Updated: Mar 18, 2019
Vessel Logistics has released their 2019 California Cannabis Harvest Projections Report, predicting that the double impact of new regulations and substantial over-permitting will drive down wholesale prices before the end of 2019. The full 16-page report is available here for download, and we have outlined our key-takeaways below.
California’s transition to a fully regulated Track and Trace system, where cannabis is weighed and monitored by the state from seed to sale, will be extremely disruptive for Farms, Manufacturers, and Distributors. While many are currently focused on licensing challenges with the state (some calling these challenges an “extinction event” for the industry), a new Harvest Projections Report from Vessel Logistics predicts that the challenges associated with adopting new regulations (paired with substantial oversupply) will drive down wholesale prices before the end of 2019.
Here are a few tips to help producers:
1. Reduce Exposure. Don’t Overplant.
Because licensed cultivators are not allowed to do business with non-licensed players in the cannabis industry, the implementation of California’s Track and Trace System will significantly curtail sales into the black market. Before Track and Trace, black market sales were the main outlet for a farmer’s overstock. The industry’s reliance on unregulated markets caused producers to overestimate California’s actual wholesale demand for 2019. This overestimation is exacerbated by California’s underdeveloped retail market, which, due to local city and county restraints, has gone from approximately 5500 locations to 621 storefronts and 314 delivery businesses statewide. Survival should be the producer’s goal. Farmers should reduce exposure to falling prices by significantly cutting production. Even with reduced production, California’s 1,000 Acres of permitted cannabis farms will unavoidably produce a significant oversupply in 2019, causing the temporary reduction of flower and concentrate prices.
2. Streamline Production.
Although oversupply will hurt all types of companies, falling prices will impact indoor, outdoor and mixed light farmers differently. Regardless of the production method, farms must have best in-category COGS to survive lower sustained wholesale prices. Overproduction will force the farm price of cannabis below the COGS of 90% of current farm licensees, forcing cannabis producers to reduce costs like mainstream farmers. In 2018 the average whole plant price, at wholesale, across all farming types was $568 per lb. and by Q3/19 the report warns farmers to expect that price could drop to $200 or below.
3. Access to Distribution.
Farmers must have access to viable distributors to be successful. Distributors move product from the cultivation site to either the manufacturers (bulk products) or to the retailers (packaged products). Although over 1100 companies hold distribution licenses, less than 75 operate as traditional distribution companies, making it difficult for a cultivator to select the right partner. In a more mature market, California’s 930 retailers would be serviced by a fraction of the current number of distributors, but self-distribution has been the prevailing trend for farms and manufacturers in California attempting to bypass distribution and preserve a larger slice of the supply chain. However, due to the costly fees and high compliance cost of annual licenses, self-distribution will be unsustainable for the majority of cultivators once temporary licensing expires in March. The new trend will be moving the industry closer to a traditional consumer goods supply chain, making the choice of distributors key to a farm’s success both long term and during the upcoming period of oversupply.