Marijuana

Has Arizona's Uncapped Cannabis Cultivation Created a Glut?

Separated by strains, they dry to perfection.
Separated by strains, they dry to perfection. Jacob Tyler Dunn
Cannabis prices are falling across Washington, Oregon and Colorado as supply steeply overshadows demand. In Arizona, cannabis prices are beginning to fall, too — prompting concern the Grand Canyon State might have a glut of its own.

"In the past several months the price of flower has gone down," said Ryan Hermansky, Arizona Dispensaries Association (ADA) board president, in a statement released to Phoenix New Times. "Flower is being sold at competitive prices and that enables well-run grows to function and be profitable."

Hermansky reports current Arizona wholesale prices ranging from $500 per pound for outdoor flower and $2,200 per pound for top-tier indoor flower. For comparison, Colorado's all-time-high price per pound was $2,007 in 2015; in July 2022, the average price was reported as $709.

Declining prices across Arizona are reflected in government data. Despite several incremental increases in transaction privilege tax (TPT) across some cities and towns in 2022, total tax revenue from Arizona marijuana sales remained relatively consistent.

For example, tax collected on marijuana sales in April 2022 totaled $21.7 million, down slightly from $21.9 million in December 2021.

There is concern that without regulation capping production in Arizona, grows continue to increase output even with prices already on the decline. Without a marked increase in demand in step with the industry's continued expansion, it is possible that a surplus of product will result.

Andrew Livingston, the director of economics and research at cannabis law firm Vicente Sederberg, does not necessarily see lower prices as bad for the state market.

"Arizona entrepreneurs need to be able to produce at price points that are competitive," Livingston said. "Eventually, Arizona cannabis will need to be competitive with cannabis grown in Washington, Oregon, and Colorado."

But it is not only lower (or promotional) pricing that is reining in revenue. Overall consumption also appears to be stagnating, if not weakening.

"Although there are nearly 200,000 medical marijuana patients and numerous adult-use consumers in Arizona, marijuana sales have not increased and have declined in many areas," Hermansky said.

The Arizona Department of Revenue reports taxable adult-use marijuana sales slipped from $70.2 million in December 2021 to $68.4 million in April 2022.

However, it's still up considerably from April 2021, when sales were reported at $53.2 million.

There's a lot that can cause sales to fluctuate, including changing habits during and due to COVID-19, the relatively recent influx of new Arizonans, outrageous inflation, and recession fears. But there remains real concern that as in Washington, Oregon, and Colorado, Arizona may also be approaching market saturation.

Hermansky disagrees.

"Each voter-passed initiative had a limit to the number of licenses available in the state, which has prevented oversaturation of dispensaries throughout Arizona," he said.

According to the Arizona Department of Health Services (DHS), as of May 1, there are 169 establishments, 131 operating facilities, and 22 labs in-state. That pales in comparison to this 26-page document listing marijuana retail licenses in Oregon, and this 1000-plus line spreadsheet detailing licenses in Colorado.

Although there is a cap on the number of production entities in Arizona, there is no cap on how much any one entity can grow.

"Each vertically integrated license also is able to legally operate a grow. The state does not limit the size of grows, however, some cities put limitations on the square footage allowed," Hermansky said.

This is unlike Colorado, where there is no limit to the number of licenses but a tiered system that controls cultivation facilities' output.

"Colorado, and other states, regulate production facilities in specific tiers. In order to expand their cultivation facility, they need to be able to justify to the regulators that they have been able to produce and sell at or near their production limit in the past," Livingston explained. "Arizona allows licensees to build out their cultivation facility based upon what they perceive is happening with market forces and demand."

Copperstate Farms, located in Snowflake, is one of the largest facilities in North America and the top wholesaler in Arizona. It boasts 1.7 million square feet of canopy and a 40-acre greenhouse. In May, Copperstate reported it produced over 200,000 dry pounds of cannabis yearly.

To put that in perspective, Arizona's total medical marijuana transactions year to date for 2022 total 42,699 pounds.

The value of 200,000 pounds of dry marijuana deserves a little long-form math. At current Arizona pricing, Copperstate's 200,000 pounds can expect to be worth somewhere between $100 million and $440 million (depending, of course, on where the weed was grown, the particular strain, and market conditions).

That's just one grow.

Hollister Biosciences' Arizona brand campus includes 700,000 square feet of cultivation area, Trulieve 64,000 square feet, Connected Cannabis 36,000 square feet, and Ayr Wellness 80,000 square feet.

In May, Ayr reported yields as approximately 75 grams per square foot. That totals over 13,227 pounds for the 80,000 square foot cultivation area.

"Given the fact that Arizona's market is less than two years old, I would be very surprised if they have reached a point of market saturation," Livingston said.

Marijuana continues to be classified by the federal government as a Schedule I drug, meaning it is illegal and therefore cannot be transported across state lines. The marijuana grown in Arizona stays in Arizona.

Whether it is consumed, processed into shelf-stable products, or destroyed remains to be seen. 
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