California has had legalized marijuana for more than seven year. However, only 40% of California’s cannabis market is controlled by licensed companies. Meanwhile, the underground cannabis trade continues to control 60%, and illegally export millions pounds of cannabis.
California’s legal marijuana production totaled 1.4 million lbs last year. But illicit marijuana production was 11.4 millions lbs, valued between $7.8 Billion and $17Billion. Around 9 million lbs of illicit cannabis was exported out of California.
A new report commissioned from the California Department of Cannabis Control, and carried out by ERA Economics was released to reporters on Monday during a briefing.
The report’s findings were stark, but Duncan MacEwan, managing partner at ERA, put a rosy spin on it, saying the indications are that the regulatory framework in California is working – slowly but surely – in replacing the illegal market, with plenty of room to grow.
MacEwan stated that the legal cannabis production has grown, with an increase of 11.8% in the last year from 2023. The ERA report shows that the California legal marijuana market, in the quest for more market shares, has stagnated since 2021. This market’s total has remained the same at around 38%.
Another measure shows that the cannabis market has grown from 580,000 pounds when it launched in 2018, to 1.4 millions pounds the year before.
Does the market work? MacEwan said. “Yes is the answer we’d come to … We’re showing production increasing. This is the kind of bottom-line measure.
MacEwan acknowledged that there’s been plenty of market contraction and business failures, and he noted there are still plenty of challenges ahead for operators – ranging from the illicit market to high tax rates to price compression. The macro-level picture, however, is positive. Key metrics are moving in a good direction.
He said that, given the fact that only a small portion of all market shares are actually held by legally registered companies, there is a lot of room for growth.
The industry has grown. The industry’s gross value is lower because production has increased, but the unit price for this increase is also down. MacEwan said that it is just the result of lower unit prices.
In the ERA report, it was noted that retail sales revenue has been declining since Q3 of 2021. The price decreases are the sole cause of this trend. Quantity of cannabis sold – “in terms of weight and units” – has increased over the same time period, the report said.
“I am more optimistic than perhaps most people, but I see this market as growing.” MacEwan explained that these are the growing pains of a new industry, which didn’t really exist in most places a decade before.
The report by ERA found that the wholesale cannabis market also saw a significant increase last year. Prices were up 11.7%, after three years of consecutive declines. However, wholesale prices remain 57% below their peak in 2020.
The report says that this is largely due to the consolidation of the entire supply chain which led to relative stabilization in the last few months. In the past year, there has been a drop of 18% in the number active cultivation permits, a 25% decrease in the number delivery operators, 1% decline for storefront retail, and corresponding license statistics.
According to the ERA, “The market’s short-term outlook is very similar to that of 2023/24. It will continue its adjustment process.” The ERA report stated that “tax and licensing fee adjustments are expected to improve market health, though a potential rise in the state’s excise tax by 2025 will mute these effects.” As the adult market in California and the other states approaches a competitive balance, it is expected that prices will converge over time.
This report cautions that “However,” licensed participants in the market are at an unfair competitive disadvantage compared to illegal market participants, who cross state borders.
The report made several recommendations to the DCC and lawmakers, including
- Reduce costs of legal cannabis producers so that they can compete better with underground markets.
- Data collection on the industry, illegal operators as well as legal cultivators.
- Encourage more localities both to embrace the industry as well as lower their taxes and fees for businesses.
ERA Economics Market Report 2024