California cannabis business are taking a close look at what is happening to marijuana prices in the aftermath of that state's legalization and the lessons that can be drawn from it as California heads towards its own recreational legalization later this year.
Since the rec industry launched in mid-2014, Washington’s newly licensed cultivators have produced more marijuana than rec shops sold every single month. The cumulative production surplus stood at 850 pounds just three months after the first rec store opened – which equated to 2.5 months of supply – and has soared since then.
The increasing inventories are placing downward pressure on the pricing of legalized marijuana. Additional pressure is coming come from the continued existence of the black market which doesn’t have to concern itself with the state and federal taxes (especially IRS 280E) of the legal market. (Note that the same thing is occurring in Mexico where prices for illegal marijuana have reportedly fallen 70% over the past four years from $100/kilogram to $30. The drops are do to U.S. competition as increasingly more states allow cultivation. Prices in Mexico are generally less due to lower quality as well as it still has to be smuggled into the U.S. for sale.)
In Washington the result will likely be a shakeout of cultivators as the less committed, financed, or efficient participants drop out and an equilibrium between supply and demand is achieved. This is economics 101 and California firms will likely find themselves following a similar script.