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The Rollercoaster Economics of Distillate Pricing in Michigan’s Cannabis Market

Distillate pricing in Michigan’s cannabis market has been a topic of discussion since the commercial market opened in 2018. Prices for 1,000 grams of distillate, commonly known as a liter, have fluctuated greatly in the past few years. From skyrocketing to over $50,000 per liter in October of 2020 due to limited supply and high demand, to hitting a floored price of $1,500 these past few months. The pricing had been on a 27-month progressive decline and we are now seeing the first increase in pricing.

The industry uses pricing of distillate as a benchmark metric for all product pricing. As distillate prices come down, prices for other product categories follow the trend and tend to deplete in value. However, $1,500 for a liter is not a sustainable price for growers, and several have been burning cash to stay alive and survive until prices rebound. But the positive thing is that in the last 30 days, distillate prices have rebounded for the first time ever, with prices popping back up to $2,500 and even as high as $3,000 in some instances.

The recent rebound in distillate pricing could be attributed to the disciplinary action taken by the Cannabis Regulatory Agency (CRA) against licensed operators who are running an illegal structure. These bad actors are bringing in low-priced distillate from out of state and illegally funneling it into the legal market, which is driving down prices. The suspension of TAS Asset Holdings, aka Fwaygo Extracts, by the CRA (see state documents here; see news article here) has likely caused other bad actors to hold back out of fear of being caught. This suspected decrease in supply, coupled with an increase in demand as operators prepare for 4/20 sales, has been correlated to price increases. Not only to mention Michigan saw its second highest legal sales of any month ever in February at a total of $206,378,444.  This represents a whopping 52% growth year over year. I can only imagine that if February sales performed that well, what does summer have in store for the industry as Michigan’s population swells with vacationers from all around the country and world?

As a little bit of an aside, we believe that the decrease in per unit prices for products is positively impacting the total gross volume of sales in Michigan.  As prices decrease at dispensaries, the black market is getting squeezed and more and more consumers are converting from the historical caregiver, small-scale home-based model to now hitting the dispensary storefronts. Legal dispensaries offer so many benefits to consumers such as ease of access (sometimes including home-delivery), a plethora of options, and safe, tested, compliant products.  Nearly every caregiver we know from the good-ole days has converted to a commercial legal entity or moved on from the industry for good due to falling demand in the black-market.

Depending on how things shake out for Skymint (see article here), that could additionally remove a reasonable percentage of cultivation capacity from the Michigan market which will reduce supply, again impacting pricing in a positive way for licensed operators. But, the reality is that year over year, there were 34% more plants harvested this February than last February along with the price of an average ounce dropping by 46% from $160/oz to $86/oz. While there is a lot of good that comes with increasing distillate pricing, one challenge we foresee is how to handle the wholesale pricing of products using this distillate as an input. As distillate increases in price by ~43-71% (increase from ~$1.75/g to $2.50-3.00/g), there would be a logical assumption that wholesale and then retail product pricing will follow suit. The question is, how aggressive will brands, manufacturers, and retailers be with their wholesale/retail pricing to maintain shelfspace and gain consumer adoption amidst the rising distillate pricing? This increase of 43-71% in distillate can increase the direct costs of a product for manufacturers by 5-25+% depending on how much distillate is in the finished product.

You may be asking how illegal, black-market inventory is making it into the licensed market. There are a couple ways we have heard of which include fluffing yield during the manufacturing process (when manufacturing distillate, the yield was 14%, not 7% there by funneling in 1x more distillate from the black market) or inflating yield during harvest and adding in black market plants simultaneously. Realistically, it isn’t that hard to do this, but the new Director of the CRA, Brian Hanna, has a background in criminal intelligence and data analysis with the Michigan State Policy. He is using his expertise to identify and flag uncommon trends in data and mobilizing field investigators to assess operators' data and information in person. The good licensed operators thank you for your service to the industry.

Overall, the pricing of distillate in Michigan’s cannabis market is a complex issue that is influenced by various factors, including illegal activity, caregiver market, licensed operators, consumer trends, and supply and demand. As the market continues to evolve and regulations become more stringent, it will be interesting to see how the pricing of distillate and other cannabis products fluctuates in the future. How far will prices rebound? Hard to say at this point but we do watch distillate pricing on a weekly basis via our network of operators we connect with consistently. From what we can tell, we may have hit the bottom of the market pricing but it's hard to say. There is monthly CRA data we track to study macro changes to the Michigan market and help determine, through data, when we did in fact hit the bottom.

Keywords: Distillate pricing, Michigan cannabis market, supply and demand, illegal activity, Cannabis Regulatory Agency, yield, toll processing, 4/20 sales, Michigan State Police  

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Brian Hanna Tweet

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