even smaller. Our mom and pop stores need to take themselves out of the marijuana bubble and get people that wouldn’t normally use marijuana into their store.”