The Challenges of Making Predictions in the Ever-Changing Cannabis Industry

Cannablog by Brandon Van Asten, CPA, Bridge West LLC and Het Shah, New Leaf Data Services, LLC

Cannabis regulations are constantly changing in unpredictable ways. In New York, for example, the Compassionate Care Act of 2014 has undergone several changes affecting operators in the State since its inception. Over the past few years, there have been several new additions to the list of qualifying conditions, including chronic pain in 2016, PTSD in 2017, and cannabis as an alternative to opioids in 2018. This addition drove-up the patient count from approximately 14,500 at the end of 2016 to over 111,000 patients as of January 2020. See Figure 3 below from the November 14, 2018: Medical Use of Marijuana Under the Compassionate Care Act Two-year Report – 2016-2018.

In addition to the expanding list of qualifying conditions, in 2017 the state of New York approved five additional licenses, doubling the operators in the state. In 2018, the New York Department of Health approved wholesaling, which previously required operators to be vertically integrated. This update completely changed the landscape of the market. Because regulatory changes influence business strategy and pricing, operators need to be quick on their feet and always ready to adjust to the constantly changing environment.
On September 24, 2019, Massachusetts Governor Charlie Baker announced a public health emergency and put a four month ban on vape products in the state. The uncertainty around vaping has caused a slight decline in demand, forcing companies that focused on vape products to consider other product lines.
The recent addition of adult-use cannabis in Massachusetts and Illinois, which were previously medical only states, means medical facilities will now be competing with (or selling to) adult-use operations, which have a much larger market to serve. Adult use operators can more easily take advantage of economies of scale and medical markets are not as familiar with the seasonality component. In Oregon, as seen in the pricing from Cannabis Benchmarks®, when the 2018 outdoor harvests hit the market, we did not observe significant decreases per pound, as one might expect as this was likely already priced in to the selling price. Dispensaries traditionally have been working with select few growers who they trust or have a good track record of quality product. They are known for disciplined cultivation methods and they properly store their product to distribute year-round. Hence, there is not as much seasonality when lower cost outdoor harvested product hits the market. In 2019, you can see that the increasing prices leveled off as the outdoor harvests came in. In short, demand is high for quality product and the suppliers continue to charge a higher price. Prices fluctuations can be hard to predict.

The potential of federal legalization is always lingering in the background, which could result in the changes to 280E tax and open the borders between states and countries to do business. Eventually, with full legalization, the black market will deteriorate as legal cannabis becomes cheaper than street prices. Any federal regulation changes to cannabis would likely have a drastic impact on the current cannabis markets as U.S. companies are operating in their own little bubbles right now.
Often the regulatory changes in the industry have a downward impact on pricing, which is great for the consumers and patients. However, it is important that your business model is sustainable and prepared for significant market shifts. We advise our clients to plan for the worse and evolve their business models quickly as changes in the landscape occur.
Bridge West has been working with cannabis clients since 2009. Over the years, we have gained significant experience helping clients adjust and stay ahead of the many market shifts. If your business is currently operating without a forecast and budget, you are likely unprepared and unaware of the potential impact of market shifts on profitability. To learn more about how we can assist you in developing a forecast that can bring a deeper understanding of the market in which we operate, and how changes in the market affect your business model, email me at bvanasten@bridgewestcpas.com.
For those interested in detailed pricing trends in the cannabis and hemp industries, Cannabis Benchmarks® and Hemp Benchmarks® have been reliable sources of pricing information. They offer weekly U.S. and state-level spot prices and market commentary each week in their paid reports.
Visit https://bridgewestcpas.com/industry-affiliations to sign-up for the free U.S. weekly pricing reports or receive 15% off state-level spot price snapshot and premium weekly reports.