Cannabis Crunch

Joan McGuire

Despite inflation, cannabis prices are falling — putting Oregon’s once-thriving pot industry, and government programs that rely on it for tax revenue, in a sticky situation.

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According to the OLCC market report released this month, the wholesale price of a pound of useable marijuana in June had dropped by nearly half of what it was last year. ($1,299 versus $698). Retail prices have also dropped 20% year-over-year, despite inflation reaching 9.1% in June.

Jeremy Kwit, founder of the Bend-based cannabis retailer Substance, says inflation means his customers have less discretionary money to spend on his products. And although his operating costs have increased, he tells Oregon Business that he has lowered prices in order to keep customers coming back.

“Wealthy people can take yoga classes and eat at fancy restaurants when they want to feel happy, but cannabis is a working-class drug,” says Kwit. “We know individuals are suffering, so as a community resource we have to provide them with the lowest prices possible so they can afford to consume.” 

Substance Cannabis Market in Bend. Credit Substance Cannabis Market

Kwit was in the process of opening a new location in Cottage Grove when, he says, inflationary pressure increased his expansion costs by nearly 30%.

Competition with large out-of-state retailers and the illicit market, as well as consumers buying smaller amounts of product, meant scaling up the company would give it the best chance to succeed. But a tight labor market, combined with increased costs and decreased revenue, also made it difficult to grow.

“We made 30 calls to surveyors along the I-5 corridor and none of them called us back. Finally, someone said they would do the work but it took them three months for the proposal and three months to get onsite and do the work. But their work was terrible, so we had to hire a new one,” says Kwit. “That’s 12 months just to get lines on paper. That impacts my ability to run our business, let alone expand. We might literally lose out on our ability to open stores in other cities because we have been unable to produce city planning documents.”

Meanwhile, Kwit still operates without access to national banking systems, one of a myriad of regulatory challenges facing cannabis suppliers.

“It’s like one of those silly television game show shows where you have to scale over things with a rope and there are obstacles trying to push you into the water,” says Kwit. “We’re all climbing a wall in the cannabis business, I’ll tell you that.”

Bethany Moore, communications director of the National Cannabis Industry Association, told OB via email that the market fluctuations were a “normal part of the growing pains of any emerging industry.” Moore acknowledged the specific challenges Oregon cannabis businesses face competing with the illicit market, which makes raising prices to keep up with inflation more difficult.

She says after an extremely profitable 2020 and 2021, market forces and federal inaction on cannabis reform are making growers and retailers feel the squeeze.

The Cannabis Administration and Opportunity Act (CAOA), introduced last week by Senate majority leader Chuck Schumer and co-sponsored by Senate finance committee chairman Ron Wyden (D-OR) and Corey Booker (D-NJ) would remove cannabis from the federal list of controlled substances. The bill joins other frozen federal legal action to ease restrictions on cannabis businesses, including the SAFE Banking Act, and the MORE Act — which would allow the cannabis industry to operate like other industries.

Senate Republicans have threatened to filibuster all three pieces of legislation, though some polls say most Republican voters support cannabis legalization according to some polling figures.

The cannabis industry’s struggles will likely cause budgetary problems for states that have legalized the drug. State economist Josh Lehner tells OB that lower cannabis prices could lead to a “moderate slowing” of tax revenue generated by the industry.

“The drop in prices is having a clear impact on tax revenues,” says Lehner, who adds that while his economic forecast did anticipated a decline in tax revenue for the cannabis industry, the dip may be from inflation rather than from consumers shifting their spending habits in the wake of COVID-19, as his previous model suggests.

“We expected a decline in tax revenue, but it may be that we are getting the forecast correct for the wrong reasons.”

For Kwit, the only option is to keep moving forward. He compared Oregon’s cannabis industry to its craft beer scene, where some of the state’s decades-old breweries have shut down due to competition and inability to scale. He adds that the struggles of cannabis retailers are the “tip of the iceberg” and that that cannabis supply chain is hurting all the way down.

He says labor costs and the cost of dealing with insects — which are a problem for farmers across the state this summer — have hurt growers as much as declining revenue.

Still, Kwit was upbeat about his company’s prospects moving forward. As of now, the Cottage Grove expansion is still full speed ahead.

“We’re running on fumes, but we’re not a distressed asset. We’re an efficient operation. There’s a lot of consolidation happening all around us, and we need to grow the business to make it a fiercer competitor,” says Kwit. “Those of us that are able to make it through this are going to be scrappier.”

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