Pot Predictions: Cannabis And A Recession

A Recession and Cannabis: The push for cannabis legalization in the United States is in full swing. Although the sentiments toward the marijuana industry are currently bullish, many wonder how the burgeoning market will respond to a significant economic slump. Could the steady income from venture capitalists, private equity funds, and other investment streams help the weed industry hold its own? Or will they dry up and bring the expansion of the industry to a sudden halt? Jackie Cahan, Chief Financial Officer of Illinois-based supply chain management firm 240Logistics, shares her financial and banking predictions amid a possible recession in the cannabis industry.

The Cycle

Cannabis was hardly an industry during the Great Recession that took hold of the world economy in 2008. The world is a different place now and while much has changed, history will be the first to tell you that everything is cyclical, including economic recessions. While many Americans have feared a recession has been looming in the background ready to choke our economy, I don’t think things are going to be as doom and gloom as many have feared. Especially in cannabis, especially during an election year. 

Yes, swift and lasting changes need to be made in the cannabis industry to offer protections we simply do not have that most others do. The SAFE Banking Act is the perfect example of this. Without safe banking the future of cannabis remains uncertain, unsafe and unpredictable. But I believe that SAFE banking is on the horizon and it will be passed sooner than we think. There are many players in this game and while I don’t have a crystal ball, here’s what I think we all need to keep in mind as we navigate a year poised to be a major turning point in cannabis.

The Good

There are many industries that are recession-proof but there’s a difference between those who will survive a recession and those who will thrive. We all know “sin industries” thrive. Cannabis is a lucky participant of a sin industry as witnessed during the pandemic. Sin industries will see the GDP output excel during a recession but cannabis operators need to be smarter and take control in order to maximize their bottom line. Operators need to use data to make decisions. Retailers need proper shelf planning and just-in-time (JIT) inventory.  Manufacturers need JIT manufacturing. If businesses can plan ahead and build these safety nets into their operations, they’ll be one step ahead of the game. I know firsthand the importance of implementing these practices in real time. 

The Bad

As we sit here today in March of 2024, we still are gathering data that supports growth, albeit more tepid than in previous quarters. Higher interest rates can be a catalyst for GDP constriction but we have yet to see that data. Consumers are still gainfully employed and out happily spending. 

But this is an election year that is going to be unlike any other. Tensions are high and there is general unease in the collective psyche of America. I don’t know the future and I like to rely on facts and data not feelings, but should we continue on the trajectory we may see a slip into reduced GDP in several quarters post the election. 

The Ugly

Price compression is another factor contributing to a possible GDP decline in cannabis. I do think price compression in new markets is on the horizon. In mature markets post the “pandemic high,” price per pound hit bottom and has not seen any significant upward trajectory in recent years citing over supply as the main concern. What I think most people forget is this is still a commodity/plant that has to be grown in the ground first. Price expansion and compression is a function of supply and demand. Demand is not wavering and judging by the expansion in legal cannabis states it’s here to stay.  

It’s the manufacturers who are saddled with slow moving inventory who will be crushed. They will be squeezed in the middle by higher input costs and zero pricing elasticity. If they are not using JIT manufacturing they will go out of business during a downturn since they have nowhere to turn for capital to smooth out those cyclical pressures. 

The Importance Of A Strong Supply Chain And Consumer Control 

When consumers get to decide what goods they want to purchase and are not driven to purchase simply what’s on the shelf, you will see strengthening in the industry. Consumer demand ensures a safe landing from a recession- not SAFE banking. Many consumers are leaving the industry because they lost their favorite brand because the product is inconsistent and because we don’t have education on the cannabinoids and the power of the plant. A proper functioning market only exists when consumers are in control. 

SAFE banking ensures the industry has one prong of a proper functioning supply chain. Another prong of a healthy supply chain is credit and finance. When an industry relies solely on cash on delivery, trust remains elusive, inventory becomes stagnant and consumers don’t decide what brands are superior. Credit and finance are also paramount for investors to make informed decisions. Without data which enables credit and finance decisions to be made—the industry draws a bleak picture for investors who cannot make informed decisions. 

The Bottom Line 

Whether or not the cannabis industry gets sucked into a recession there are basic tenets of business to guide all of us. Cash is king. Know your costs. Create an annual operating plan and stick to it. Run sensitivity models over and over against the data to stress test the business. Cannabis operators need to be that much smarter than other industry operators. Because of our legal standing, we never know what’s around the corner. 

One thing we do know that is around the corner is AI. We have to automate the supply chain, we have to take the waste out of the supply chain. I think predictive modeling is the way of the future for companies to anticipate demand. Brands don’t want their product products falling off the shelves and I think JIT manufacturing and inventory planning can help ensure the success of any operator during both boom and bust periods. As the CFO of a logistics and supply chain company, I’m all about systems data and connectivity. Work smarter not harder. You have to believe in the people you hire, the process and technology in that order. The latter two support good people. 

Lastly, I want to stress that cannabis needs collaboration, cannabis needs SAFE banking. Cannabis needs a fully functioning supply chain-  without it the industry will languish in its current state whereby brands extend 90% of the credit available to dispensaries and retail operators decide which goods get placed on the shelf - not the consumer. And remember, it’s the consumer who will ensure cannabis’ safe landing in a recession.