Supply and Demand in Michigan
Recreational and medicinal cannabis are still in high demand in Michigan, and dispensaries remain an essential business while many non-cannabis businesses have closed down. According to recent reports, medical marijuana sales remain strong through the COVID-19 pandemic, while recreational or “adult-use” sales have dipped a couple weeks into the state’s shutdown order. Despite consumer demand remaining strong, Michigan started to see its wholesale cannabis price drop this March.
This article will explore the different cannabis wholesale markets in Michigan, from the caregiver market, to the MMFLA licensed market, to the MRTMA market. We will also explore a few reasons why the markets are priced differently and how these different markets will be relatively priced in the future. We will also explore why we’ve experienced a short-term drop in the licensed market, and speculate on whether this dip in the wholesale price of cannabis is a temporary blip or here to stay.
The Split of Michigan’s Wholesale Cannabis Market: Caregiver v. Licensed Product
Prior to the proliferation of provisioning centers under the MMFLA, the wholesale cost of caregiver flower per pound was approximately $2,000 to $2,500. At the time, caregiver cannabis was the only legal or quasi-legal market for marijuana, so the when you talked about the wholesale price of cannabis in Michigan, you were talking about the price of caregiver product.
In 2018 , the Michigan’s wholesale market for marijuana started to split. On the one hand, the caregiver market remained strong, but a new market emerged—the MMFLA licensed product market. In this new market, MMFLA licensed product was at a premium since, due to guidance issued by the MRA, it was the only product that could be directly sold to a licensed provisioning center. There was still some crossover between these two markets –caregivers were allowed to sell to un-licensed temporary operating facilities, as well as MMFLA growers and processors, who could then sell to MMFLA provisioning centers if the product passed testing. Nonetheless, the market was still splitting, with licensed product garnering a premium to caregiver product.
With the increase in the number of Michigan dispensaries, MRA stopping provisioning centers from purchasing from caregivers, and caregiver product having to pass MMFLA safety testing, the price of licensed product shot up to around $4,000 a pound, with premium product fetching prices as high as $5,000 a pound.
But what really split the market, and determined whether cannabis would be subject to caregiver pricing or licensed product pricing, was whether it could pass Michigan’s stringent safety testing guidelines. At the time, it was estimated that 70% or more of caregiver product was failing safety testing. If caregiver product could pass testing, then it could garner a premium and sell to licensed growers and processors for resale to dispensaries. If not, then caregiver product couldn’t enter the licensed system, but could still enter through unlicensed temporary operating dispensaries. As more and more temporary operators became licensed and couldn’t purchase untested product, the wholesale caregiver market was pushed to the side.
With new guidelines further restricting caregiver product going into effect beginning March 1st of 2020, with caregiver product set to be fully phased out by the end of September, and with recreational dispensaries openings starting to pick up their pace, it was expected that prices for licensed product would shoot up again. In the beginning of the month, this seemed to be the case, but then prices starting precipitously dropping. As of the time this article was written, licensed product prices had dropped down to around $2,500 / lbs wholesale. This begs the question, why would the prices drop in a period that was expected to see prices rise even further?
Recent Changes to the Market: Caregivers Phasing Out
Back in November of 2018, only 2.4% of the flower sold in medical dispensaries was provided by licensed businesses, the remainder coming from caregivers. With restrictions on caregiver sales put in place last year, there has been a shift in the licensed market. In January of this year, 38.2% of the 2,968 pounds of marijuana flower sold was provided by licensed growers; according to the Michigan Marijuana Regulatory Agency.
The Marijuana Regulatory Agency, or MRA, has now decided to phase out direct sales between caregivers and the licensed marketplace. With the new restrictions in place, caregivers are only allowed to sell marijuana flower to licensees, and will be completely prohibited from selling into the licensed market at the end of September, 2020. That being said, as of the beginning of March, approximately 60% of flower provided to the licensed market was provided by caregivers. This will most likely cause a medium-term increase in the licensed retail price for not only flower, approximately 60% of which is caregiver product, but for infused products such as vaping cartridges, oils, and edibles as well.
Michigan’s Shelter in Place Order
With Gov. Whitmer’s “Stay at Home” or “shelter in place” order taking effect, Marijuana facilities were considered “essential businesses”, and most remain open. According to the MRA guidance, licensed facilities will still be allowed to sell to qualifying individuals, even with an expired form of identification. Curbside and delivery services are the only options, with no customers allowed in stores, and the minimal number of employees allowed on premise for the store to remain open. Even with actual visitations suspended, sales remain steady.
In fact, sales in Michigan increased by approximately 1 million dollars the week before the governor’s order, but then plummeted around 1.2 million the week following. This drastic rise and fall of sales can be attributed to cannabis consumers stocking up before the impending “Stay at Home” order. Sales were front loaded as consumers prepared to hunker down during the stay at home order, fearing stores would close. If ordered to stay at home, it would make sense that Michigan residents would stock up on the necessities, and for many residents, marijuana is a necessity.
During this time, sales in California, Colorado, and Washington have declined compared to Michigan. This may be a result of the fact that these states are more dependent on tourists than Michigan for much of their recreational sales. Michigan, being much less of a tourist state, has not seen quite the same effect.
Buy the Dip?
As mentioned above, Michigan has seen a precipitous drop in the wholesale price of licensed cannabis over the last month. The most obvious reason for the drop in prices is COVID-19. Through my work as a cannabis business attorney, I’ve heard from both growers and dispensaries that the wholesale market was slowing. Growers were finding it harder to unload product as dispensaries owners slowed down new purchases due to expected decreasing retail traffic. But this decreased retail traffic didn’t decrease all that much, so if this were the reason for the dip in pricing, then the wholesale market should quickly recover.
I’d like to propose a second reason for this dip though, one that hasn’t really been talked about much except among certain cannabis industry insiders. When caregiver flower restrictions were about to take effect, one licensed grower dropped 5,000 pounds of “caregiver” product in a single day into METRC, while others also dropped significant amounts of caregiver flower as well. To put this in perspective, one grower entered approximately $15,000,000.00 to $20,000,000.00 worth of product in a single day. This amount is well beyond what a single caregiver or collection of several caregivers could possibly produce in an entire year, so where did this new supply come from?
The answer—probably not Michigan. While I’m not going to name any names, it became clear that a certain licensed Michigan marijuana facility was loading up on out of state product. They were purchasing the product from a caregiver, but what essentially was happening was that out of state product was being laundered through caregivers.
If this were the reason for the dip, then it will likely be temporary as the state ratchets up the restrictions on licensees purchasing from caregivers, with sales limits taking effect in June and all caregiver sales to licensees stopping at the end of September.
Since we believe these were the two primary reasons for the drop in whole pricing, and both are likely temporary, we expect the wholesale price to recover from this most recent price dip.
The Coming Split of the Cannabis Wholesale Market…Again: MMFLA v. MRTMA
What we saw in the split between the caregiver market and licensed market is happening again, this time in the split between medical, or MMFLA marijuana products, and adult use, or MRTMA marijuana products.
One reason for this split is the lag between MMFLA licensees being able to convert to MRTMA licensees. Municipal opt ins under the MRTMA have been a slow go so far. Dozens of municipalities have opted in to the MMFLA but still have yet to opt in under the MRTMA. In contrast, I am hard pressed to think of a single municipality that has opted in to MRTMA cultivation facilities but not MMFLA.
In addition, large growers will be required to continue to service the medical market in order to add additional plants to their adult use cultivation. This is due to the “excess marijuana grower” license, which was a devilish work around created by the MRA to get around vague language in the MRTMA statute forbidding the holding of more than five MRTMA Class C licenses. This work around required MRTMA growers to hold at least two MMFLA Class C licenses in order to be eligible to grow more than 10,000 plants for adult-use. This prevents large growers from switching entirely to the adult-use market.
Second, the market for MMFLA product will decline, while the market for MRTMA product is set to explode. Many medical card holders have let their patient status expire because they don’t need one in order to go to certain dispensaries. This trend will continue as more and more adult use dispensaries come online.
Taking these factors together, the supply under the MMFLA is not going anywhere, yet the demand will fall as more and more cardholders let their MMMA certifications expire. In contrast, MRTMA demand is rising, yet there are not many MRTMA licensed grow facilities. Moreover, MRA recently prohibited MRTMA licensees from transferring caregiver product brought in through the MMFLA, further limiting MRTMA supply. With very little supply, and explosive demand, MRTMA marijuana products are likely to sell at a significant premium compared to MMFLA products. This is causing a second split in Michigan’s cannabis wholesale market.
Even if none the factors above are true (hint: they are), the MMFLA market will never be at a premium to the MRTMA market for the simple reason that if it was, MMFLA cardholders would simply buy from the adult use market. The fact that the MMFLA market is a subset of the MRTMA market means that MMFLA product will always be priced as a discount compared to the MRTMA market.
What Does the Future Hold?
Michigan retail sales have been relatively steady; however, wholesale sales have dropped to $2,500 a pound. We believe that wholesale prices and sales will recover due to dispensaries’ need to replenish supplies, and will be in higher demand due to both delay in production of new facilities and the phasing out of caregivers from the system. But this won’t happen overnight. We still need to work through the massive amount of “caregiver” product that recently entered the marketplace.
In the short term, once the out of state product has been filtered out, prices will rise again. This is mostly because people have either consumed their COVID-19 stockpile, or the illegally sourced out of state product will no longer be available.
However, once things start going back to somewhat normal, with social distancing bans being eased, and people being allowed back into public spaces, the construction of new facilities will continue. In fact, many of my cannabis business law clients’ facilities are continuing constructing their MMFLA and MRTMA facilities during the shelter in place order. Eventually, when these new facilities open, more product will be available, causing an inevitable long-term decline in the price of wholesale cannabis in Michigan.
I am often asked to predict the future price of cannabis in the wholesale licensed market. My cannabis business law clients constantly ask me what I think the price will be in one year, or what the price will be in five years and beyond. While I don’t have a crystal ball, I do have the benefit of looking to other states to see how the price has evolved under similar regulatory schemes and timelines.
For the Michigan cannabis market, the best analogue by far is the Colorado cannabis market. Colorado legalized adult-use marijuana well before Michigan and saw their first dispensary sale in January of 2014. The State then saw the prices decline over several years to eventually bottom out at about $800 per pound in 2019, before rising to about $1,000, where it is has mostly held steady. The same scenario is likely in store for Michigan.
Keep in mind, however, that there are now three different cannabis wholesale markets in Michigan—caregiver, MMFLA and MRTMA. That means there will be three different wholesale prices, with MRTMA being the most expensive, then MMFLA followed by caregiver product.
As a grower, this means you will want to get into the MRTMA market as soon as possible. That could either mean adding an MRTMA license to your MMFLA facility, or if you are a caregiver, transitioning your grow to a Class A or MRTMA microbusiness license. In short, Michigan cannabis growers will need to stay ahead of this curve in order to get the best price for their products.