U.S. Cannabis Spot Index down 9.9% to $1,700 per pound.
The simple average (non-volume weighted) price increased $18 to $2,072 per pound, with 68% of transactions (one standard deviation) in the $1,536 to $2,608 per pound range. The average deal size increased 37% to 11.8 pounds. In grams, the spot price was $3.75, and the simple average price was $4.57.We noted last week that for the first time this year, the observed weight of indoor flower contributing to the composite Spot Index was less than 50%. The influx of greenhouse and outdoor grown flower coming to market continued this week, further diminishing the share by weight of indoor flower. The majority of transactions are for higher-priced indoor grown flower, driving the simple average of $2,072 per pound; while the majority of the weight is lower-priced greenhouse and outdoor grown flower driving the volume weighted average to $1,700 per pound. In the history of the index, we have observed a spread of this magnitude – $372 per pound between the simple and weighted averages – only twice before; both occurred during 2015’s fall harvest. For the weeks ending November 20th and December 4th, the spread was $401 and $386 per pound, respectively. Indoor flower spanned from $1,200 to $4,000 per pound; the median price was $2,175. Greenhouse flower spanned from $1,150 to $2,600 per pound; the median price was $1,600. Outdoor flower spanned from $1,200 to $1,850 per pound; the median price was $1,450. Deal sizes for indoor flower ranged from 0.25 to 25 pounds. Deals for greenhouse flower ranged from 0.5 to 350 pounds. Outdoor flower transactions ranged from 1 to 100 pounds.
The largest transactions reported were two 350-pound deals, both for greenhouse grown flower – one in Washington at $1250 per pound, the other in Colorado at $1,300 per pound.
As illustrated in the chart below, prices declined across all grow types, with multiple large greenhouse deals in the 200 to 350 pound range driving the weighted price of greenhouse grown flower beneath that of outdoor grown flower. Multiple states experienced their lowest prices of the year, including Colorado, Oregon, Washington, Nevada, Arizona, Michigan and Illinois.
Numerous outlets have commented on an industry report released by Headset, which tracks retail sales data from storefronts and dispensaries in Washington. Though the data under discussion is specific to that state’s market and retail-focused, it has potentially deep implications for producers, both in terms of pricing and cultivation process decisions. The primary takeaway from the report was discussed in an article on Quartz: Cannabis flowers remain the most popular product for retail customers, but the plant’s raw product is losing market share to other permutations, such as concentrates, edibles, and other infused products, as well as pre-rolled joints. The Quartz report notes that, two years ago, flower accounted for more than 75% of retail sales in Washington, but has fallen to less than 60% currently. Regardless of the factors driving these trends, the rise of concentrates, infused products, and ready-to-smoke pre-rolls will influence cultivation trends, as well as wholesale markets themselves; indeed, such changes have already been taking place over the course of the past year to 18 months. In the early days of legal cannabis markets, most cultivators harvested their product with the express purpose of drying and trimming the flowers for sale. Any excess trim left over that could be used to make concentrates and other infused products was considered a bonus. However, as demand and competition increased generally, in conjunction with the rise of business intelligence in the industry, producers have had to become more selective with what flowers are being put on the shelf, as consumers are more discerning due to the plethora of available options. Additionally, some noticed that the profit margins for concentrates and infused products were higher than those for flower. However, such margins often do not find their way to the producers, who generally sell low-cost product – either trim or low-quality flower – to processors. Primarily over the course of the past year, some producers began processing larger portions of their crop, or even the entirety of it, as demand for concentrates and associated products has increased. The latter situation occurs most frequently when a processor is also running an associated grow operation. As we posited in our 2016 Year Ahead Special Report, published at the outset of this year, such demand has the potential to change cultivation models and protocols, particularly indoor ones, many of which are focused on producing pristine, shelf-ready flowers as their final product. More likely in the long run, however, is that falling demand for flower will add another reason for cultivators to move to growing methods fueled by natural light. The ability to achieve a greater yield per square foot outside, as well as strong cannabinoid and terpenoid production gained from growing under the sun, but not necessarily an aesthetically desirable final product, lends itself well to extraction. Cultivators can also be saved the significant hassle of drying and trimming large volumes of product, which requires an environmentally controlled space and a great deal of labor. This is particularly true as whole-plant extracts such as Live Resin and Rosin grow in popularity. Employing masses of cheap-to-produce outdoor product could in turn help lower the price of concentrates and other infused products, which have largely maintained their retail price points in the face of fluctuating, but generally falling, wholesale prices for flower and trim. It can be safely assumed that a lower retail price for concentrates, which currently can sell for in excess of $60 per gram in same areas, will drive demand for those products even more, increasing their market share as they become more affordable. In such a scenario, raw flower would remain the domain of indoor producers, who would not be able to produce cheaply enough to maintain profits while still selling to processors. Of course, the rise of greenhouse product, presaged in last week’s observed surge, will put additional pressure on warehouse growers, particularly as smaller, “craft” greenhouse operations can produce extremely high quality flower for significantly lower cost. This week’s downward price trend continues, driven again by high-volume, low-priced deals for greenhouse and outdoor-grown product. One source, an agricultural professional with decades of experience, pointed out that any crop able to garner high prices one year is frequently over-planted the next, often resulting in a price crash. As we noted in last week’s report in regard to Colorado, existing operations have spent the past two years expanding – sometimes into greenhouses – while newly-licensed producers in the southern part of the state worked to get their operations up and running, in addition to overcoming the growing pains that often accompany one’s first few harvests. Industry participants have feared a price crash as early as 2014, when the adult-use market came online and the “Green Rush” began in earnest, but it now appears that new and existing producers needed the last two years to complete construction and expansion projects, as well as hit their strides operating larger-scale facilities and greenhouses. Reports from California tell of new growers descending on the state in recent years, looking to take advantage of the still loosely-regulated market. This has occurred in conjunction with the rise of light-deprivation approaches, as cultivators sought to avoid the fall price crash by harvesting multiple times throughout the summer. Similar mechanics are taking place in Washington, with the added wrinkle of farmers holding back product from last year’s harvests due to seasonal oversupply that seriously impacted producers in recent years. Still, the fact that the volume-weighted price for greenhouse cannabis in Washington was lower this week than that for outdoor product speaks to the supply flood originating from light-deprivation operations. This period of oversupply is occurring at a time when cultivators typically expect to command higher prices, based on the more strictly seasonal nature of prior cannabis production. That expectation is illustrated by the outdoor product that was held back last winter and is still being released onto the market. However, the proliferation of legalization and the adoption of regulations allowing licensed greenhouse production in the major legal markets has disrupted previously predictable price trends. Cannabis markets have always dealt with oversupply, but it has been restricted mainly to winter, after fall harvests have been cut down, dried, trimmed, and have reached market. Now, the ability of greenhouse producers to grow cheaply, yield great amounts of volume, and generate multiple harvests per year has driven down the market price drastically at a time previously associated with scarcity. Just as many cannabis business operators have become accustomed to the market’s prior trends, it appears that a confluence of factors has converged to force market participants to familiarize themselves with new patterns in order to maximize margins and make sound business decisions. |
Forward Curve down as new greenhouse supplies compound pricing pressure from last year’s inventory.
Forward prices have been steady or declining for 9 weeks, with no price increases since the week ending May 13th. As is typical for this time of year, outdoor cultivators have been liquidating supplies from inventory harvested last fall. However, in years past – and as recently as a few weeks ago – outdoor cultivators selling this time of year had two objectives: capture higher prices associated with summer demand and higher indoor cultivation costs, and eliminate inventory ahead of the new fall harvest. Yet, as we have witnessed over the past few weeks, the volumes and pace of outdoor flower coming to market has had the effect of transforming outdoor cultivators into price setters as much as price takers. Last week saw further downward price pressure with the arrival of the season’s first light deprived harvests from greenhouses. Of the light deprived greenhouse flower anticipated to come to market through the remainder of the year, we estimate that only about 15% has been brought to market thus far (corresponding to flower grown during the period extending roughly from April 21st through June 21st), setting the stage for continued downward price pressure ahead of the larger fall outdoor harvest. This new normal has pushed down forward prices across the six-month Forward Curve. The premium or discount to the US Spot Price are illustrated in the table below. This week’s forward volume represented 14% of the total number of observed spot and forward transactions. 85% of the forwards had durations of at least two months, while 54% had durations of at least three months. 49% had durations extending through the fall harvest and into January. The distribution of forwards by grow type was 10% outdoor, 37% greenhouse and 54% indoor, and were reported from California, Colorado, Washington, Nevada, Arizona, Michigan and D.C. 41% of this week’s reported forwards were for monthly deliveries and ranged from 2 to 350 pounds. 59% of this week’s reported forwards were for weekly or biweekly deliveries and ranged from 2.5 to 100 pounds. The average forward deal was for 23 pounds. Late this spring, the US Securities and Exchange Commission (SEC) relaxed crowdfunding rules in a manner that made many believe cannabis startups would be able to take advantage, a topic discussed in our report for May 27th. However, in our June 17th report, we noted the travails of ancillary company NetRX, which is focused on developing software and systems to serve medical dispensaries. Despite the new crowdfunding allowances, NetRX’s attempts to employ such fundraising avenues were shut down when the escrow bank serving the crowdfunding platform being used discovered that NetRX was involved in the cannabis industry. Now, however, in a guest post on New Cannabis Ventures, NetRX CEO Ralf-Rainer von Albedyhll explains that he was informed last Friday by StartEngine, the crowdfunding platform in question, that the escrow bank no longer objected to holding the funds pledged to NetRX during the fundraising period. According to Albedyhll, the escrow bank simply did not understand the distinction between ancillary firms and those that deal in cannabis plants and product directly. Making that clarification means that crowdfunding for ancillary cannabis companies could be back on, although the viability of that avenue still likely depends on the whims of any banks backing such fundraising efforts. Albedhyll’s post also included the revelation that the preparations for crowdfunding cost in the realm of $20,000, including legal, accounting, video production, and establishing a database for required record keeping. Time will tell whether or not banks that back crowdfunding platforms are widely agreeable to entertaining the fundraising ambitions of ancillary cannabis companies. However, the resolution of what previously appeared to be an overwhelming hurdle means that ancillary companies may indeed be able to be successful in accruing capital via crowdfunding. The accelerated development of ancillary products and services will help to streamline the cannabis industry and make business more efficient, thereby lowering operating costs and allowing the price of the product to be pushed down further. Sample headlines from this week’s Premium Report:Spot Index California
Colorado
Washington
Colorado
Oregon
Washington
Illinois
Florida
Hawaii
|