Marijuana Prices Are Plummeting: What Does It Mean?

Marijuana Prices Are Plummeting: What Does It Mean?

Marijuana prices per pound are steadily falling. As cannabis becomes a legally produced and traded crop, it is becoming an agricultural commodity, and like other agricultural commodities, wholesale prices have rippling effects for producers and consumers.

So, why are marijuana prices dropping, and what does it all mean?

Legalization Drives Down Prices in the Long Run

In a typical agricultural commodity market, prices are determined by the simple economic law of “supply and demand.” Prices are set by the total amount all producers make available for sale coupled with the total demand of all buyers. Lower supply and higher demand results in higher prices because the commodity in question is rare and desired.  Higher supply and lower demand results in lower prices because there is an overabundance of the commodity.

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When the price of a commodity is low, the buyer holds the power over the producers and the market is referred to as “a buyer’s market.” When the price of a commodity is high, the seller holds all the power over the buyers and that market is called “a seller’s market.”

Cannabis has traditionally been bought, sold and priced in a “seller’s market. Before the current “Green Rush” the vast majority of would-be growers avoided the market altogether for fear of losing everything and spending their lives in prison if caught. The risk factor involved in setting a farming operation up and selling an illegal substance discouraged farmers from producing and allowed the market to maintain high prices.

I am here to tell you it is time to stop basing your revenue projections off those artificially high prices. Those days are slipping away, despite inaction from the federal government.

As western states began to pass medical cannabis legislation, bringing more growers out into the open and encouraging more to join in, local prices started to steadily decline. Under current federal policies (the Ogden and Cole Memos), states are allowed to produce and sell cannabis in-state per their state laws but are required to keep that supply within state limits.

Of course, that is impossible. Since when have borders prevented suppliers from meeting demand for anything? Well, never. It’s why prohibition never worked in the first place; demand incentivizes supply.

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In the medical era, when legal prices in legal states even for top shelf cannabis started to come down, prices in states without robust markets spiked up. A grower growing for the semi-legal “gray markets” out west were presented two markets’ worth of demand to meet; legal and illegal. Shortly before legalization laws started passing, growers who supplied illegal demand could make between $3,000 and $5,000 a pound if they were willing to illegally shuttle their product to the East Coast or Midwest, or sell it to local legal markets for about half that price.

Those higher export prices coupled with laws that allowed growing in the open brought even more Green Rush growers out West, drastically increasing supply. Legal sales to customers over the age of 21 in fives states (and counting) has only served to pile onto the supply glut.

Now, thanks to legalization, supply has begun to outweigh demand in both markets, and marijuana prices are plunging as a result.

So Prices are Plunging — Is That a Good Thing or a Bad Thing?

Well, that depends on who you are and where your interests lie.

Some state medical and recreational sales schemes have engineered scarcity in the market or levied such high taxes on product that prices remain artificially higher than the law of supply and demand would dictate. California, for example, has set such high tax rates on growers and consumers that prices could spike to up to 70 percent higher than pre-legalization prices in and fuel the already massive black market. In medical states back east, like Florida, Illinois and Ohio, oligopoly markets have the same effect on prices by forcing the power into the seller’s hands.

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Attempts to artificially inflate legal prices will have the effect of fueling the black market. Black market suppliers often are providing higher quality marijuana at better prices than state programs, and supplying that illegal demand has forced the prices down even in legal markets.

Going into 2018, and the rollout of California’s legal sales, a lot of farmers and investors are worried about the price of pot. Small farmers who relied on raw cannabis buds alone for their livelihoods are being forced to scale up or get out. Investors are increasingly finding out that despite their sky-high projections, farming a semi-legal agricultural commodity is a “boom and bust” business that takes foresight, passion, dedication and the wherewithal to sustain long-term market fluctuations.

So are falling marijuana prices a bad thing or a good thing? If you are a seller, it’s absolutely not a good thing. But if you are a buyer, those prices absolutely are. But as cannabis becomes a legal commodity and is being priced as such, pricing will have to radically change to reflect that variations of not just quantity, but quality, in the market.