The Cannabis Pragmatist — April 2023: State of the California Market | Volume 1, Edition 2
Welcome to the Cannabis Pragmatist. It’s a busy Spring in the cannabis industry. Greenhouses are glowing and open fields are starting to dry.
The California cannabis industry is a battleground in 2023, with companies fighting for profitability amidst a challenging economic climate. The supply of flower and oil in winter and early spring of 2023 is thin. Very thin. A whiplash effect from the 2022 glut and fire sales. Those with inventory are in a prime position to capitalize on the high prices, with sun grown flower peaking at around $600 per pound, high-quality greenhouse flower fetching about $900 per pound, and indoor flower priced at $1,600 to well over $2,000 per pound. High-quality bulk liters of distillate testing 90% and higher are quick to sell for $1200/liter.
However, with most cultivation companies downsizing staff and operations in 2022 and 2023, it remains to be seen which cultivation companies have the capital and courage to seize the potential opportunity and plant beyond the reduced forecast for 2023. The cannabis industry has always been a battlefield, but the past two years have been brutal. The pandemic has disrupted supply chains and sent shockwaves through the economy. Companies once riding high on a wave of optimism and equity investment are now struggling to stay afloat. Surplus inventory and record low prices in 2022 forced businesses into difficult decisions with layoffs, pay cuts, and facilities closures to survive; or face insolvency.
The 2023 growing season has culminated in a critical moment. The battle unfolds in the fields and the boardrooms of companies across the industry. All eyes are on the greenhouse harvest in spring and summer as the industry waits to see how it will impact inventory levels and prices throughout the raw commodity supply chain.
But it’s not just cultivators fighting for their place in the industry. The distribution and retail sectors have also been consolidating, with big and small companies looking to gain an edge in a highly competitive market. The recent merger between The Parent Co and Gold Flora made headlines, but it’s just the latest consolidations shaping the industry with more to come.
In this environment, quality of product and efficiency in operations reign supreme. Those that remain have a combination of great operators aligned with smart capital that will prop up their portfolio companies in challenging moments. This year the money has been hard to come by in a market where profitability is elusive, and the economy is on shaky ground. Very little equity capital is available in 2023, and even asset-backed senior secured loans have become difficult to find if a company isn’t EBITDA positive.
One saving grace to cannabis has been the IRS’s Employee Retention Credits (ERC). Many cannabis companies applied in 2022 and are finally receiving checks in 2023. But ERC money is simply a band-aid. Companies that will prevail will be strategic about their investments and make intelligent decisions about where to allocate their resources. The companies that outlast their competitors will come out on top. Success means having wartime executive leadership and board members that are agile, adaptable, and ready to pivot in response to changing market conditions, even if that means breaking the rules to win. With fear at an all-time high, it’s timely to reference Warren Buffet’s axiom to be fearful when others are greedy and greedy when others are fearful. Spring of 2023 is an excellent time to be greedy.
The cannabis pragmatist: Sell all bulk inventory to buoy cash position and increase raw material production, such as flower and oil, for the summer and fall bulk market squeeze.
Oh, and a word to the wise from a biased man: Plant.
