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Inflation: is it affecting the cannabis market? 

Home » Inflation: is it affecting the cannabis market? 

Could cannabis be inflation-proof or are there other factors keeping cannabis prices down? Cannabis Wealth spoke to economist and cannabis expert Andrew Livingston from the US cannabis law firm Vicente Sederberg to find out.  

Inflation in the UK hit 6.2 per cent in February, the highest rate in three decades. On the other side of the Atlantic, US citizens are seeing similar price hikes across their day-to-day expenses. 

But as most industries face price increases throughout their supply chains, the cannabis industry appears to be resisting the fluctuations with retail prices across the US remaining relatively constant. In fact, recent statistics suggest that prices may even be decreasing.

Data from cannabis analytics firm Headset shows that the prices of marijuana flower, edibles and vape products declined by 16.7 per cent, 11.8 per cent, and 12.4 per cent respectively from January 2021 to January 2022. 

A number of factors are influencing current inflation, notably the acute impact of the war in Ukraine on global oil and gas prices as well as the continued effects of supply chain disruptions caused by the Covid-19 pandemic. 

“Before we were dealing with the most recent increase in gas prices – in part due to the war in Ukraine – we were seeing supply chain issues really hampering global commerce and global trade,” said Andrew Livingston, director of economics and research at the cannabis law firm Vicente Sederberg

On the surface, the cannabis sector appears to be partly immune to the effects of inflation as prices for the consumer continue along a downward trajectory. The latter may be true, but Livingston stressed that the cannabis industry is “absolutely impacted by inflation”. 

Read more: Exploring California’s cannabis supply chain

The issue is complex with various factors coming into play. There are some aspects of inflation that can’t be escaped, such as transport costs and an increase in salaries in line with rising costs of living. But other factors vary significantly from state to state. For example, energy prices will vary depending on the region’s reliance on imported oil and gas. “It is important to look at the specific segment of the industry and also where it is occurring,” Livingston said. 

According to Livingston, there are other factors more important than inflation that are influencing the price of cannabis in the US. “There are other things that that are higher up on the list of a CEO’s mind than the price of gasoline,” he said. 

A major influence on cannabis prices is the maturity of a state’s cannabis legislation. States that are still in the early stages of legalising cannabis such as Massacheusettes can see

wholesale prices exceed $3,000 per pound whereas in states with a more mature cannabis sector like Colorado, wholesale prices can be less than $1,000 per pound. 

As a state’s cannabis market matures over time and barriers to entry for new companies are lowered, the environment naturally becomes more competitive causing an erosion in margin and lower prices on both a wholesale and retail level. 

“Because we have these circumscribed state markets, the factors there are significantly more important than 15 or 20 per cent inflation,” Livingston said. “The wholesale price differences between states can be 200 to 300 per cent depending on what state you’re in and that’s larger than inflationary pressures.

According to Livingston, if prices are continuing to decrease, it may be that other market forces are proving stronger than the impact of national inflation. 

“As additional licenses, supply and competition come in, [those] competitive forces will drive prices down. It’s not like there isn’t inflationary pressure on these cannabis businesses, but if prices are dropping despite inflation, it may be that other competitive forces are outweighing it.

“The fact that we haven’t seen prices all shift up or all shift down with national inflation seems to indicate to me that the economic forces specific to each market so far have remained stronger than the inflationary pressures that are affecting the cannabis industry nationally.”

North America’s number one cannabis point of sale software, Cova, has seen “some inflationary effects” on the cannabis industry, especially early in the supply chain. 

“Cultivation and manufacturing are being hit with significantly higher energy and transportation costs,” Cova CEO Gary Cohen told Cannabis Wealth. “Those increased costs have already flowed forward to the retail sector in slightly higher product costs. Same-store year-over-year sales were down 5 percent in January 2022.  Some of this decrease is due to the absence of stimulus money in the hands of cannabis consumers a year later, while the rest is due to both higher prices and smaller basket sizes.”

In response, Cohen said that Cova Software has reconfigured some of its subscription tiers to accommodate the budgets of smaller volume stores. 

Michael Sassano, Chairman & CEO of the Ireland-based manufacturer Somai Pharmaceuticals believes that the sector’s forward-looking approach to sustainability could be playing a part in protecting cannabis businesses from sharp rises in energy costs. 

“In comparison to other industries, the cannabis sector in the US and EU should be less impacted by inflation,” Sassano told Cannabis Wealth. “Cannabis from its onset embraced sustainability and reduction in dependency on non-renewable resources. 

“And keep in mind that the largest growth in the cannabis sector has been the last six years in US and two years in the EU. This indicates that cannabis was already using the more modern cost savings equipment and was well aware of conforming to renewable resources.”

Determining exactly how the cannabis industry is affected by inflation isn’t an easy task, especially in the US where each state’s market is confined to its own borders. Until federal legalisation, it will be difficult to pinpoint exactly where and to what degree the cannabis industry is impacted by inflation. Nevertheless, it is clear that some businesses will face financial difficulties over the coming months. 

Read more: 22 predictions for the cannabis industry in 2022

“Will there be some businesses that maybe go out of business because their margins are tight and they can’t deal with an increase in these direct input costs that are caused by our current inflationary environment? Absolutely,” said Livingston. “[But] I have significant faith in the sector to push through.”

Oliver Summers, veteran dispensary operator and CEO of consultancy company Summers International Cannabis told Cannabis Wealth that inflation has impacted his business “slightly” as it faces increased costs across distribution and delivery. However, he believes cannabis has “always been impervious to economic environments”. 

“From recessions and inflation to financial booms, cannabis always continues along, never really seeing an overt change,” he said. “A perfect example would be the pandemic. People were not working and living on savings, yet cannabis sales were huge. 

“In 2008, after the stock market crash, my sales increased at my shop as well, even though many people were broke. When people are doing well they spend money on cannabis to celebrate. When they are doing poorly, they need it to cope.”

There are some conflicting views on how and to what extent inflation is affecting the cannabis industry but uniting them all is a resounding confidence in the resilience of the market. For companies that are struggling, Livingston advises having flexible supply chains and developing a strong, diverse network of companies to work with during periods of instability. 

He also recommends talking to investors and creditors early to ensure businesses have enough of a cash runway to cope with temporarily increased costs or potential operational losses. 

“Ensure that you can shore up your finances in such a way that you’re not running month to month, so if the tides turn you can weather through it,” he said. “That means talking to investors now before things get potentially more complicated and more difficult.”

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