Economic Outlook: Cannabis Farmers in Trouble in Oregon
In two years since retail recreational marijuana sales began in Oregon, the number of licensed growers in the state has risen above a thousand. There are another 2,405 applications pending with the Oregon Liquor Control Commission (OLCC), which regulates and taxes the industry.
So how did legalization turn out? For OLCC, it’s been a resounding success. Just in the month of July, they collected over $8.7 million in retail marijuana taxes. That is much higher than expected and up 69 percent from a year ago. The success has much to do with the OLCC’s efforts to let the free market find its own level by, among other things, not limiting the number of growers.
While that’s been great for government and consumers, it has been anything but for most growers. Many growers who got state licenses invested their savings in cannabis farming. They are underwater on their investments and it is about to get worse with the 2018 harvest coming in this month.
Prices have plunged. Unsold product is piling up. We are growing far more than we consume. You don’t need an economist like me to tell you that this means prices fall. Oregon now has the lowest wholesale prices in the country. An auction house this spring reportedly sold a 60–pound lot for just $100 a pound ($6.25 an ounce) into the wholesale market.
Farming has always been a treacherous business, with growers having to take whatever price the market offers. But there is something quite different going on in Oregon.
For example, the average price Oregon growers are getting for trim, which is used to make extracts, has fallen to $50 a pound. Meanwhile, according to one of our Nevada clients, they are paying $800.
Why the huge difference? After all, the states border one another. It’s because federal law prohibits shipping across state lines. Oregon has an ideal growing climate, especially in Josephine and Jackson counties. In other states they have to grow indoors, and even if they can grow outside—saving money on utilities and capital—they deal with less favorable weather conditions.
High productivity in agriculture is not usually a problem for Oregon farmers. The state produces far more hazelnuts than it uses. But that is fine because growers are allowed to ship hazelnuts to other states and countries. Oregon marijuana growers cannot.
Currently, less than a third of what Oregon grows is being sold. Thousands of pounds of usable, but unsellable marijuana is destroyed each month under the watchful eyes of Oregon regulators. Most farmers are not covering overhead costs. And compounding their stress, they cannot even get relief in federal bankruptcy court (because marijuana is a controlled substance). Plain and simple, the situation is dire.
I mentioned all this to an acquaintance who has been growing conventional crops all his adult life in in the Willamette Valley. His response (with a smile) to the marijuana growers, “Welcome to farming. Get used to it.”
Overproduction, collapsing prices, and crop failures are common in agriculture. Ironically, it is happening now for another member of the cannabis family: hops. But unlike marijuana, which is an annual, hops are perennials — meaning that once you plant them (and at great expense), they keep producing for years. You’ll be producing hops for years whether or not prices are good enough. That’s happening now.
The problem for hops started when craft beer became all the rage around the world. Expectations of higher demand were widespread. After all, craft beer sales were rising at double-digit rates. It costs farmers about $10,000 to plant a new acre and they found it easy to get loans to expand.
Unexpectedly, the spurt in craft beer sales slowed. Sales so far this year are up only 1.7%. And like marijuana, inventories of unsold hops are growing to all-time records. Prices of common varieties, like Cascade, dropped from $7 a pound in 2015-16 to just $1.20 — well below the cost of production. Hops farming became a disaster. Some in the business have filed for bankruptcy.
In spite of these problems, hops growers expect business to recover, albeit it will take some time. Years of experience has taught them that the free market works, but neither painlessly nor quickly. It is a lesson that marijuana farmers need to learn from their more experienced brethren.
Unlike what is happening to hops, the plight of the marijuana industry was predictable. In 2014, my colleague Dr. Mike Wilkerson and I use economic principals to forecast that retail marijuana prices in Oregon would gradually fall to about $145 an ounce. At the time, Washington stores were selling it for $600 an ounce. Today, you can get an ounce for $39 including tax.
Those caught up in the mania following legalization thought the forecast was crazy. We got our share of calls and emails. But four years later many of those same marijuana enthusiasts find themselves in deep financial trouble.
The emerging cannabis industry is learning the realities of agriculture. The supply-demand dynamics of farm product markets are similar for all crops whether it is cannabis, the common potato, or high-priced wine grapes. But the one huge difference—the freedom to sell across state lines—is the key for Oregon growers. It is something that should be lobbied for and aggressively so. If and when that happens, it will spark a rebound unlike any farm commodity in memory.
Robert Whelan is a Senior Economist at ECONorthwest, the Pacific Northwest’s oldest, independent economics firm. Robert specializes in business economics and has written extensively on cannabis agriculture and market conditions.
 OLCC Marijuana License Applications, September 29, 2018. Available online at https://www.oregon.gov/olcc/marijuana/Documents/mj_app_stats_by_county.pdf
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