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“The boom is over”: Colorado cannabis growers hope volatile wholesale market is stabilizing

After low of $759 per pound in 2018, average wholesale marijuana price now back up to $1,316 per pound

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Entrepreneurs who broke into Colorado’s cannabis industry at the ground level — the growers — have endured economic whiplash over the last two years as the market for wholesale flower experienced volatile swings in price.

The average market rate slumped to a low of $759 per pound in 2018 after peaking at $2,007 per pound in early 2015. That rate has rebounded to $1,316 per pound this month, after five consecutive quarters on the rise, reaching the highest price in three years.

Still, many anticipate the wholesale cost will remain relatively flat in 2020. Or at least they’re hoping it will.

“The boom is over and now we’re looking at a more mature market,” said Christian Hageseth, CEO and chairman of One Cannabis, which expects to produce 14,000 pounds of marijuana in Colorado in 2020.

In the six years since recreational legalization, Colorado’s $7.6 billion cannabis industry has been grappling with stabilization between the forces of supply and demand. And that’s perhaps no more evident than in the wholesale market.

In mid-2018, the number of licensed retail grows in the state peaked at 744, according to data from the Colorado Department of Revenue’s Marijuana Enforcement Division. The influx of new cultivators and crops led to a downward swing in the average market rate, with pounds of flower selling for less than they cost to harvest and process, said Josh Monroe, owner of Fat Face Farms in Denver.

New state regulations mandating pesticide testing and microbial contamination testing only compounded the problem, forcing many farmers who couldn’t recoup their expenses to shutter. By the end of 2019, Colorado cultivation licenses dropped 8% to 683 businesses, according to the Marijuana Enforcement Division.

“You have to be agile and able to adapt quickly to the really rapidly changing environment,” said Monroe, who’s in the process of selling his 6-year-old indoor operation to industry giant Cannabis One Holdings.

Those who work in the industry are accustomed to wholesale price fluctuations in the fall, when plants from outdoor cultivations are harvested. “Croptober,” as Hageseth calls it, had no noticeable effect on wholesale prices this year, however, due in part to an early freeze and a crackdown on illicit operations, he said.

The average market rate, which changes quarterly, is the number the state uses when collecting its 15% excise tax on sales and transfers between grows and stores.

Technology also plays a role, as new software has enabled a digital marketplace for wholesale cannabis. Cultivators now upload their inventory, test results and pictures to digital platforms where buyers can compare products. With the exception of “some unicorns,” most strains fetch the average market rate, Monroe said, or growers risk being priced out completely.

“It’s become a very efficient market, so it’s pretty inelastic,” he said.

And in an industry in which profit margins often are described as thin, thanks in part to federal regulation that prohibits cannabis businesses from taking substantial tax deductions, additional testing for things like heavy metals, required as of January, is expected to eat into the bottom line.

“The cannabis industry gets this reputation that it’s a business that’s flush with cash and creating marijuana millionaires,” said Mike Lord, director of business development of LivWell, which operates two grows and 16 retail stores in Colorado and Oregon. “It’s a hard business like any other business.”

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Though some market indicators suggest Colorado’s cannabis climate may soon be fully baked, there are others destined to incite change. Lord expects to see continued consolidation in the space following a 2019 law that allows public funding in cannabis. That law enabled companies like Denver’s Medicine Man to acquire independent dispensaries and product manufacturers.

And any movement on the federal level, such as approval of SAFE Banking Act to allow marijuana businesses access to bank services, would surely have local implications.

For now, Hageseth and others are waiting for the point of equilibrium.

“I hope the market settles out, that we get the right amount of producers selling at the right price, so everyone makes some money,” Hageseth said.

Entrepreneurs who broke into Colorado's cannabis industry at the ground level — the growers — have endured economic whiplash over the last two years as the market for wholesale flower experienced volatile swings in price.

Riding high: 6 Colorado cannatech companies to watch

The cannabis industry is a market ripe with opportunity. According to Business Student, the cannabis industry is expected to be worth $24 billion by 2025 — and is set to create almost 300,000 jobs by 2020. And Colorado is at the vanguard of the industry as one of the OG states to legalize cannabis for both medical and recreational use.

In true form, local tech companies are coming up with ways to help dispensaries interact with their customers, provide workforce support, and so much more. Here are seven cannatech companies that are keeping things lit.

Top Cannatech Companies in Colorado

  • Wurk
  • Vangst
  • Baker Technologies
  • MJ Freeway
  • Cultivate
  • CanPay

Location: Denver

What they do: Emerging markets are an opportunity for innovation, but innovation doesn’t come without a little regulation. Wurk is a workforce compliance platform that provides payroll and HR services for the cannabis industry and other emerging and highly regulated industries. Wurk has an applicant tracking system for recruitment purposes, as well as software for employee scheduling and time tracking. In April 2017, Wurk raised a $2 million seed round.

Vangst takes a different spin on on-demand recruitment tech, focusing its efforts on the rapidly growing cannabis industry. The recently launched platform, which currently serves businesses in Colorado and California, connects employers looking to fill temporary positions — such as trimming, harvesting or budtending — with vetted job seekers looking for temporary gigs. The company landed $10 million in Series A funding back in January and aims to expand its platform to 10 additional states as well as Canada by the end of 2020.

Location: Denver

What they do: Baker is a CRM for the cannabis industry that believes the cannabis shopping experience should be more personal, using its tech to help dispensaries connect with their customers. Their products include a customer loyalty program, data analytics and messaging. Baker works with more than 1000 dispensaries in both the U.S. and Canada, and in November, the company announced that it raised an $8 million Series A round funding.

Photo Via Shutterstock

Location: Denver

What they do: The cannabis industry is growing fast, and MJ Freeway wants to help out businesses looking to get in on that action by providing both software and consulting services. The company works across 23 states and in Canada, Australia and Europe. In April 2017, MJ Freeway announced that it raised $3 million in Series B extension financing.

Photo Via Shutterstock

Location: Boulder

What they do: Companies increasingly need fresh ways to engage customers on mobile — and the cannabis industry is no different. Cultivate provides a mobile app for dispensaries, which offers pricing, menus, ordering and tools to keep inventory organized and updated.

Photo Via Shutterstock

Location: Littleton

What they do: CanPay might make the line for the ATM just a little bit shorter. It allows users to pay for their purchases from cannabis retailers directly through its debit payment app. The app enables users to link their checking account to CanPay’s app digitally, making paying for cannabis as tech-enabled as using Apple Pay on your next Starbucks run.

These six cannabis companies in Colorado are shaking up the cannatech world.