As 2022 draws to a close, we are looking ahead to try and anticipate what
2023 has in store for the cannabis industry.
Missouri & Maryland
Voters in five states were asked to consider legalizing adult-use cannabis
and two states, Missouri and Maryland, voted to approve implementing adult-use
cannabis programs. These two states are home to approximately 12.3 million
people between them, dramatically expanding the population of people with
access to legal cannabis. These two new markets will likely see a flurry
of activity as licenses are issued and national players seek to increase
their market share.
Missouri voters approved Amendment 3 which established the State’s
adult-use cannabis program on November 4, 2022. The adult-use program
will be administered by the Department of Health and Senior Services (DHSS),
which is also responsible for the State’s medical cannabis program.
Beginning December 8, 2022, adults in Missouri have been allowed to legally
possess up to three ounces of marijuana.
Under Amendment 3, current medical cannabis operators are eligible to submit
requests to convert their operations to serve medical and adult-use customers.
Thanks to this provision, individuals in Missouri could be able to purchase
adult-use cannabis as early as February 2023. Individuals and businesses
who do not currently operate medical cannabis businesses will be able
to apply for an adult-use microbusiness license beginning in June 2023.
In November, Maryland voters approved Question 4 legalizing adult-use cannabis
in the state. Under the new law, adults 21 and older will be able to possess
up to 1.5 ounces of cannabis flower, 12 grams of cannabis concentrate,
or any amount of cannabis products that contain less than 750 mg of THC
starting July 1, 2023. The regulatory framework governing the adult-use
cannabis program in Maryland will be created during the 2023 legislative
session which runs from January 11 to April 10, 2023.
Given the fact that the rules and regulations for the program still need
to be developed, a full-fledged adult-use cannabis industry likely won’t
take root in the state until 2024. This could occur earlier if the State
of Maryland gives current medical cannabis operators priority position
to serve the adult-use market as other states, including Missouri, have
done when implementing their adult-use programs. However, nobody will
know how many licenses will be issued and who will be eligible to receive
one until the Maryland General Assembly finalizes the program’s
Oversupply and Downward Price Pressure
In the early years of the cannabis industry, everything was “up and
to the right” i.e., experiencing a state of consistent growth. However,
as many of the early adopting states start to reach a state of market
maturity, we are seeing that the traditional rules of economics apply
even in the cannabis industry. In particular, much of the industry is
likely in for a thorough lesson in supply and demand in 2023.
Growth in Cultivation & Production
As more adult-use markets move towards maturity, cannabis cultivation and
products manufacturing capacity has greatly increased in many states.
Most states start off with a deficit of cultivation and manufacturing
infrastructure when the begin their adult-use programs which initially
results in high wholesale prices for cannabis flower, trim, distillate,
and other cannabis concentrates. High wholesale prices incentivize investment
in cultivation facilities and manufacturing facilities as operators rush
to capture their share of the available market.
Many states are reaching a point where production capacity is rapidly catching
up to the needs of the market. As long as wholesale prices remain high,
operators continue to invest in cultivation and products manufacturing
which increases the amount of cannabis available for purchase. At some
point however, the market adjusts to the increased production and reflects
it in the wholesale price.
Supply > Demand
When production capacity exceeds total demand, the market inevitably begins
to intervene as cultivators and product manufacturers compete to sell
their products. Given cannabis’ four-month crop cycle, it is difficult
for cultivators to simply stop production when wholesale prices begin
to drop. Many cultivators are forced to continue growing their crop through
to harvest even in the face of declining prices leading to an even greater
amount of cannabis on the market.
The increase in cannabis production capacity eventually causes a glut in
supply of cannabis product on the market and results in downward pressure
on wholesale prices in these markets. This oversupply in the market leads
to a race to bottom for producers as they are forced to sell their product
at lower and lower prices in order to stay afloat. In a case of extremely
bad timing, inflation looks to continue to increase the cost of cultivation
and product manufacturing inputs while wholesale prices continue to decline.
As individual state markets continue to mature, the number of small operators
will likely decrease as the industry consolidates. Mom and pop businesses
will slowly be replaced as large operators emerge in-state and multi-state
operators continue to expand into new markets. Downward pressure on wholesale
cannabis prices will likely exacerbate this trend as smaller operators
struggle to compete with reduced profit margins.
Price Wars & Small Producers
In a business environment with reduced profit margins, operators with large
balance sheets and operators with low cost of production are most likely
to survive and thrive. As profit margins decline across the industry,
inefficient operators are unable to turn a profit at market prices and
must either improve their operations or go out of business. This is creating
the conditions for consolidation as efficient and/or well-capitalized
operators already operating in the industry are perfectly positioned to
increase their market share at the expense of inefficient, failing operators.
While increased supply of cannabis and lower wholesale prices are typically
a boon to retailers and consumers, low prices squeeze the bottom line
of cultivators and processors. Larger, more efficient operators are better
able to withstand reduced profit margins, but smaller mom and pop operators
will be disproportionately affected by declining wholesale prices and
may be forced to close up shop. This will create opportunities for more
efficient and better-capitalized operators to acquire additional assets
and market share at bargain prices.
Growth of MSOs
In 2022, multi-state operators (MSOs) completed a number of high-profile
acquisitions and dramatically expanded their operations across the country.
These acquisitions furthered the trend of large MSOs capturing market
share at the expense of smaller competitors. Continued downward pressure
on wholesale prices in certain markets will likely further this trend
towards consolidation throughout 2023.
Increased consolidation favors MSOs thanks to their economies of scale,
exposure to multiple state markets, and the size of their balance sheets.
This small handful of businesses are best positioned to take advantage
of price instability in various state markets and acquire new assets at
distressed prices. It is safe to assume that these MSOs will continue
to grow through acquisition, resulting in further consolidation of the
cannabis industry within these companies.
Brand Development & Expansion
Brands are becoming increasingly important with cannabis consumers, especially
in more mature markets. More and more cultivators and products manufacturers
are reacting to this and investing in developing their brands. These well-developed
brands are an important asset as operators look to expand beyond their
One way that smaller operators are able to compete with bigger, better
capitalized businesses is by licensing brands and products in other states.
This allows product manufacturers to compete in and gain exposure to new
markets without going through the licensing process, building out a facility,
and developing new sales channels in each state. Thanks to the relative
ease of entry through licensing, it is becoming increasingly common to
see established brands from Colorado, California, and other established
markets in dispensaries nationwide.
As producers in other states expand their brands into new markets, local
operators are forced to compete at that level or lose market share to
out-of-state rivals. This has the potential to create a “Red Queen”
scenario in which operators must continuously adapt and evolve their brand
and product offerings in order to stay relevant. Businesses throughout
the cannabis industry will likely continue to invest in brand and product
development in order to maintain and gain market share in each state.
Continued Gridlock in DC
Any hope of cannabis reform coming from Congress in 2023 likely died on
election day when the Republicans acquired a thin majority in the House
of Representatives. In this new era of divided government, it seems unwise
to put any faith in Congress’ ability to pass much legislation at
all, much less meaningful cannabis reform. Considering how contentious
votes for the continued funding of the government are, it is difficult
to imagine the legislature passing any of the cannabis reform bills that
have been circulating Washington for the last several years.