Michigan's Plummeting Cannabis Prices: A Closer Look

It’s no secret that price compression has become a significant challenge for cannabis operators over the last several months.

One market that has taken a hit with plummeting prices is Michigan. In December 2022, the average retail price for an ounce of adult-use flower dropped to $91—an all-time low for the state's market. That number is a 51% decrease compared to $185 per ounce in December 2021 and a 74% decrease compared to $351 per ounce in December 2020, according to monthly sales figures from the state’s Cannabis Regulatory Agency (CRA).

© Data Courtesy of Michigan Cannabis Regulatory Agency

Despite prices declining significantly in Michigan, consumer demand has increased, and sales figures are record-breaking—leaving some to wonder about the forces behind Michigan's plummeting prices.

Race to the Bottom

Will Bowden, CEO of Grasshopper Farms, a Michigan-based premium sun-grown cannabis provider, says while there is no softening of demand in Michigan, the retail price per ounce and wholesale price per pound of flower is decreasing.

"They're losing money just to keep shelf space, and they think they'll be able to raise the price later," he says. "It's very hard to raise your prices later. When you lower your price, you've actually just set your new price. ... That's my philosophy." 

Bowden says one factor impacting prices could be that operators have trouble navigating a "transition period," which typically happens between years three and six of legalization, he says. Michigan launched adult-use sales in December 2019.

"So, when a market comes online, there is typically a natural occurrence where there is greater demand than supply. So that keeps the prices abnormally high, and that's why a lot of operators really seek to get into that year one and year two opportunity in any newly regulated state," he says. "But what I think happens is people don't always have their plan for the transition period. … and what happens is supply will eventually catch up to demand, and then you'll have people who will start having price wars so that they can try to carve out their piece of their market share."

He says this leads to that "race to the bottom," particularly at the wholesale level. According to Cannabis Benchmarks, Michigan's spot wholesale flower price averaged nearly $2,750 a pound in January 2021 and dipped 66% to $925 per pound in October 2022. That number increased slightly in December 2022 to $1,036 per pound, but so far in February has averaged $995 per pound.

"I'll focus on flower for a second, but this happens with all the products out there. So basically, what will happen is all the cultivators, regardless of discipline, indoor greenhouse or outdoor, will start dropping their prices down just to stay on shelves, and it gives a tremendous amount of power to the retailers to negotiate," he says. "The main thing that will impact that negotiation is consumer demand. So that's one of the things in the race to the bottom that happened, just pure supply and demand."

Bowden adds that operators may not be prepared to navigate normalized wholesale prices, which, in turn, causes them to sell the product at a lower price than the cost to produce it.

"They're losing money just to keep shelf space, and they think they'll be able to raise the price later," he says. "It's very hard to raise your prices later. When you lower your price, you've actually just set your new price. ... That's my philosophy."

Market Event

Bowden says another factor that can impact prices is a "market event."

He referred to one of the largest cannabis product recalls in Michigan to date, which happened on Nov. 17, 2021, when the state's Marijuana Regulatory Agency (MRA)—now the CRA—recalled more than $200 million in products tested by Viridis Laboratories between August and November 2021. At the time of the recall, that lab was testing as much as 60% to 70% of the products on the market, Cannabis Business Times reported.

The recall led to a court case where Virdis Laboratories sued the MRA and said it was "unjustified, prejudiced and retaliatory," CBS News reported. On Dec. 3, 2021, "Michigan Court of Claims Judge Christopher Murray granted Viridis Laboratories a preliminary injunction for a recall of products that one of its labs tested but denied a preliminary injunction for a recall at another of the company's labs." This decision led to nearly half of the recalled products being released, CBT reported.

Despite this, Bowden says the initial recall caused a lot of chaos among operators, as many were worried that they would not only be competing with other recalled product, but also product that wasn’t subject to the recall.

"So that created this panic, and prices dropped,” he said, adding that the price per pound for flower dropped from between $1,500 and $2,000 a pound to $300 and $600 a pound.

“That was more of a market event,” he says. “But at the same time, suppliers were producing enough to compete with each other. So, it's kind of a perfect storm.”

Bowden says that while he doesn't think the product recall is still impacting the market, it may have triggered that race to the bottom.

"It accelerated normalization and maybe a little bit beyond normalization ... but the way that at least supply works, your indoor growers are trying to turn five or six times a year, your pure outdoor growers maybe one time a year. We've cleared both of those hurdles, since then, so we're well beyond that market events supply, or the subject of that supply being an influence on today's market, but I don't think we would be where we are today without that market event," he says.

Increasing Supply and Demand

The number of cultivators in Michigan has also increased significantly in the past year, leading some to believe that oversupply is impacting prices.

For example, as of December 2022, Michigan had 825 active grower licenses for its adult-use market, as well as 133 excess grower licenses held by many of the largest companies in the state, according to CRA’s December 2022 report. Those numbers are almost double compared to December 2021, when there were 518 active grower licenses and 59 excess grower licenses.

"This is where it gets a little harder because the reports that Michigan puts out, they'll tell us how many cultivators are out there, but they're not saying what each cultivator is doing with their product, meaning most of the outdoor farms are pure biomass farms because they're not able to actually grow flower that's going to be able to sell out there at a price that makes sense for them," Bowden says. "So that's one thing we must consider when talking about this."

He says that the CRA's reports also don't show which cultivators may be slowly ceasing operations.

"It's hard to predict some of those things at this stage in the market," he says. "I think what's happening is that starting with that recall, we started the clock on an 18- to 24-month window in which people are going to exit out slowly. They're just trying to grab revenues before they do with existing products, existing growth, things like that. I think that this year will be the last outdoor grow for some of the folks who are doing outdoor grow. I think that we're going to see a change in that."

While there is an increase in supply, there's also a significant increase in demand, aside from the medical market, Bowden says. For example, Michigan retailers sold a record high of cannabis products in December 2022, bringing in $221.7 million—with more than $208 million coming from adult-use sales, CBT reported.

Furthermore, CBT reported that Michigan's total medical sales for all of 2022 declined almost 47% from 2021, which is also tied to falling prices.

"The caregiver numbers are declining because the price of cannabis has gotten so inexpensive at the retail marketplace [that] it's now cheaper to actually purchase cannabis than it is to cultivate it and grow it yourself," Rick Thompson, owner of the Michigan Cannabis Business Development Group and executive director for Michigan NORML, recently told CBT. "So, people that were utilizing the privilege of growing in order to save their patients money are no longer doing that; it's not advantageous."

As the average flower price per ounce continued to decrease, the number of qualified caregivers and patients started to dwindle. As of Dec. 31, 2022, there were 179,863 qualifying patients and 19,053 primary caregivers approved in Michigan—a significant decrease compared to Jan. 31, 2020, where there were 267,068 patients and 36,136 caregivers, according to CRA data.

Despite this, the increase in consumer demand continues to outpace the falling dispensary prices. For example, adult-use retailers sold 68,432 pounds of flower in December 2022 and nearly 523,000 pounds of adult-use flower in total for 2022—representing a 181% increase compared to 2021, CBT reported.

Navigating the Market

To navigate this market downturn, Bowden says that Grasshopper Farms has worked to differentiate itself in the marketplace and focuses on creating high-quality products for its consumers.

"First and foremost, you have to deliver a great product that is accepted by your retailers and accepted by the consumers," he says. "You have to talk to both of those groups differently to make sure they know who you are, what you're doing, and know what to expect when they get your product."

Bowden adds that product consistency is key and that your retailers and consumers should always know what to expect when they purchase/consume your product.

Moreover, he stresses the importance of being strategic with your pricing strategy.

"So while there are farms out there who are selling somewhere around $350 a pound, we have never dropped our prices below the $500 to $700 range depending on the quantity that they are buying because we're confident in our product, and consumers at this point are confident in our product too," he says. "All of the retailers we sell to, they sell out in four to six days after they get our product, and that's regardless of the quantity that they have on their shelves."

He also mentions that a solid business model is crucial as supply continues to increase.

"I do not think that we have too much supply in the state of Michigan; I think that there's plenty of space for people," he says. "It's a matured market now, even though it's still young, it's matured, which means now you've … got to have a business plan; you've got to have a sales and marketing plan; you've got to have a plan for your inventory, and how you manage your inventory."

Bowden says he thinks Michigan operators will either start to stabilize or exit this year.

"I think we'll start to see if the prices might change a little bit based on operators who are able to sustain a viable business," he says. "I don't know how much further the wholesale price will go up. It might just kind of sit where it is right now, but I don't think it'll go down more, though, at this point.

"I think that what's going to happen is, if there is anybody else who comes in and tries to saturate the market, I think they're going to have to make a name for themselves, and this is where that sales and marketing plan better be a part of your business plan. And you better be able to speak about your company so that people know what they're getting. And then you have to be consistent with your supply."

Editor's Note: This article was originally published at 4 p.m. Feb. 14 and was updated Feb. 15 at 11 a.m. to reflect wholesale prices in Michigan.