Its All About SUPPLY

The Cannabis industry has enjoyed a very good run and it stands to get even better in the coming years. As legalization spreads to every state and acceptance of Cannabis as a Medicine becomes even more mainstream, economic forces that effect every industry and commodity will pose the industries first major challenge.

Supply, demand and pricing will be increasing important factors in determining the health of the industry and the viability of the businesses that continue to start up, all or most continuing to use financial metrics that I think are in jeopardy of changing ALOT, and not in an orderly way. Lets start with the demand side of the equation. Consensus and data are firmly in place showing that demand for cannabis, both as a medicine and for adult use will rise strongly over the next few years. Laws continue to change and attitudes about cannabis use along with the medical community recognizing the value of cannabis all are helping to expand the potential market, patient pool, and keep demand increasing. All good there.

Heres where things stand to get difficult. Supply has and continues to explode with cultivation square footage increasing by 10 fold by some estimates. Add to that the grey and black market supply which doesn’t go away when laws change. Also, people can grow their own cannabis fairly cheaply, putting even more stealth supply into the system.

Which brings us to pricing, which has already dropped by about 50% across the board for most flower forms of cannabis and chances are we have only seen the beginning of the price decline for cannabis. As this plays out and the marketplace finds equilibrium, many business models will need to be adjusted to account for the decline in cannabis prices.

Many industries have encountered and overcome similar economic dynamics. Best example I can think of is the semiconductor industry. As more and more semiconductor factories were built and capacity increased dramatically, the prices of semiconductor chips dropped ~90%, many factories kept producing even at a loss because it would have cost more to shut down completely and also lose marketshare.

As more and more cannabis factories are built and existing ones learn to grow better and faster and more efficiently, the same thing stands to happen. Owners, Operators and investors need to plan for the inevitable adjustment and disruption in order to successfully navigate the industries most serious challenge.

Author: Phyto Partners

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