The state generated $5.3 billion in legal sales last year, an 8.2% drop from 2021 and the first since the adult-use market launched in 2018. Here’s what that means for New York and other states.
Forbes Staff
OG Article: here.
View our Fair Use Policy: here.
Annual legal cannabis sales in California decreased for the first time since the nation’s biggest pot market launched recreational sales nearly five years ago. In 2022, legal sales reached $5.3 billion, according to figures released by the California Department of Tax and Fee Administration, down 8.2% from $5.77 billion in 2021.
Despite the drop, California still represents roughly 20% of the $26 billion industry. Many in the cannabis sector see the state’s high taxes and a limited number of dispensaries as the main culprits for the decrease, viewing the legal market as broken and dysfunctional. At a small farm near Garberville in Humboldt County, the heart of California’s Emerald Triangle, Johnny Casali is preparing a greenhouse full of mother plants for the upcoming season. Casali, the founder of craft cannabis brand Huckleberry Hill Farms, has long believed the legal framework is driving many longtime growers out of business.
“Most of us farmers have been trying to tell the state [regulators] that the marketplace is imploding,” says Casali. “The drop in retail sales means the customer is tired of paying the exorbitant taxes and are now buying it from a friend of a friend or the guy on the corner.”
Despite selling all of Huckleberry Hill’s product in 2022, Casali posted a $50,000 loss for the year. The main factor behind his rolling paper-thin margins is that the price per pound of weed has plummeted. The wholesale price in California is currently around $665 a pound, which is down 26% year over year, according to Cantor Fitzgerald. Since 2017, the year before legal recreational sales began in the state, and through last summer, the wholesale price of cannabis in California is down over 50%, according to New Leaf Data Services, an institutional-grade wholesale price tracker.
All of this means that California—which only has about 1,000 legal dispensaries for its 40 million residents—grows far more cannabis than can be legally consumed within its borders. The cannabis surplus has led to a price war in the legal industry and intense competition from the illicit market.
Casali says he’s hopeful as demand for this upcoming season is already strong. “We are already getting orders for this season,” he says. “But without federal legalization, I don’t know how we fix our supply-and-demand problem.”
An investor with positions in California and other states says that he is seeing greater exporting of cannabis from the Golden State, which is a federal crime. So instead of a bifurcated market within the state—one with legal and illegal operators—there is more interplay between the two. Legal companies are sending product to other states, particularly New York, in an effort to make ends meet. “No longer is this just rogue ghost distributors,” the investor says of the shipments of California cannabis leaving the state, “brands are now embracing it.”
The connection between California growers and New York’s market is a well-worn path. The marijuana economy has long had varying shades of legality as operators cross over from the illicit market to the legal market—and vice versa. As New York builds its legal market, the state’s gray and illegal cannabis economy has run rampant, thanks to little enforcement of unlicensed dispensaries in New York City and a never-ending stream of cannabis coming from California. But not everyone views the decline in California’s cannabis sales as a harbinger of greater turmoil in the industry. Pablo Zuanic, an analyst at Cantor Fitzgerald who covers cannabis, believes that mature markets like California experienced a revenue boost in 2020 and 2021 thanks to Covid-19. Now with lockdowns and stimulus checks a distant memory, inflation is also adding to the decline.
Zuanic does allow that “structural issues” such as high taxes and the illicit market contributed to the decrease last year, but he expects 2023 to rebound. He notes that there was “only” an 8% drop after a 23% jump in 2021 and a 68% increase in 2020. And, for those paying attention—despite an annual decrease—California is still the country’s biggest, and best, weed market. “We expect the market to continue to grow,” Zuanic wrote to Forbes in an email.
Graham Farrar, the cofounder of Glass House Brands, one of California’s mega producers with a 1.5-million-square-foot greenhouse in Camarillo, says he doesn’t think Californians smoked less weed in 2022 than in 2021. Farrar thinks the illicit market is simply outcompeting the legal market in terms of price and consumers are following lower prices. Farrar says he thinks a temporary tax holiday would help the industry.
“Nobody prefers bathtub gin, right? You only drink bathtub gin if legal gin costs twice as much,” says Farrar. “If we could bring taxes on the consumer down, I think you’ll see more people in the legal market. And I think you'd actually collect more tax revenue.”
Back in Humboldt, Casali says that if the legal market doesn’t provide enough economic incentive for longtime cannabis entrepreneurs, they’ll quickly go back to the black market. And with demand coming from New York and other states, the temptation is too great. “People who entered the legal market want to stay in the legal market and sleep well at night,” says Casali. “But if that's not possible, we lived long enough not sleeping well at night, and it wouldn't be that hard to return to their old ways.”
Comments