Market Concentration So Far

This chart includes most of Fall Harvest and will be updated when more current information is released by the WSLCB

by Dominic Corva, Executive Director

News of market saturation from Fall Harvest should be situated in the context of market concentration. We have previously focused on market concentration by Tier, but after looking closely at the existing data the big news is that seven producers account for 43.7% of all legal cannabis produced through November 11.

We chose the top 7 because it includes all producers that have produced at least twice as much as number 8, BMF Washington (569 lbs). The following table provides their relevant production information. Please note that all production numbers include raw cannabis produced, not just buds; and that crop failures for any reason are not included in the totals.

The first thing to note is that only one of the top producers for the year is not a Tier 3 producer: Avitas is a Tier 2 Producer; and that while most of the rest likely fall into the category of “mixed indoor and outdoor” we are looking at mostly outdoor greenhouse production. PDT Technologies, for example, harvested over 2000 lbs in November — accounting for over a quarter of the November crop. They won’t be harvesting anything like that until their first light dep crop, possibly in July 2015.

This example highlights two things.  First, a huge amount of the current “glut” per retail store (remember we are still at less than a third capacity for the state) is coming from a seasonal harvest, and therefore supply issues will resolve themselves within a few months. Producers who are desperate for capital will take lower prices right now, while producers who have thought ahead will reserve inventory for when prices come back up. This is a function (1) of more retail stores to open and (2) far smaller monthly harvests until Fall 2015.

Second, it demonstrates how much a single, dialed-in. Tier 3 outdoor I-502 producer can at this point command major market share. In November 2015, there will be a lot more than one. This leads me to believe that legal cannabis market prices will not only compare favorably with gray and black market prices in less than a year, they may simply compete those prices out of business.

This last point is very relevant to policymakers right now, as they mobilize fiscal arguments against the continuing existence of medical markets. The maturation of the I-502 market will do that work without an expensive, hostile takeover with dubious social policy consequences such as expanding the black market considerably and driving consumers away from the legal market.

In a competitive market, the wholesale price for cannabis depends on the cost of production (sunk costs do not count). In an oligopolistic market — the one described above — a few producers capture margins well above the cost of production, and have a huge advantage over incoming market participants.

This is the social cost of a political decision by the WSLCB to create a limited, slowly developing, regulated as tight as Mike Tyson’s fist in its glory days. That decision was made well before the other major structural drags on I 502 market development became apparent, chief among them vanishing real estate viability. The cause of this is more than zoning, of course: it is also the result of the Association of Washington Cities’ choice to organize against I 502 permitting until they get a share of I 502 state revenue.

The perceived social benefit of that decision should not be invisible here: the WSLCB and the State of Washington have examined Federal guidelines and chosen the most conservative path to legal cannabis possible. Presumably, this means the children have been protected — not those of I 502 applicants who have gone out of business and lost their savings while the tightly regulated market grows.

Further analysis of the existing legal cannabis production landscape is forthcoming.