Cannabis prices are plunging in the U.S. and they are likely to fall further

You may not have noticed it, but the cannabis industry has evolved at light speed during the last decades. With U.S. data serving as a reference, it has come an awfully long way in a very short period of time. In 1995, not even one U.S. state had passed a single law concerning the use and sale of marijuana. The survey conducted by the global consulting and polling company Gallup that very same year revealed that only 25% of respondents liked the idea of legalizing pot nationally. In little more than 20 years, the picture has changed dramatically. Today, 29 states have regulated weed in one way or another, and 9 of them have even legalized the use of recreational marijuana. Gallup's latest survey, conducted in autumn 2017, shows that 64% of respondents support legalization, which is quite an all-time high. Besides, the recent regulation of recreational cannabis in Canada has heated up the debate even more.

As the industry grows, cannabis prices drop

Despite all that, the federal government still considers cannabis a Schedule I drug (alongside heroin), meaning it's an illegal substance at the national level. And, although one would expect this to hamper its development, the cannabis industry has done nothing but thrive in those states where weed is now legal. According to Colorado's Department of Revenue, for example, cannabis sales generated $1.49 billion in 2017, 15% more than the year before and more than double compared with 2014, the year in which recreational marijuana became legal in the state.

Research shows that the industry will keep on growing in the coming years thanks to states such as California and Oregon, which have recently joined the list of cannabis-friendly regions, or Washington and Colorado, where the weed wheel shows no sign of stopping. Sales are estimated to reach about $17 billion by 2021. The expectations are indeed very high but they may not be so far from reality with so many states lining up to legalize the drug. In addition, as the industry grows, pot prices fall. Cannabis Benchmarks, an independent price-reporting agency based in Denver (Colorado), revealed that wholesale cannabis prices are dropping and show little sign of slowing down. In September 2015, it peaked after touching $2,100 per wholesale pound, and in 2016, the average price went down to $1,789. The last report, released in autumn 2017, shows that wholesale prices dropped to $1,562; a downtrend that is expected to continue in 2018 as well.

Why cannabis prices are falling

There are multiple factors that are causing this dramatic price decline. Perhaps, the main blame can be put on the inexperience. Other than Uruguay, there are virtually no referents to learn from when it comes to cooking up market strategies. The new legal framework is fertile ground for most U.S. states. It's as if they were acting blindly, without knowing which way to go. A clear example of this experiment-based learning is the small crisis the state of Colorado went through in 2011.

A bunch of companies decided to make use of the typical capitalist strategy of lowering the prices and boosting production for the purpose of establishing a product on the market, without even thinking about the possibility of marijuana being different from other products. Cannabis overproduction was difficult to face at that time too because only medical marijuana was legal and some small companies were forced to quit as a result of not being able to bear the costs derived from their inability to dispose of surpluses. Other producers simply started selling excess stocks on the black market and ended up being arrested by the federals. We could say that Colorado has been a guinea pig for the rest of the nation and, alongside Washington, it's still the laboratory of the cannabis industry. They are crossing their fingers kind of guessing on the annual output. However, as they keep shooting high, the overproduction of cannabis affects the prices, driving them down. While this may not affect small producers, it will definitely hit big companies hard. Large cannabis firms try to flood the market with marijuana both to secure long-term supply agreements with retailers and to strengthen emotional ties with consumers. This way they can reduce the prices and the margins, making it more difficult for small producers to compete. By driving them down, large growers leave smaller players out of the game, securing their market position and future profits. But not only that. With this course of action, they are also leaving Mexican cartels out of the industry, in short, because drug-trafficking doesn't seem to be profitable enough.

And, lastly, the plunging of the prices can also result from the initial euphoria brought about by the legal cannabis tide that is washing over the U.S. Cities like Denver are turning into places of pilgrimage like Amsterdam, where pot tourism has increased dramatically since the legalization of recreational marijuana. This might dissipate after a while, when cannabis becomes legal in more states, and if that happens, the prices will again start to go up. This sharp drop in prices could, therefore, be a transitory phenomenon or something that needs some regulation, in order to protect the small producers. As the years go by, data on these states is being looked into more meticulously to bring supply into balance with demand. That's why Canada and its new legal framework that will come into force this autumn are generating a great deal of interest: everyone's on the lookout for the market changes resulting from the main G20 potency legalizing pot.