Cannabis Insiders Split On Market Impact Of Inflation

In the days leading up to the recent bear market entry, cannabis insiders provided Benzinga with varied opinions regarding the impact of inflation on the cannabis sector.

As fears of skyrocketing inflation fueled the bear market, some remained optimistic about cannabis, even confident in some instances.

On the other hand, several sources cited numerous pain points, including rising production costs, the unlicensed market, slowed sales momentum, and declining product prices.

Cannabis Market Concern

The cost of cannabis has been declining in many major markets for months, with consumers seeing prices per milligram trending down for most of the year. In many markets, consumers are seeing prices fall as the cost of other products rises.

Still, due to various factors, including a return to office work, the rising cost of living and slowing wage increases, the urge to buy cannabis has slowed since the end of last year.

According to Marijuana Business Daily, total sales growth across five western state markets was 15.9% in 2021 compared to 39.2% the year before.

"The entire cannabis industry is reeling from post-covid drops in retail purchases, and now the wholesale market is following suit," said Chris Vaughn, CEO of Pacific Consolidated Holdings and California-based delivery service Emjay.

Bottom lines are being leveled by sinking cannabis flower prices. Vaughn cited a market oversaturated with options as part of the problem. He said premium flower prices fell from approximately $1100 per pound in 2021 to between $400 and $600 this year.

As prices fall, production costs are on the rise. Morgan Paxhia, co-founder and managing director at Poseidon and AdvisorShares Poseidon Dynamic Cannabis ETF said, "Businesses have seen costs rise pretty much across the board, including construction, labor, packaging and more." Paxhia noted that cost of living increases are equally affecting consumers.

Brandon Dorsky, CEO of California-based edibles brand Fruit Slabs, feels inflation isn't represented in most cannabis consumable prices, except for high-end products with price elasticity.

"Everyone else is scared to start pricing in inflation costs," said Dorsky. He added that he attempted to raise prices when fruit costs went up but were pushed back by various distributors.

Conversely, operators like Somai Pharmaceuticals CEO Michael Sassano said cannabis companies had years to address rising cultivation and production costs.

"Incremental inflation for things like packaging, nutrients or extract solvents should be offset by these years of production efficiencies," Sassano said.

Regardless, Paxhia said the slowing economy increases the probability of a recession.

"Legal cannabis has not really been tested in a macro recession, so we'll be looking to see how consumers behave through this time," Paxhia said.

Geoffrey Lawrence, CFO at California-based cannabis brand Claybourne Co., said consumers are pivoting back to the less expensive unlicensed market.

Lawrence feels that states can improve their marketplaces and hedge against inflation "by creating a more equitable distribution of cannabis retailers so we take the air out of the illicit marketplace while also boosting cannabis sales and tax revenues."

Cannabis Market Confidence

Other operators and insiders appear confident about the downturn and its impact on cannabis.

"Cannabis is basically recession-proof; there will always be a need and consumers," said Anne M. Davis Esq., co-founder of cannabis healthcare platform Bennabis.

Sweetleaf Madison Capital CFO Kevin Bush expects the sector to be "significantly less" affected than other markets.

"Whatever volatility in input pricing is derived from generalized inflation in the broader economy," he said.

Bush added, "that amount is minuscule compared to the input price volatility resulting from much larger factors that affect price levels in the cannabis industry." He cited state-by-state regulations and market demands as prime factors.

On the consumer side, Bush said, cannabis should see results similar to another "vice" industry, alcohol. If accurate, cannabis sales would likely continue to perform well, but consumers may switch to more affordable, less premium products.

Piecemeal regulations are always a factor in the US market. Cannabis POS company Cova Software CEO Gary Cohen cited less income availability, the return of non-cannabis public alternatives and fiercer MSO competition as causes for decreased revenues.

Cohen expects mature state markets with ample distribution to see their sales volume impacted more. However, newer markets with tight retail distribution may see fewer sales due to expensive products.

"I think the global supply chain will get caught up at the end of the year, and wage increases will stop increasing by then as well," said Cohen, predicting inflation will pull back in early 2023.

Cannabis Market Uncertainty

Others say it's too early to tell what inflation and downturn will have on cannabis.

Jordan Lams, CEO and founder of Moxie, cited numerous uncertain areas of concern, including potential company-consumer demand misalignments, results of the hiring frenzy and scarcer capital.

"This time, it's not exclusive to capital-intensive plant-touching operators, as we've recently seen with major ancillary technology players' announcing layoffs," Lams said.

In May, Akerna Corp KERN announced layoffs amid restructuring plans. The following month, Dutchie announced it cut 8% of its staff. The job cuts are not exclusive to the US market, with Canopy Growth Corp CGC announcing an 8% workforce layoff in April.

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