California Cannabis Market Saturation Analysis
Since pioneering the cannabis policy reform movement in 1996 with Proposition 215, the California cannabis market saturation has been rising. The state’s cannabis production has increased tremendously over the years, and now, with so many marijuana farms, it’s growing too much product.
According to a 2019 cannabis harvest projection, if something isn’t done soon, this market saturation will devastate the industry.
In 2019, Vessel Logistics, a cannabis distribution company based in San Francisco, revealed that more than 1,142 acres of cannabis farms in Cali have state permits. This allows these farms to produce as much as 9 million pounds of crop per year. However, the permitted wholesale market was only capable of supporting around 1.8 to 2.2 million pounds.
“Thus, even when a 50 percent cut in production is accounted for, significant oversupply is unavoidable in 2019,” the report said.
Fast forward to 2021; we’re seeing the cannabis sector in California continuing to thrive. After being deemed “essential” during the pandemic, the industry continued its operations. However, companies with more capital have been benefiting far more than the smaller shops.
Cannabis Industry Journal reported that supply chains are becoming more complex, pushing the smaller operations out as the larger ones dominate the market.
As competition becomes more intense among manufacturers, many cultivators have found it challenging to continue supplying per local and state regulations. The main issue has been track-and-trace requirements.
Intense competition could decrease California’s cannabis market saturation by pushing these smaller shops out of the market. Some of these small business operators are likely to move to other jurisdictions to find more tolerable regulatory and tax rules.
Regardless of such, since 2019, we’ve seen an impressive uptick in cannabis consumption in California. According to the Visual Capitalist, from 2019 to 2020, adult-use cannabis sales nearly doubled, and California is on track to sell over $6 billion worth of cannabis in 2021.
While consumption is obviously on the rise, other changes in California’s cannabis sector will contribute to more saturation. For instance, the U.S. Senate might pass legislation that will give cannabusinesses access to traditional banking and financing services. This will make these operations easier to finance and operate and add to their legitimacy and desirability.
With access to traditional banking and financial services, companies will begin looking at affordable debt to scale. If full federal legalization happens, we’ll see interstate and international cannabis distribution open as 280E tax restrictions are lifted.
However, we could see the California cannabis market need more product to satisfy demand. As cannabis consumption increases due to the pandemic, the market should demand more product. This also doesn’t consider that, as the cannabis Mecca of the U.S., California will begin serving product throughout the country once full federal legalization happens. Then again, as pharmaceutical companies continue stepping in for their piece of the market, saturation may increase.
As more cultivation opportunities come about as agricultural counties liberalize their cannabis cultivation policies, we can expect more saturation, too. These counties may start permitting more acreage and begin streamlining permit processes.
Even though some neighborhood groups will offer some pushback, these farms are operating sustainably without issue throughout the state. On the other hand, we’re also expecting to see some innovations in pest-and-disease control, outdoor growing techniques, odor reduction, and seed breeding that will allow farm expansion and distribution.
Budget gaps could also demand more cannabis businesses begin operating. As cities and counties revisit opening their borders to cannabis retail storefront and delivery, they’ll look to start offering or expanding the number of licenses they’ve made available. New dispensaries are sure to pop up and begin distributing the massive influx of legal cannabis flower and products.
As the market grows and becomes more saturated, we can also expect prices to drop for cultivators selling their product wholesale. More licensed cultivation projects have begun this year, and though the growing demand might outpace supplies in the beginning. By the third quarter, supplies are likely to saturate the market. The one exception is expected to be premium flower.
California’s illicit market will also offer undercut pricing. Legal growers must comply with state and local regulations, which forces their costs higher. Despite these issues, cannabis is still one of the most profitable crops on a per acre basis, so we can expect market saturation to continue as more people grow it.