Robert Dodge has 4,500 recreational marijuana plants at his licensed facility in Burton, UBaked Cannabis Company. He works with about half the state’s licensed retailers, but he’s finding it difficult to compete in an industry saturated with growers.
In Michigan, the number of licensed growers is 35% higher than that of recreational retailers at 711 to 526.
With supply much higher than demand, wholesale and retail cannabis prices have dropped significantly and fast. In many cases, prices are even lower than in states that have been cultivating cannabis for a decade.
As of June, 1,285,248 recreational marijuana plants were being grown statewide by licensed facilities, up 71% from January, amounting to over 63,200 pounds.
During that period, the number of retailers increased 17% from 449 to 526, while the number of growers increased 34% from 530 to 711.
This market imbalance is causing grower profit margins to tighten, and many in the industry question how long they can sustain their business as revenues shrink.
Dodge said the most important challenge for him and other growers is the declining cannabis prices, which have dropped from $222 per ounce in August 2021 to $122 per ounce in June, a 45% decrease in but a year.
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It’s a number that has been dropping since adult-use marijuana sales began in Michigan in 2019. At that point, marijuana was selling for over $500 per ounce when the number of licensed retailers was twice the number of licensed growers at 26 to 13, with only 4,000 plants being grown statewide.
Growing pains
Andrew Brisbo, executive of the Michigan Cannabis Regulatory Agency (CRA), said the state had seen a dramatic increase in the number of grower licenses making it a much more challenging environment for businesses.
The CRA is the state government agency that issues marijuana licenses and regulates the recreational and medical industry,
“The grower side is expanding far more quickly, without the parallel increase within the number of retailers, which is contingent upon new municipalities opting in,” he said. “As the pace of latest retailers and opt-in communities has slowed, the growers haven’t slowed their expansion efforts.”
In June, 68 grower licenses were issued statewide compared with only 20 retailer licenses, consistent with state records.
Currently, 123 Michigan communities leave adult-use marijuana businesses, a variety that has grown 13% since August 2021, while another 1,384 have chosen to opt-out, which has decreased by 1% over that same period.
Over the past 12 months, the state has seen a 150% increase in the number of growers but only a 75% increase in the number of retailers.
“If policy keeps chasing the short-term trends within the industry, then equilibrium might never be achieved,” said Brisbo. “At this point, if the availability side continues to grow short of more retail locations, this is often sort of what the market situation will be for the short-term.”
Mark Jerant, who grows 450 marijuana plants at his business, Warren-based Epic Roots, said there’s some competition value but added that the way the industry is heading is simply not sustainable for smaller growers.
Jerant said his sales are down with cannabis prices continuing to drop and the increasing number of shops going vertical, becoming their grower and processor.
Providing some relief to growers are the changes within the CRA’s regulatory fees, which Brisbo said, are lowered every year since they’ve implemented the program both on the medical and the adult-use side.
“We’re always watching the regulatory landscape and trying to address concerns,” he said. “We can make changes to enhance the business climate as long as it’s not sacrificing the health, safety, and welfare of the general public .”
Due to this saturated grower market, Dodge said his sales are down, and he is not turning a profit with a $30,000 to $40,000 sale a year ago now being a $6,000 sale.
“With the availability being so high, growers are struggling to pay their bills and are willing to sell their product at such a coffee price just to keep their lights on.”
He wont to do $1 million a month in total sales, but that number has dropped to around $300,000 to $400,000 with $500,000 in overhead costs.
Also read – Marijuana growers face challenges as supply explodes, demand slows, and prices drop.
Dodge said his company is discussing whether to travel vertically to survive on their current profit margins.
In Michigan, there’s no statewide cap on the number of licenses issued for marijuana businesses, both on the recreational and medical sides.
Under state law, the cities, villages, and townships that opted-into into the operation of marijuana businesses have the authority to place license caps by passing a local ordinance.
In Oakland County, the opt-in communities that leave recreational marijuana businesses include Berkley, Hazel Park, Ferndale, Lake Orion, Madison Heights, Orion Township, Oxford, Pleasant Ridge, Pontiac, Royal Oak, Southfield, Walled Lake, and Waterford.
In mid-Michigan, the cities of Clare, Mount Pleasant, and Wise Township leave recreational marijuana businesses.
The Michigan Cannabis regulatory authority does not have the constitutional authority to implement a statewide cap as outlined in the 2018 voter-approved Michigan Regulation and Taxation of Marijuana Act that legalized recreational marijuana for adults over the age of 21.
Any statewide license cap would come via a constitutional amendment approved by the Michigan State Legislature.
Brisbo said the constitutional amendment has gone by voters deliberately created a free market system in terms of saturation but stopped in need of whether he would support a statewide cap.
“I don’t think it had been anticipated that municipalities would sort of coordinate across the state to identify market trends and appropriate balance of that,” he said.
The Michigan Cannabis Manufacturers Association estimates that the adult-use market in Michigan will succeed in about $3 billion in retail sales at maturity. The state will see over $2 billion in retail sales this year.
Jerry Millen, the owner of The Greenhouse, a licensed retailer in Walled Lake, said it’s hard for independently-owned growers to compete immediately with the overabundance of supply and the bigger companies trying to choke out the smaller growers, making it a race to the bottom in terms of what the product can be sold for.
“There is just 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.
Millen said his business is profitable with 1,200 to 1,600 customers daily, but his revenue is down 30%, thanks to the declining marijuana prices.
Although he doesn’t support a statewide license cap, he said that option might have to be looked at in the future.
On the grower side, Dodge said he’s 100% supportive of a statewide license cap because the market is saturated and believes that “corporate weed” will take over.
Other challenges
Another hurdle that growers are still facing may be a lack of banking resources, the tax environment at the federal level, and a scarcity of access to government grants and loan opportunities that other businesses in other industries had access to during the COVID-19 pandemic.
“I’ve heard from folks paying 60 to 70% federal tax rates because they can not write off normal business expenses as other types of industries can,” he said.
“From the beginning, these cannabis businesses are visiting 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 cash in of to make these legal businesses more competitive, efficient, and profitable.”
It requires a competitive business model for growers to remain in business and be successful. These are things that Congress could cash in of to make these legal businesses more competitive, efficient, and profitable.”
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Jerant said the State of Michigan had done an excellent job reducing its regulatory license and renewal fees. However, working in an industry with so few tax write-offs and a high federal rate makes it hard to operate like any other business.
Dodge said he wants to pay his employees well and offer them and their families full healthcare benefits. Still, things have changed thanks to the industry’s current environment and lack of access to resources that every other industry has access to.
“We are all forced to use for private equity loans at high-interest rates,” he said. “There’s visiting be a mass default in the next 12 to 24 months, and it’ll squeeze out more companies from this industry. Frankly, we’re on the cusp ourselves. We’re with great care concerned about the future.”
Millen said he wants to be treated like all other businesses in tax write-offs.
