Despite its surface appearance, California’s licensed cannabis market is growing, and legalization is working, according to a state report the Department of Cannabis Control (DCC) commissioned and issued to state lawmakers on March 3.
The California Cannabis Market Outlook, 2024 Report, prepared by ERA Economics LLC, provides a snapshot of industry conditions, from production capacity to consumption trends, pricing shifts and growth opportunities within the regulated space. It also provides insights into the size of California’s unlicensed market as well as an overview of the hemp market.
The report can be downloaded here.
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So, what’s going on in the market?
“There’s a lot of different conflicting information sometimes,” ERA Economics Principal Economist Duncan MacEwan told media members on Monday.
“We keep an eye on the news and what’s going on in different segments of the market in the office here, and there’s a lot of different data points,” he said. “We could see a headline that shows a very different market size than a headline that comes out just the next day.”
Often pointed out in the media, business conditions have become difficult for licensed California operators since a market peak in late 2020 and 2021, when the average wholesale price was more than $1,300 per pound for dried flower and statewide retail sales hit an all-time high of $5.35 billion in 2021, according to the DCC.
Inflation-adjusted wholesale cannabis prices as of the fourth quarter of 2024 are down 57% compared to average prices in Q4 2020, according to the report. More specifically, indoor prices dropped 46%, outdoor prices decreased 74%, and mixed-light prices took a 60% dip.
Similarly, the average retail price for half an ounce of dried flower is down 37% during that same period, from $74.34 to $46.84, according to DCC data.
Considering price compression, unrelenting taxes and fees, licensing requirements and banking restrictions, legalization has not worked by myriad metrics for many businesses whose profit margins have been gobbled up by the added business costs associated with the industry.
“There’s definitely some struggles for individual businesses that have been managing with lower prices, which has driven some of the consolidation that we’ve seen in the industry,” MacEwan said.
However, amid the growing pains of a program that didn’t exist a decade ago, the economist said he’s optimistic for the future of California’s cannabis industry as licensed production and consumption continue to grow and as consolidation leads to a more stabilized marketplace.
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Although the average number of active licenses dropped 18% from 2023 to 2024, MacEwan pointed out that licensed cannabis production spiked by 11.8%, the nominal wholesale value of cannabis increased by 7.5%, and units sold at retail increased by 5.2%.
“The industry is actually growing,” he said. “Production is up, but unit prices for that production are down a little bit. So, the gross value of the industry is down. And so, this is really just a function of decreasing unit prices.”
While some may view the falling prices and license numbers as signs of a failing market, wholesale and retail prices have largely stabilized in the past year, and supply and demand are on an upward trajectory, according to the report.
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Specifically, licensed operators produced roughly 1.4 million pounds of cannabis (dry-flower equivalent) that was consumed in 2024, representing roughly 40% of the estimated 3.8 million pounds Californians consumed in total, according to the report. This means about 2.4 million pounds were supplied from unlicensed operations.
Overall, ERA Economics estimates that an average of 11.4 million pounds of unlicensed cannabis is produced in California each year, meaning an estimated 9 million pounds is trafficked out of state. However, ERA’s confidence interval for the illicit market is 7 million to 16.3 million pounds, meaning the estimate isn’t precise.
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By ERA’s estimate, the total wholesale value of unlicensed cannabis production is around $11.9 billion annually, with $2 billion being consumed by Californians and $9.9 billion being exported. The retail value is much larger.
In addition to the ability to export, the unlicensed market also has a competitive advantage in lower production costs, including the absence of licensing fees, and taxation and regulatory constraints imposed on licensed operators.
“Increasing efforts by both the [DCC] as well as other state agencies, federal and local authorities, help put pressure on eliminating the illicit market production,” MacEwan said. “Anything that increases the cost of producing in the illicit market is good in that it pushes folks towards the licensed market.”
Despite the unlicensed market still controlling the majority share, the report indicates that the licensed market is catching up as more stores open, as the DCC continues to pursue policy interventions that reduce financial burdens on licensed businesses, and as enhanced enforcement efforts crack down on unlicensed operations.
Educating consumers on the benefits of a licensed market will also help level the playing field, according to the DCC.
“We’ve made tremendous strides in strengthening California’s legal cannabis market, thanks to California’s leadership and our ability to adapt to the needs of businesses and consumers alike,” DCC Director Nicole Elliott said in a press release. “By reducing costs, expanding access, and strengthening enforcement, we’re creating a fairer, safer and more resilient industry. Our commitment to supporting the legal market and protecting public health is unwavering.”
In the licensed market, the wholesale value of cannabis produced in 2024 was $1.03 billion, according to the report, which also provides a snapshot of the total canopy capacity for each license type in the state.
The maximum licensed capacity in 2024 was 82.3 million square feet, while the reported canopy capacity—what licensed operators have built out—was 60.6 million square feet.
Although estimated yields per square foot by license type indicate California’s licensed operators could have produced roughly 4 million pounds of cannabis (dry-flower equivalents) in 2024 based on their canopy capacity, ERA estimates canopy utilization was roughly 36% based on the 1.43 million pounds sold at retail.
“Canopy capacity utilization in California appears to be comparable or lower than that in other states with licensed cannabis markets, based on limited information available from previous years,” according to the report.
Although taxes and fees, the illicit market, regulatory barriers and the general business environment for cannabis remain headwinds for California operators, opportunities await the state’s licensees, according to the report.
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- Growing demand for licensed cannabis eventually puts upward pressure on prices;
- Lowering local costs and removing restrictions can increase the number of retail locations, which can help pull consumers into the licensed market who would have otherwise purchased from unlicensed producers;
- Increased sales volume and consistently stable prices for value-added products such as edibles and pre-rolls show that there is growth potential for licensed businesses across the cannabis supply chain;
- The DCC is considering alternatives to the current license fee structure to redistribute fees and improve fee equity overall. The department is also considering changes to cultivation regulations, the California Cannabis Track and Trace (CCTT) system, and others. These help the licensed market; and
- Restricting or banning intoxicating cannabinoids derived from hemp would provide direct benefits to licensed cannabis cultivators and retailers by reducing the supply of substitute products.
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The report also includes a long list of policy recommendations for lawmakers to consider, from combatting the illicit market to lowering local restrictions, adjusting taxes and fees, reducing costs for licensed operators and increasing demand for licensed products.
So, is the market working?
“When we look at the data … yes, is the answer that we would come to because we’re showing production increasing and that’s the kind of bottom-line metric,” MacEwan said. “If we were thinking about any conventional commodity, what do you track when you’re looking at almond production in California or processing tomato production? You start at the farm: How’s that doing? How’s that moving? And the trend is towards a growing licensed [cannabis] industry.”
