How to Survive in a Cannabis Market with Falling Prices

In a previous blog I wrote that in Colorado and other states large harvests of outdoor cannabis would depress prices.  That harvest is now hitting the market and we are seeing prices in the $400-$500.  The price of indoor pounds has fallen to $1,000 or less, down from close to $2,000 a pound a year or so ago.  This does not include the 15% excise tax that is the responsibility of the seller.

How do cultivation companies survive in a market like this?  First and foremost, know your costs.  Understanding your cost to grow a pound of cannabis is critical to surviving.  Whether you use a sophisticated cost accounting system, or simply divide your costs by the monthly yield, this is the starting point to good decision making.

Once you know your cost of production compare that to the market.  If your costs to grow a pound exceeds the market, it is time to make some tough decisions.
Consider the following:

• Should you stop growing completely?
• Should you renegotiate your lease with the landlord?
• Should you shut down temporarily and wait for prices to recover?

In markets with declining prices dispensaries without grow operations have the advantage.  They can purchase cannabis and cannabis products at market prices and try to maintain their profit margins.

Cultivators with long leases are at a disadvantage.  Getting out of a real estate lease may not be possible leaving default the only option with all the negative legal implications that entails.  One solution is to turn the property and the licenses over to the landlord and simply walking away and focus on the retail operation.

There are no easy answers here.  The reality is that many business models are not viable as the cannabis market matures and prices fall.   Large cultivation operations continue to achieve efficiencies that lower costs, making competition with them more difficult.

I think lower prices and consolidation is a trend that will continue. Stay tuned…

Article by: Jim Marty, CPA, CEO of Bridge West LLC. If you have any questions or would like to learn more about how Bridge West can assist with these tough decisions, please contact Jim Marty,  at 303-651-0304 or jmarty@bridgewestcpas.com.