Price Fluctuations Threaten to Drive Marijuana Growers Out of Business

Wednesday, February 04, 2015

Annie Ellison, GoLocalPDX Reporter

Christopher White, of West Coast Herbs, tends to his plants. (West Coast Herbs)

A marijuana market saturated with product, falling prices and high taxes have put some Washington pot growers on the brink of closure, industry experts say.

Marijuana growers and processors in the Evergreen state blame state regulators and an excise tax of 25 percent for what they say is a supplier-crushing bottleneck. Regulators failed to anticipate crop cycles or issue production and retail licenses cohesively, which led to a flooded market, roughly a dozen growers and retailers tell GoLocalPDX.

Put simply, there are more Washington growers with more marijuana than the market has demand for, and wholesale prices have dropped to a third of what they were when retailers opened their doors in July.

“We’re in a serious blood bath right now for producers and processors,” said CannaSol owner Jeremy Moberg. He said marijuana growers are selling at below their production cost just to stay afloat. “The house is burning down, there’s a 31,000-pound supply in Washington, that’s ten years of supply,” he said.

Industry watchers say the market mayhem and price wards in Washington are a real warning to Oregon, as the state readies to roll out its own legal pot market later this year.

Falling market

Vancouver, Washington marijuana retailer New Vansterdam was ready for opening day, but at a cost, spokesperson Shon-Leuiss Harris said.

When legal recreational cannabis hit the market, growers were courted with premium prices for their limited product -- between $10 and $14 per gram -- from retail shops that needed stock in order to open, Harris said. Washington growers had expected the average wholesale price would be no less than $6 per gram, or $2,721 a pound.

“There were some pretty laughable prices in July,” Harris said. At one point, New Vansterdam was offered a wholesale price of $21 per gram. Comparatively, current retail sale prices range between $15, on the low end, and $25 per gram.

But, as outdoor crops came to harvest at the same time, the market flooded, giving retailers the ability to negotiate cut-throat prices. Moberg, who said he is sitting on 1,500 pounds of marijuana, said some farmers are selling to other producers, as well as retailers, for as low as $2 per gram. To break even, a grow operation can sell for no less than $3-$4 per gram.

“It started out being a golden ticket to turning into another struggling business industry,” said 3RB grower Rocky Butain. Rather than selling for $7 a gram as he anticipated, he is lucky to get $4 per gram.

“No producer planned their business around $4 a gram,” said Harris, who wouldn’t specify what New Vansterdam, which brings in $1 million per month in gross sales, pays for wholesale marijuana flowers. But, he said he is seeing a trend of prices between $3 and $6.

As of Tuesday, Feb. 3, there were roughly 380 producers and processors (most are both) and 114 of retailers, the Washington State Liquor Control Board’s Brian Smith said. In total, 334 retail licenses will be issued.

Farmers reeling

In roughly a dozen interviews conducted by GoLocalPDX, retailers and growers said that farmers across the state are reeling from overproduction.

“Profit margins went from extremely good to barely worth it,” said Moberg, who has had at least one job inquiry from a worker at a farm that is going out of business.

“There are people throwing in the towel already," he said.

Some farmers are trying to stay alive by offloading their goods to other producers and processors.

Christopher White, a small-level grower at West Coast Herbs, said he gets calls everyday from farmers trying to sell their stock.

“They can’t get rid of it, nobody wants it,” he said.

Power Shifts to Retailers

After initial shortages the economic power has shifted from growers to retailers, and some growers are selling at a loss to establish a place in the market.

“If there is relief in sight, it’s legislative,” said Moberg, who is lobbying for measures in the Washington legislature that would improve market conditions, including lifting city and county moratoriums banning the sale of marijuana, and increase the number of retail outlets.

Smith, of the WSLCB, said growers are upset they aren’t making the money they’d hoped for, but that the market glut is a boon for consumers. He said to be competitive with the black market, retailers need to be able to sell for $12 per gram. But, Harris said to stay in business retailing for that price, wholesale cost would need to be in the ballpark of $1 per gram.

Harris said he has knows growers who are “re-evaluating” the move to commercially farm marijuana.

White, who grew medicinal marijuana prior to getting a recreational permit, said his small operation serves a niche -- powerful boutique pot that retails for $24 a gram -- that does not face the distribution bottleneck larger outdoor operations are facing.

“People are getting weeded out already,” he said. The shop White sells to carries between just four and five growers.

“A lot of people feel stupid for applying for this license,” White said. “Everyone thought recreational was a gold mine and it’s the opposite.”

White said he is happy to sell for $7 a gram, but knows some growers selling for $2.

A warning for Oregon

Southern Oregon growers are already producing more marijuana than the legal recreational market will buy, Moberg said. The licensing structure in Colorado, the only other state where marijuana is legal, differs from Washington’s in that it allowed the producers to hold retail licenses, which Washington’s forbids. Stand-alone retailers and producers were only allowed after October, 2014.

In Washington, an excise tax of 25 percent applies between producer and processor, processor and retailer, and retailer to consumer, while Colorado enacted a lesser 15 percent excise tax and a 10 percent sales tax.

Grower and retailer licensing was at the top of a list of recommendations industry experts had for Oregon to avoid challenges Washington is facing. Moberg warns that Oregon’s top concern should be capping production. Meanwhile, the OLCC is hearing from Oregonians around the state as it takes initial steps in developing a marijuana regulation process.

Related Slideshow: 7 Things Oregon Can Learn from Legal Marijuana in Washington

In the wake of what many business owners, lobbyists and advocates call a rocky implementation of recreational marijuana in Washington, Oregon regulators have the opportunity to learn from their neighbor to the north.

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Engage Medicinal Marijuana Industry Experts

Washington has been criticized for not incorporating the medicinal marijuana industry or its experts, in its transition to legalization.

“Give all of the people who are legally in the medical marijuana system an easy path, keep people in place,” lobbyist Geoff Sugerman said.

By being the first state to legalize medicinal marijuana in 1998, Oregon has the advantage of a fully functional supply chain of medicinal growers and retailers

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Connect Growers and Retailers

Washington Retailers say at first it was hard to find newly licensed marijuana growers. The state can help the fledgling industry by helping to better connect producers and retailers, Cannabis City in-store manager Amber McGowan said.

Regulating wholesalers is another way to go between growers and retailers, McGowan said.

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Phase in Retail and Production Permits together

By proportionately phasing in retail and pot farming permits, Oregon can prevent both the short supply and flooded market that Washington experienced. In July, retailers sold out in days, while the approved growers scrambled to meet the demand. According to McGowan, there are too many growers and not enough retailers to sell to now.

“There are too many farmers going out of business because there are not enough people to sell their product,” McGowan said. “To make it super successful, don’t over saturate the market with growers.”

Solstice Grown grower Alex Cooley advocates not putting a cap on the number of licenses issued at all.

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Avoid Heavy Taxation

In Washington, growers pay an excise tax of 25 percent tax between grower and processor, another 25 percent tax between processor and retailer, and another 25 percent between retailer and customer.

This means a gram of marijuana, which goes for less than $10 on the black market, goes for $25 in retail stores, Cannabis City's Amber McGowan said.

This price differential is driving customers to the black market, critics say.

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Don't Use a Lottery System

To limit the number of retail stores per county, would-be retailers entered a lottery through Washington's regulators to determine who was eligible to apply for a permit.

Critics say the lottery system cut out qualified retailers, some who had experience from the medical cannabis industry, while allowing unqualified people to set up shop.

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Talk to Cities and Counties

Taking into account the laws specific to counties and municipalities will be essential to Oregon’s success in implementation, William Simpson of Northwest Producers and Processors Association.

“The single largest mistake we could make is not talking to the attorney generals, cities and counties about moratoriums and what would be allowed,” Simpson said. In Washington, some license holders were unable to open due to county moratoriums and bans.

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Treat the Industry like Agriculture

Grower Alex Cooley argues that because marijuana is a plant, it should be regulated like an agricultural crop, taking into consideration harvest cycles. Washington suffered a short supply in July, and then a flooded market following the harvest of outdoor crops in the fall.

Cooley urges Oregon regulators to allow crops on farm land, as some Washington cities are now banning grow operations within city limits.

“It’s a plant, it should grow in the sun, not in a warehouse in Seattle,” he said.