Robert Dodge has 4,500 recreational marijuana plants growing at his licensed facility in Burton, UBaked Cannabis Company, and works with about half of the state’s licensed retailers, but he’s finding it difficult to compete in an industry saturated with growers.
In Michigan, where the number of licensed growers is 35% higher than the number of recreational retailers at 711 to 526. With supply so much higher than demand, wholesale and retail cannabis prices have dropped significantly and fast. In many cases, prices are even lower than states that have been cultivating cannabis for a decade.
As of June, 1,285,248 recreational marijuana plants were being grown statewide by licensed facilities, up 71% from January, amounting to over 63,200 pounds. During that same time period, the number of retailers increased 17% from 449 to 526 while the number of growers increased 34% from 530 to 711.
This market imbalance is causing grower profit margins to tighten and many in the industry to question how long they can sustain their business as revenues shrink.
Dodge said the biggest challenge for him, and other growers, is the declining cannabis prices, which have dropped from $222 per ounce in August 2021 to $122 per ounce in June, as 45% decrease in less than a year.
It’s a number that has been dropping since adult-use marijuana sales began in Michigan in 2019. At that time, marijuana was selling for over $500 per ounce when the number of licensed retailers was twice the number of licensed growers at 26 to 13 with only 4,000 plants being grown statewide.
“The biggest challenge is trying to figure out how to maximize a gram of marijuana and get the most out of it,” he said. “I hope cannabis prices are at rock bottom prices right now, but I still think we have another three to four months before we really see the bottom. We’re really struggling as a company with the state issuing more grow licenses. Our revenue is down 60% month over month and we’re just trying to get out on the other end of this.”
Growing pains
Andrew Brisbo, executive director of the Michigan Cannabis Regulatory Agency (CRA), said the state has seen a dramatic increase in the number of grower licenses making it a much more challenging environment for businesses.
The CRA is the state government agency that issues marijuana licenses and regulates the recreational and medical industry,
“The grower side is expanding much more quickly, without the parallel increase in the number of retailers, which is contingent upon new municipalities opting in,” he said. “As the pace of new retailers and opt-in communities of that has slowed, the growers have not slowed their expansion efforts.”
In June, a total of 68 grower licenses were issued statewide compared with only 20 retailer licenses, according to state records.
Currently, there are 123 Michigan communities that allow for adult-use marijuana businesses, a number that has grown 13% since August 2021, while another 1,384 have chosen to opt-out, a number that has decreased 1% over that same time period.
Over the past 12 months, the state has seen a 150% increase in the number of growers, but only a 75% increase in the number of retailers.
“If policy keeps chasing the short-term trends in the industry, then equilibrium might never be achieved,” said Brisbo. “At this time, if the supply side continues to grow short of more retail locations, this is sort of what the market situation is going to be for the short-term. I think we’ll see that it starts to even itself out over time.”
Mark Jerant, who grows 450 marijuana plants at his business, Warren-based Epic Roots, said there is some value to competition, but added that the way the industry is heading is just not sustainable for smaller growers.
“I think you’re setting up a lot of people for failure with the number of licenses and the supply being so high,” he said. “We’re kind of teetering at the point of having too many licenses, but it’s really hard to put a finger on what the best solution is because you don’t wanna kill competition.”
Jerant said his sales are down with cannabis prices continuing to drop and with the increasing number of retailers going vertical by also becoming their own grower and processor.
Providing some relief to growers are the changes in the CRA’s regulatory fees, which Brisbo said, have been lowered every year since they’ve implemented the program both on the medical and the adult-use side.
“We’re always looking at the regulatory landscape and trying to address concerns,” he said. “We can make changes to improve the business climate as long as it’s not sacrificing the health, safety, and welfare of the public.”
Due to this saturated grower market, Dodge said his sales are down and he’s not turning a profit with a $30,000 to $40,000 sale a year ago now being a $6,000 sale.
“With the supply being so high, growers are struggling to pay their bills and are willing to sell their product at such a low price just to keep their lights on.”
He used to do $1 million a month in total sales, but that number has dropped to around $300,000 to $400,000 with $500,000 in overhead costs.
Dodge said his company is discussing whether to go vertical in order to survive on their current profit margins.
“Quite frankly, if someone made an offer on our business, we’d probably sell it,” he said. “I don’t want to scare anyone out there, but it’s that fight or flight thing right now.”
Statewide cap
Should there be a statewide cap on the number of licensed recreational marijuana growers to help balance out the flooded market?
For retailers and growers, it’s a difficult question to answer.
In Michigan, there is no statewide cap on the number of licenses that can be issued for marijuana businesses, both on the recreational and medical side. Under state law, the cities, villages, and townships that opted-into allowing for the operation marijuana businesses have the authority to place license caps by passing a local ordinance.
In Oakland County, the opt-in communities that allow for recreational marijuana businesses include Berkley, Hazel Park, Ferndale, Lake Orion, Madison Heights, Orion Township, Oxford, Pleasant Ridge, Pontiac, Royal Oak, Southfield, Walled Lake, and Waterford.
In mid-Michigan, the cities of Clare, Mount Pleasant, and Wise Township allow for recreational marijuana businesses.
The Michigan Cannabis Regulatory Agency does not have the constitutional authority to implement a statewide cap as outlined in the 2018 voter-approved Michigan Regulation and Taxation of Marijuana Act that legalized recreational marijuana for adults over the age of 21. Any statewide license cap would come via constitutional amendment approved by the Michigan State Legislature.
Brisbo said the constitutional amendment passed by voters deliberately created a free market system in terms of saturation, but stopped short of whether he would support a statewide cap or not.
“I don’t think it was anticipated that municipalities would sort of coordinate across the state to identify market trends and appropriate balance of that,” he said.
The Michigan Cannabis Manufacturers Association estimates the adult-use market in Michigan to reach about $3 billion in retail sales at maturity. This year, the state is expected to see over $2 billion in retail sales.
“So, there’s still room for market capture,” said Brisbo. “That puts us on a much better track than similarly situated states.”
Jerry Millen, owner of The Greenhouse, a licensed retailer in Walled Lake, said it’s hard for independently-owned growers to compete right now with the overabundance of supply and the bigger companies trying to choke out the smaller growers making it a race to the bottom in terms of what the product can be sold for.
“There is too much product in the system and it’s only getting worse,” he said. “People can’t afford to pay their bills because the profit margin in the cannabis industry is not what people think. Everybody thinks you get rich overnight. No one gets rich overnight except lottery winners. And we know what happened to lottery winners, right? They go bankrupt within a year.”
Millen said his business is profitable with 1,200 to 1,600 customers per day, but that his revenue is down 30% due to the declining marijuana prices.
Although he doesn’t support a statewide license cap, he said that option may need to be looked at in the future.
On the grower side, Dodge said he is 100% supportive of a statewide license cap because the market is saturated and he believes that “corporate weed” is going to take over.
“The multi-state operators are coming in, have extremely deep pockets, and are able to wade this storm out by dropping their prices,” he said. “That’s just crushing the little guys. We’re in discussions with groups in other states to expand our brand, but in Michigan we’re just getting crushed.”
Dodge said the state holds the key to the future of this industry adding that a license cap would “change everything very quickly.”
“The companies that are going out of business, and there are a lot of them, are now dumping off their inventory for pennies on the dollar to these dispensaries, which are holding up orders on our end,” he said. “The state just keeps issuing licenses and we have to readjust our businesses.”
Other challenges
Another hurdle that growers are still facing is a lack of banking resources, the tax environment at the federal level, and a lack of access to government grant and loan opportunities that other businesses in other industries had access to during the COVID-19 pandemic.
“I’ve heard from folks that are paying 60 to 70% federal tax rates because they can’t write off normal business expenses as other types of industries can,” he said. “From the start, these cannabis businesses are going to be put at a disadvantage in terms of profitability so that causes folks to try and insulate themselves in ways that other businesses don’t have to from tax liability. These are things that Congress could take advantage of in order to make these legal businesses more competitive, efficient, and profitable.”
Right now, for growers to stay in business and be successful, it requires a very competitive business model. These are things that Congress could take advantage of in order to make these legal businesses more competitive, efficient, and profitable.”
Jerant said the State of Michigan has done a great job of reducing their regulatory license and renewal fees, but working in an industry with so few tax write-offs and a high federal tax rate makes it hard to operate like any other business.
“We can’t write off so many things that any other normal business would be able to do,” he said. “It makes it really hard to pay for things having the tax burden that we do. At the federal level, the taxes are still so high and so difficult. Right now, it’s really a whole new ballgame with how we have to meet our margins now. “
Dodge said he used to pay his employees very well and offer full healthcare benefits to them and their families, but things have changed due to the industry’s current environment and lack of access to resources that every other industry has access to.
“We are all forced to apply for private equity loans at high interest rates,” he said. “There’s going to be a mass default in the next 12 to 24 months and it’ll just squeeze out more companies from this industry. Frankly, we’re on the cusp ourselves. We’re just so concerned about the future.”
Millen said he just wants to be treated like any other business in terms of tax write-offs.
“If you knew what I paid in taxes the past three years, your jaw would hit the floor,” he said. “I’m considered illegal by the federal government, but they take my tax money happily. This just makes my profit margin even smaller. Our mom and pop stores need to take themselves out of the marijuana bubble and get people that wouldn’t normally use marijuana into their store.”
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