Understanding the Price Drop in Wholesale Cannabis

Understanding the Price Drop in Wholesale Cannabis

Why Do Wholesale Cannabis Prices Drop Sometimes? from CannabisNet on Vimeo.

When something is prohibited by law, the street value of the substance increases. This is due to demand remaining the same, but supply being stifled. Simple economics.

Once the substance is legalized, in this case cannabis, the supply increases and as a result, the price will drop as the scarcity of the substance is lifted.

This is exactly what’s happening in the world of cannabis. Oregon has seen a significant drop in price to wholesale cannabis purchases. Last summer, the price per pound was roughly $1500. By October 2017, the price per pound dropped to $700.

There have been similar trends in other states that have legal cannabis on the books. The question we should be asking is; is this something to be concerned about?

Why the Prices Drop and Why it’s not a bad thing

The only people who are truly negatively affected by a ‘price drop’ are the people who make money off industry taxes.

Sure, wholesale sellers will also get a dip in their profit margins, however one should never take the inflated value of cannabis based on current prices.

The truth of the matter is that cannabis is a plant and anyone can grow it with minimal requirements. The actual value of cannabis should be similar to tobacco in terms of cost of production, especially sun-grown cannabis.

The only reason a pack of smokes costs so much is because of all of the taxes around it. Similarly, cannabis, if produced at the same volume of tobacco would be quite inexpensive to produce [comparatively].

The only reason why the price per pound is so elevated within the cannabis market is due to prohibition which inflated prices. Now that cannabis is being produced at a higher rate, with higher quality, the price per pound is dropping.

This will drive down the price per ounce and per gram as a result. The prices will eventually level out when the market establishes itself within the general consumer market. No one knows where exactly the price per pound will bottom out.

You’d have to calculate cost of production with roughly a 20% mark up to estimate what it would be. I don’t have those figures yet, however I will be investigating in the near future. Nonetheless, by looking at what tobacco farmers sell their pounds for at wholesale prices, roughly $1-2 USD per pound, we can see that the cannabis market is still way above this threshold.

Of course, we have to consider that tobacco is being grown at a much larger scale than cannabis currently. This is why there is still “scarcity” involved within the supply and demand chain. However, what would happen if we reach the proportions of tobacco farming in relation to cannabis?

It probably won’t ever get down to the $2 per pound margin because unlike tobacco, cannabis isn’t subsidized by the government. This means that there will always still be more costs involved in production, yet when the plant is fully legalized we will most definitely see another plunge in wholesale prices.

What does lower Wholesale Prices mean for consumers?

Consumers are the big winners when it comes to lower wholesale prices seeing that dispensaries would be able to lower their price on their products. It could mean that you could buy a pack of joints for $10 and a joint could go for as little as a dollar.

Ounces and everything in between will be dropping their prices too. The edible market will also become more cost efficient.

For medical cannabis patients that need large amounts of cannabis for their condition, this will drive your medical expenses even lower. Furthermore, with lower cost per pound, cannabis medicines will also drop in prices.

The only real “loser” here is the government that makes money through taxation. It would mean that they would have lower margins to work with. We can expect the government to play around with the taxes to maintain their profit margins, however ultimately the consumer market will dictate the sweet spot.

If taxes and costs are too high, people would easily turn back to the black market rendering the purpose of legalization void. I believe through the following years, as prices continue to drop on a wholesale level, the government will be trying to introduce a few new taxes here and there.

Despite this action, the price for the consumer will continue to fall until it bottoms out. The only thing currently standing in the way of this action is prohibition laws still on the books. Once this hurdle is removed, it will provide enough wiggle room for the industry to find it’s price point sweet spot.

All in all, we need to continue to watch the market to see how things will shape out in the future. For now, the price drop scare is a nonstarter. It’s just the market behaving the way it should behave post prohibition.