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Cannabis Prices Drop As Supply Grows

It’s the basic economic principle of supply and demand. When there is more demand than supply, producers can charge a higher price for their rarer product. When supply outstrips demand, prices drop as producers compete for sales. It’s what makes capitalism efficient.

So it should come as no surprise that the price of cannabis goes down a lot after the initial legalization of recreational use in a state. Even though the cannabis industry is rife with licensing expenses, taxes, high initial startup costs, and significant overheads from power bills and labor, there is a strong incentive to produce more efficiently.

Take Colorado. Since January 2014 when recreational cannabis became legal, prices have dropped to around $1,300 a pound, wholesale. That’s a nearly 48 percent drop, and it’s putting the squeeze on growers.

“Anybody that is investing in this sector or starting a business in this sector needs to understand that the price of cannabis is going to drop precipitously,” said Troy Dayton, CEO of ArcView Group, a cannabis investment consortium in Oakland, California. “The agricultural technology space is already booming, and now they get to lay their hands on the cannabis industry.

J. Chandler is VP of Cultivation Technologies, Boulder, Colorado, and his company sells equipment originally designed for tomato greenhouses. Automated feeding and watering systems are a start, and Chandler says that indoor growers can drop their costs from $1,000 per pound to around $300.

Leif Olson, managing partner, Good to Great Consulting, Denver, Colorado, says that competition is likely to become so costly that the industry will switch from indoor growing to greenhouses. “Growing inside is definitely an antiquated concept,” he said. “It’s coming out of hiding.

When Brian Lade, owner, Smokey Point Productions, Arlington, Washington, started his first indoor grow in his garage, he was harvesting about 100 pounds from his crop. Now he’s expanding his warehouse operation to 135,000 square feet and will be growing 1,700 pounds of cannabis flowers.

His employee count, on the other hand, has gone from 25 to around 100, and Lade points to more efficient technologies as the answer. The preparation for his growth media: soil mixing, separation in containers, etc. is all automated, and each container is brought to an employee via conveyor belt. Lade is currently trying out trimming machines, which could significantly cut his labor costs.

“If you want to provide cannabis to your people, you’ve got to adapt or die,” he said. “We are basically just getting way bigger, and then adding efficiencies like the machines and computer software.” Computers control the nutrient levels in his water, and the climate of his grow rooms.

Lade sees room for improvement in his setup but is limited in some ways by his location. Washington is not known for its sun, and he’s thinking of entering the nascent recreational markets in Colorado or Nevada, where greenhouses are more cost-effective. For now, the federal prohibition has enforced a regionalization on the cannabis industry. Should that be rolled back, Lade may get to see how well his Washington operation competes with a grower in more sunny climes.

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