Cannabis: Commodity Price Decline Impact

Given approximately appropriate climatic conditions, cannabis grows like many other plants.  An experienced cultivator can grow fields of cannabis much like they would spinach or kale with one key difference in outcome – a pound of spinach retails at $3.83 while a pound of cannabis retails at over $5,100.  A hop farm can fetch $25,000/acre, while the same farm repurposed to grow cousin cannabis can fetch upwards of $5,000,000.

A value of $47,700,000/sqkm makes cannabis the most lucrative cash crop around; this compares to tobacco at $277,000/sqkm.  The spread of legalization has been accompanied by steep price declines, a trend we expect to continue into the foreseeable future.  Traditional agriculture will only continue to shift production in this highly profitable direction, narrowing the behemoth gap in profitability among its current options.

Cannabis prices plummet in 2016

While we have seen a slight uptick in price when recreational laws are first enforced, supply increases rapidly and prices begin to fall at a remarkable rate.  In 2016, the average asking price for a pound of recreational cannabis fell 38%, compared to a 24% decline for a pound of medical cannabis (data provided by Cannabase).  As the market continues to reach equilibrium, we expect to see similar margins to other agricultural options.

We see outdoor cultivation with light deprivation becoming the primary way cannabis is cultivated in the years to come.  This allows a cultivator to harness the full energy of the sun while maintaining control over other influential environmental factors.  Thus, any company competing with the sun has an uphill battle in the long run.  Indoor cultivators, indoor grow equipment companies and regional power companies will be disproportionately impacted as commodity prices continue their decline.

Sectors poised to benefit from a steep commodity price decline include those that can maintain retail pricing strength that also use cannabis as raw material.  Branded edibles companies, tincture manufacturers, extract makers, and gourmet infused product suppliers are amongst those who could experience margin growth.  A pricing ripple would also likely increase demand for greenhouse production, cultivation supplies, grow data, and cannabis specific nutrients.

While these are just a few of the sector implications of a commodity price decline, the biggest potential for growth in our industry is in the relatively untapped health, wellness, and pharmaceutical medicinal markets.  The growing potential to create cannabinoids without the need to grow cannabis offers a large opportunity for those who can effectively compete on production cost.

In the long run, it remains economically unfeasible to compete with the free energy source that grows almost everything on our green marble.  

Posted on May 21, 2017 in Journal

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