Survival of the Fittest: Oregon’s Cannabis Market
Oregon’s cannabis market is on the way to being a $1 billion market, both in terms of medical and adult-use sales, by 2020.
However, more than 3 years into cannabis legalization, the black market in Oregon remains, and unchecked production has led to plummeting prices, posing a threat to the industry. Yet, these challenges are expected in an emerging market like cannabis and companies in other jurisdictions like California, Colorado and Washington are having to navigate this difficult landscape as well.
An environment like this often separates the wheat from the chaff, making the industry all the more strong. Companies that can survive Oregon’s extremely competitive, oversaturated cannabis market will be better positioned to succeed in expanding to other cannabis markets, in the US and beyond.
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Oregon’s cannabis market one of the largest in the US
Oregon´s legal cannabis market is expected to grow from $520 million in sales in 2017 to $1.04 billion in 2020, according to New Frontier Data, making it the 5th largest cannabis market in the United States. The recreational consumer segment in Oregon’s cannabis market is reportedly one of the largest in the country. Data from the National Survey on Drug Use and Health pegs cannabis consumption amongst Oregon residents over 21 years of age at 25 percent. Not only do Oregonian’s consume cannabis more than their fellow Americans in other states, but they partake much more frequently as well. According to a Brightfield Group survey, more than 50 percent of Oregon residents use cannabis on a daily basis, versus 34 percent in California and Washington; and only 6 percent of Oregon residents use less than once per month, versus nearly 30 percent in California.
Oversupply is the biggest challenge
Oregon’s legal cannabis market is currently facing a supply glut that has led to a dramatic 50 percent drop in prices since 2015, reports the Oregon Office of Economic Analysis, falling from $14 to $7 per gram. While wholesale prices for cannabis are dropping in all US legal markets, Oregon’s slide is by far the most pronounced.
Some have suggested the oversupply problem partly stems from the state’s regulatory framework. In trying to avoid the pitfalls that have slowed development in California’s cannabis market, Oregon’s legislature wanted strong supply lines and low prices to bring cannabis consumers out of the black market and into licensed dispensaries. The low barrier to entry has led to more than one thousand licensed recreational cannabis growers and an estimated 900 license applications are awaiting review by state regulators.
However, others view large swings in price and supply as natural growing pains in the process of creating a legal cannabis market to stamp out an existing illegal cannabis trade. Oregon’s cannabis market was home to a large black market prior to legalization in 2015; in fact, much of the state’s oversupply problem can be attributed to a strong black market (which between 2011 and 2016 produced an estimated $2.1 billion worth of cannabis) supported by hundreds of unlicensed operations. In fact, Oregon is considered the top source of the nation’s black market cannabis.
Cannabis consumers in other legal states are placing high demand on premium Oregon-grown bud, as evidenced by the majority of illicit inter-state sales originating from the state. While some are suggesting the government cap the number of licenses the Oregon Liquor Control Commission (OLCC) can issue, others argue that curtailing supply will not stop black market sales across state lines because the demand is still there. Instead, Oregon’s legislative and industry leaders are actively working on a solution that will tackle both the black market and oversupply challenges. In 2019, the Oregon legislature will consider a proposed bill that may allow for inter-state sales of legal cannabis.
“Oregon will always be a leader in cannabis and hemp. At some point, inter-state compacts will allow Oregon’s cannabis market to export product which will reduce the strain around price compression that we are seeing and help to eradicate the sale of black market marijuana across state lines,” Obie Strickler, CEO of Grown Rogue, told Investing News Network. “Until then, farmers and producers must be thoughtful in what they produce and plan ahead for distribution to ensure a meaningful return on investment.” A vertically-integrated cannabis company based in Medford, Oregon, Grown Rogue has achieved 25 percent month-over-month sales growth in 2018 despite falling prices for cannabis products.
Craft Cannabis Alliance supports inter-state sales
“We legalized cannabis, but the only people making a living in the cannabis industry are the ones who decided not to get licenses,” said Adam Smith, director of the Craft Cannabis Alliance, who has had a decades-long career in pushing public health policy reform at the state and national level. “A licensed transfer into another legal state isn’t radical. There is no faster way to incentivize growers to transition from the black market to the legal, regulated market than legalizing export.”
The inter-state commerce bill before Oregon’s legislature would lower the first barrier to selling Oregon’s legal cannabis production into other legal states, however the federal government would need to approve such sales as well. Although the federal government appears tough on cannabis, many see that tough line eroding and think it is only a matter of time before cannabis is removed from the list of Schedule 1 drugs. “The more that our state government is behind us and supporting us and advocating for this kind of thing, I think the sooner that we can get that federal movement,” Matt Walstatter, owner of Pure Green dispensary in Portland, Oregon, told local news.
Smith thinks inter-state commerce in cannabis could be a reality as early as 2020. What are the target markets for Oregon’s cannabis products? One area of focus is emerging legal cannabis markets in the East Coast states which don’t have a domestic black market or the right climate and infrastructure for low-cost, high quality cannabis production. Think New York, New Jersey and Massachusetts, which are coming very close to legalizing recreational marijuana. Mature west coast markets with high demand — including Washington, Nevada, and California — are another possible avenue.
With Oregon’s current annual production capacity capable of producing an estimated $6.7 billion worth of cannabis, the state’s producers are well positioned to meet growing inter-state demand.
Other strategies to survive oversupply
Vertical integration can help cannabis companies set themselves apart from competitors. From cultivation and extraction to distribution and retail, controlling the supply chain from seed to sale helps companies to have more control over the market, while also helping them to capture the best possible margin for their products — all important advantages in a climate of evolving market conditions.
One of the most important advantages of vertical integration in a saturated market comes from product diversification, which goes a long way toward helping a company to build its brand. In Colorado, for example, many companies are now converting much of their dried flower into cannabis extract products. The cannabis extracts market, particularly for cannabidiol (CBD), is one of the fastest growing segments of the global cannabis market and has the potential to become a bigger market than cannabis dried flower.
In many legal cannabis jurisdictions, dried cannabis flower consumption is already losing ground to the cannabis extracts market. In Colorado, for example, sales of dried flower dropped from 67 percent of total dispensary sales in 2014 to 44 percent, while concentrate sales have doubled to 31 percent, according to recent reports from BDS Analytics. Similar patterns are being seen in Oregon’s cannabis market. “The actual old-school smoking of cannabis is pretty much out the door,” said Jered DeCamp, co-owner of the Herbal Remedies dispensary in Salem, Oregon, who reports that only about half his sales are for dried flower.
Oregon’s cannabis market will survive. Pricing will reach reasonable levels and margins will once again become sustainable. However, the fact remains that product will remain in excess of consumption. Thus, it will be critical to develop derivative products such as oils, shatter and edibles. “This provides the framework for Oregon to innovate faster than other States as a result of necessity,” explained Strickler. “Ultimately, Oregon will be in a very ideal position when the Federal government allows inter-state compacts so that product can be exported to neighboring states.”