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The economics of pot: Price of cannabis flower drops 50% from last year

Basil McMahon, a wholesale buyer and chairman of the Nevada County Cannabis Alliance board, talks about some of the challenges facing the legal cannabis industry. Prices for wholesale cannabis have dropped, meaning profit margins for growers and sellers is becoming narrower.
Photo: Elias Funez

The green rush appears to have found a choke point.

Last year, Elevation 2477’ — currently the sole legal cannabis retailer in Nevada County — purchased cannabis flower by the pound for $1,100 to $1,200. According to a wholesaler who works for Elevation Distro, a business that operates above the dispensary with a distinct license, prices have dropped by 50% this year.

“Wholesale flower prices that we are seeing right now around the state are closer to $450 to $600 for freshly harvested, high quality sun grown,” said Basil McMahon, who also chairs the board of the Nevada County Cannabis Alliance. “Last year at this point in the season, we were looking at prices around $1,100 to $1,200.”



McMahon said he expects prices to drop further and cultivators’ profit margin to narrow even more post-“Croptober” — the fall harvest period when a lot of sun grown flower comes onto the market.

Although others rejoiced during October’s heavy rains following the Nevada Irrigation District’s third driest year on record, cannabis growers committed to cultivating a second round this growing season were forced to cut some plants down prematurely to avoid waterlogged buds.



A pair of employees weigh out cannabis products being packaged into 3.5-gram pouches this week in Nevada City.
Photo: Elias Funez

For some, the late October rain interrupted a full second growing season. If cannabis is too wet, it molds, making it difficult to trim and dangerous to smoke.

But even before the unseasonal autumnal moisture, the market was a sensitive place to do business, McMahon explained.

McMahon said working in bulk flower sales requires that he keep in touch with local farmers and wholesale buyers around the state.

“It is a very challenging market environment for Nevada County’s small permitted farmers,” McMahon said. “There are, of course, always fluctuations in wholesale price to be expected with the changing seasons — but this year, there has been a strong, steady downward price trend since May, which cannot be attributed to ordinary, seasonal supply and demand.”

OVER-SATURATION

McMahon said growers are making less money per pound than previous years because the suppliers’ market is over-saturated.

“The steep drop in price is due largely to a dramatic increase in the volume of cannabis production coming from other areas of the state,” McMahon said.

Not only are more cultivators starting cannabis business ventures for the first time, but more established cultivators are becoming licensed.

A pound of cannabis strain Sour Diesel is ready to be weighed into smaller amounts to be distributed and sold at area dispensaries.
Photo: Elias Funez

“Large farms, some of which are cultivating dozens or even hundreds of acres of canopy, are contributing to a situation where far more cannabis is being cultivated by licensed cultivators than is being purchased by consumers at licensed dispensaries,” McMahon said. “This has caused a glut of supply and a crash in the price, which tends to impact the smallest farmers — like those permitted in Nevada County — the hardest, while big farms are often able to take advantage of economies of scale and afford to sell their crop at a discount.”

McMahon said the dramatic cut in prices was “entirely predictable” given that other states with legalized recreational cannabis endured the same phenomena in the first few years of regulation.

Compared to Colorado and Washington, however, California already had a broad base of “very small cannabis farmers, tucked away in the hills, which were — and still are — the economic engine powering the traditional cannabis market.”

McMahon said state regulatory policy could have done more for the people who paved the way for the business — “California’s legacy small farmers.”

“State regulations to cap the amount of acreage cultivated by any single individual or business were jettisoned,” McMahon said. “Meanwhile, farmers wishing to organize into Cannabis Agricultural Cooperatives to compete against the biggest players are still restricted to those acreage caps.”

McMahon said that, fortunately, the quality of Nevada County’s cannabis product speaks for itself, and will help local growers endure fluxing prices.

“Nevada County farmers are known in the market for growing higher-than-average quality cannabis,” McMahon said. “Unfortunately, still, at the small scale which is permitted in Nevada County, it can be difficult to compete.”

McMahon said there are some local farmers who wish to increase their canopy size and, if they are in good standing with the county, McMahon believes that should be able to.

McMahon said farmers looking to diversify their end-product and engage directly with their consumers still face cultural stigma and policy hurdles.

“Other local farmers are seeking to differentiate their businesses by making value-added products on the farm and/or find opportunities to connect with consumers directly, like at farmers market-style events,” McMahon said. “We want to see a vibrant supply chain of small businesses that can endure through what is likely to be another difficult year or two, and to do that.

Wholesale buyer Basil McMahon shows off an Elevation 2477’ cannabis flower for sale called La Bomba.
Photo: Elias Funez

“We need to be proactive about supporting the community of small farmers who have taken the courageous leap to get legit and partake in the legal market. When the time comes that the federal government finally gets around to legalizing and regulating cannabis, I remain confident that Nevada County is among the best places in the nation to be.”

SUPPLY AND DEMAND

“Prices are down because production is up,” said Jon Oleson of Sierra Sol farm. “You could blame it on the big farms in Santa Barbara, and that’s probably partly true, but people entered into the market with projections in mind.”

Oleson, part of the Grass Valley Growers Co-op, said 2020 was a great selling year because people were “sitting at home with their stimulus money.” This year, with an increased interest in cultivation based off last year’s numbers, cannabis cultivators were unable to offload last year’s product in the two crucial selling months before 2021 harvests begin.

“We’re still stuck with last year’s stuff, so we’re selling it at a super discount,” Oleson said, adding that “it was nice to know there’s a market for all the price tiers, but instead of $13 an eighth – which is premium price for product — we’re selling for $6 an eighth. We’re just covering costs, or selling it so it’s not a loss.”

Oleson said less profitable years like this one are why he is so eager for smaller, artisanal cannabis cultivators to organize better among themselves.

“Many hands make light work,” Oleson said, adding that different farms in Nevada County have already banded together over permaculture-based growing practices and an interest in sustainable packaging.

Rebecca O’Neil is a staff writer with The Union. She can be reached at roneil@theunion.com


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