A global collapse in the price of psychoactive cannabis — a “Global Cannabis Price Collapse” — is inevitable.
Figure 1 (below) shows a typical graph of the revenues forecasted for the USA’s psychoactive cannabis industry, 2018-2027 (from data published by BDS Analytics, Marijuana Business Daily, New Frontier Data and New Leaf Data Services).
Figure 1: Typical forecast of the US cannabis industry’s revenue.
As you can see from Figure 1, the industry’s revenue is forecast to rise swiftly from $9 billion in 2018 to $42 billion in 2027, reflecting a Compound Average Growth Rate (CAGR) of more than 18 percent. That makes cannabis one of the fastest-growing industries in America, and, in fact, among the fastest-growing industries in history.
The problem is that “industry revenue” is the combination of two different data series: the good news of rising unit sales, and the bad news of falling unit prices. Showing only the industry’s rising revenue hides the bad news about falling prices.
Figure 2 (below) adds the industry’s falling wholesale price to the same revenue data as in Figure 1 (above).
Figure 2: Shows the “bad news” of falling wholesale prices (author’s forecast). The red horizontal dashed line represents $500/pound, below which growing cannabis in North America is unlikely to be profitable. The blue horizontal dashed line represents the lowest cost of production in North America ($250/pound).
The wholesale price forecast shown in Figure 2 (above) uses a very simple model: it applies the historical rate of price declines, from 2014 through 2018, onward through 2021. Thereafter, it assumes that cannabis will be legalized at the US federal level, enabling national-scale oversupply that causes the price to collapse towards the “lowest cost of production of psychoactive cannabis of adequate quality” in the USA (estimated at $250/pound), which will squeeze cannabis farms’ margins down to agricultural norms.
Is it possible to forecast cannabis prices? The US Department of Agriculture regularly forecasts, ten years in advance, the price of agricultural commodities such as corn, wheat and soybeans — none of which have seed-to-sale tracking, as cannabis does. So: yes, it is reasonable to forecast cannabis prices.
Is it reasonable to expect such a price collapse?
- Troy Dayton, CEO of the ArcView Group, said in 2017, “Anybody that is investing in this sector or starting a business in this sector needs to be doing so with the understanding that the price of cannabis is going to drop precipitously.”
- Dale Gieringer, Ph. D., wrote in Ed Rosenthal’s Hemp Today (1994) that, under full legalization, “the price of legal marijuana would be cut by a factor of 100 or more.”
- Jonathan P. Caulkins, PhD., concluded in 2010 that “wholesale prices after legalization could be dramatically lower than they are today.”
- Beau Whitney, Founder of Whitney Economics and Senior Economist at New Frontier Data, has stated that “Cannabis commoditization is inevitable. Those who will benefit from commoditization, such as North America’s consumers and Thailand’s farmers, will love it. Those who think international competition will lower their margins, off-shore their jobs, and threaten their businesses, will revile it. The 64 billion dollar question is not ‘if’ there will be price commoditization, but: ‘when’?”
So: because credible experts expect to see a “precipitous, dramatic” drop in the price of psychoactive cannabis, “by a factor of 100 or more,” yes, it is reasonable to expect such a price collapse.
The figures shown above are based solely on US data. For example, they show the price of cannabis flattening towards the USA’s “lowest cost of production of adequate quality,” estimated at $250/pound.
What happens when the USA’s market for psychoactive cannabis becomes integrated with the global market? Then, the price in the USA can be expected to collapse towards the whole world’s “lowest cost of production of adequate quality,” that is, towards Thailand’s cost of production, which is no more than ($0.05/gram * 453 grams/pound =) $22.5/pound. That’s less than one-tenth of the USA’s estimated cost of production.
At that point, all of North America’s producers of psychoactive cannabis will need to find a new business to be in, just as North America’s cut-flower growers had to do when when out-competed by lower-cost producers in Colombia.
So: Yes, a global collapse in the price of psychoactive cannabis — a “Global Cannabis Price Collapse” — is inevitable.
[Update (23 January 2019): The emergence of cheap and legal synthetic cannabinoids is likely to make the Global Cannabis Price Collapse happen sooner, and be even more economically devastating to cannabis farmers in the high-cost developed world, than is described above.]
[Update (24 July 2019): For two years in a row (2017-2018, and 2018-2019), US hemp acreage has increased by 3x. If that continues for just five more years, the US will plant more acres of hemp than of corn (91 million acres). Somewhere between now than then, this massive output of hemp will tip the global market from undersupply to oversupply, forcing a collapse in the price of hemp and its derivatives, notably cured hemp flower, hemp oil, and CBD isolate.
Question: What do you get when you combine (oversupplied) cured industrial hemp flower with a careful blend of yeast-synthesized THC, other cannabinoids, and terpenes?
Answer: You get “100% Natural Neo-Skunk™” (or Neo-Gelato™, or Neo-DurbanPoison™, or whatever) that will get you higher than a kite, give you the Entourage Effects of the farmed cannabis plant, at a tenth of the price of “the real thing.” Thailand’s quality is so high and its cost of production is so low (five cents a gram or less, at scale) that it can reasonably expect to survive that competition. Can you?]