In the first seven months of this year, Michigan sold more legal cannabis than it did all last year, in part due to the abundance of new sales locations operating in the state. But also, Michigan growers this fall are producing a record harvest with almost three times as many flowering plants in September 2021 as a year ago, and twice as many flowering plants in October 2021 as a year ago.
With so much supply hitting the market this year, many cultivators are trying to figure out if they can make a profit.
New Genetics owner Andrew Rost and Redbud Roots cultivator and dispensary owner Dave Murrary spoke with Grown In about the status of cannabis pricing and supply in Michigan’s saturated market saying those who want to survive will need to plan and cut costs.
“We’re sitting in the middle of “Croptober,” said Andrew Rost, owner of cultivator New Genetics, referring to the flood of outdoor crops coming to market. “It’s the time of year when prices are down,” Rost said. “It’s more drastic this year, than it was last year. I imagine it will be more drastic next year than it was this year because of the volume in the market.”
“The same reason they created the futures market years ago and the Chicago Board of Trade and a wheat contract and a soybean contract, everyone gets done with their crop all at the same time and so everyone comes to the marketplace at the same time,” said Dave Murray, owner of Michigan cultivator and dispensary Redbud Roots.
With the seasonality of the business, outdoor crops are produced once a year in October and November, flooding the market for six months and tapering off with a six-month shortage in the summer, said Murray.
“For operators just coming online, the key to survival will be getting their costs down as much as they can as quickly as they can,” he said.
Rost says everyone should have their chance in the market.
“Some of us are going to struggle and some of us are going to fail and some of us are going to succeed and that’s that,” he said. “It would be personally, better, for me if there were less. Obviously, if I were the only grower in the state that would be fantastic but I kind of like the fact that Michigan allows an abundance of licenses.”
Between December 2020 and July 2021, the number of active dispensary licenses in Michigan grew by 210 new licenses issued, for a total of 712 dispensary licenses in the state. Many of those licenses are doubled up in one location, since Michigan manages medical and adult-use licenses separately.
“The market will reach its own equilibrium,” Rost said. “When prices are $1,000 a pound, which is where we are now, investors are not going to want to build new grows here in Michigan. They’re going to want to go to Maryland or Florida or somewhere else where they still capture a premium.”
Since mid-summer, prices have declined in a big way, Rost said. In August the price for a pound of cannabis was $5,000 to $6,000.
Rost remains optimistic saying prices will go back up. At $1,000 a pound his company is profitable. However, it’s not an attractive market for outsiders to want to venture into to start something new with those prices, he said.
“If you’re already here and you’re already growing, you can survive on that,” Rost explained. “Last year it dropped down not quite as bad, but it dropped down to about $2,000 a pound last year.”
Rost describes New Genetics as a small operation with a hybrid greenhouse. His licenses allow him to grow 7,000 plants, which generates 80 pounds of cannabis every two weeks.
“I think people are surprised when they come to Michigan and try to grow,” Rost said. “It’s not like other places with the relative humidity. We have a lot of water here.”
People tend to have grandiose visions of what the industry is like and may not realize 40 percent of your costs are unexpected, Rost said.
“If you’re not expecting to spend 40 to 50% more than you think, then you’re not going to make it,” he added. “The general theme for 2021: No one’s having the time of their life right now, but it’s anticipated. Overall, it’s a dream come true and we’re all fighting to be one that’s still here in 10 to 20 years.”
He added that competition and croptober are challenges to growers but that patients ultimately benefit from access to high quality medicine at lower prices due to the additional supply that’s available.
Murray added there are always new growers coming in and there’s a bigger struggle in the Michigan market as well as in any other state with unlimited licensing.
“With unlimited opportunity comes unlimited struggle as well but you go into business with that in mind and understand it,” he added.
Michigan is going to become even more saturated with growers that came online this year and are coming to harvest right now.
“We’ll have to be ready for that kind of pricing volatility,” he explained. “Last year we saw pricing go down from $4,000 all the way to $500 a pound. I would anticipate a similar volatility in this market as well. I think for those just getting online, they’re going to have to be pretty quick and nimble to get their costs down as much as they can. If you produce a pound of cannabis for $700 to $800 a pound, you’re going to be able to survive. If you’re at $1,200 to $1,500 a pound to produce it, you’re probably not going to. It’s that simple.”
Murray’s cultivation operations are in Buchannan, Michigan. He understands the market fluctuations but still finds them concerning.
“You have people in this industry that are going to get pretty desperate and it’s like somebody trading stocks with no idea what the true value of the stock is,” he explained. “That’s kind of what you have right now. The value of the commodity itself is probably higher but because they’re in a pinch and need to make payroll or pay investors, or whatever that is, that makes them more desperate and more urgent and with urgency, comes pricing going down and they’ll take whatever they can get. That’s very concerning.”
Murray mentioned a grower who last year dropped his price down to $500 a pound.
Some growers, he added, will have to liquidate, and make decisions based on short term cash needs.
“At the end of the day, cash is king, and you need cash to run a business,” Murray said. “It’s very concerning, even if we’re doing things very well, what other people are doing definitely affects us. If customers are buying cannabis for $500 a pound, that affects us.”
As for dispensaries, Murray ultimately expects more than 1,000 of those across the state, from what he understands.
“It would be like having 30 Starbucks or 30 McDonald’s in a town,” Murray explained. “They’re not all going to survive. A lot of that will have to do with location. It really comes down to quality and who can produce at the most proficient price per pound or the cheapest. If you go after one of those and stay true to it, you’ll probably tend to do OK.”