Here we are in late 2020 (thank goodness!), Which means it’s time for the fifth annual state of the state post on Oregon cannabis. 2020 was a notable year for the Oregon cannabis industry, largely due to COVID and its impact, including record sales on the THC side. But there have also been important regulatory changes, raging forest fires and other unforeseen developments that we should remember as we take stock of a turbulent year and look to 2021.
Oregon has passed the $ 1 billion mark
It did so sometime in late November, according to the Oregon Liquor Control Commission (OLCC), which was widely reported in the press. To put that number in perspective, 2019 revenue for the same period was $ 726 million, up 40% year over year. And it’s not that Oregon has been through a slow phase: in 2019 retail sales rose 24.1% from 2108; and 2018 saw an increase of 29.1% compared to 2017.
There are likely a myriad of factors driving the oversized spike in 2020. The big problem is likely COVID and its implications, including government incentive controls, improved unemployment benefits, work from home, more free time, etc. Another factor could be gains made by the regulated market at the expense of the unregulated market. Smaller macroeconomic factors can also contribute, such as general population growth. But overall, it seems that the people of Oregon just love cannabis.
It’s still a very competitive environment
Just because retail sales are high doesn’t mean everyone is crushing them. There are so many operators. Today Oregon has up to 719 licensed retailers (up from 664 a year ago; an 8% increase) with an additional 200 in the pipeline. If you estimate that an average of 700 retailers will be active in 2020, your sales will be $ 1.1 billion, or average annual sales of $ 1.57 million per store. That’s pretty good, but you obviously have low and high deals. We saw a lot of both.
Cannabis production remains high at 1,177 licensees, but relatively static (1,152 last year at the time). The figures for processors, wholesalers and laboratories have also remained relatively static. I expect this to change somewhat in 2021 – in parallel with OLCC’s new streamlined licensing process, the agency recently got rid of an avalanche of incomplete and blocked applications that stems from the infamous 2018 break in accepting applications.
In this context, wholesale prices are trending down again and retail prices are tending to follow. This is somewhat typical of the end of the year when: 1) pharmacies tend to demand and hold less inventory for tax reasons related to Internal Revenue Code Section 280E, and 2) a swarm of flowers passes through the supply chain outdoors. There’s also a Wild Card in 2020 – The Impact of the Oregon Forest Fires. These horrific fires were devastating for many farms, but could ultimately cause prices to rise somewhat by 2021.
The secondary licensing market will change
Buying and selling cannabis businesses in Oregon can be an exercise in patience. In recent years, the regulatory approval schedule has fluctuated between 5 and 9 months, which is an eternity for buyers and sellers. Thanks to streamlined licensing, we recently saw a change in ownership in just two months, and we expect new license applications to be processed in an accelerated time frame. For any off-production license class, we anticipate that buyers will be less willing to pay sellers a premium for license interest even in 2021.
The production is of course different. Senate Bill 218 is still in effect, meaning the OLCC will not accept new applications for marijuana production licenses. The only way to get one of these licenses is to find a willing seller, and we don’t expect much of a change in the $ 125,000-175,000 that these sellers often charge. I would like to be wrong here.
Overall, we’re still doing a lot of M&A deals in cannabis in Oregon (including real estate), and I’m curious to see if this year-long trend continues into 2021. I assume this will also be the case when the focus is more on brands and non-licensed assets.
We saw some big changes in 2020. The first area of motion concerns changes to the OLCC rules. Apart from all the changes related to COVID and forest fires, here are the following important changes: 1) the rules for streamlined licensing that will soon apply; 2) the recent ban on certain vape additives combined with new ingredient disclosure requirements; and probably 3) the “fix it or ticket” approach to certain rule violations.
I want to say that this is the end of program improvements and refinements, but in all honesty it seems like we will be writing about new OLCC marijuana rules in 20 years. It just seems to be the nature of the animal. There will also be indirect local effects as more states go online and the federal ban ends at some point. Immediately, Oregon lawmakers could get back on cannabis policy here in a few months, starting with a close look at a $ 100 million bill for social justice.
The second, more compelling regulatory dynamic in 2020 was an industry wave pushing for enforcement reform. The Oregon Cannabis Association has shown strong leadership here, arguing that licensed cannabis companies “deserve to be treated like companies that need to be regulated, not like criminals to be caught.” As a law firm that represents many licensees in revocation proceedings, we agree that too often agency inspectors (many of whom have law enforcement backgrounds) have been overzealous and unfair. and the general process too cumbersome. Most companies simply do not have the resources or the essentials to combat administrative allegations. While “Fix it or Ticket” was a good start, it will be interesting to see what 2021 brings.
Hemp is difficult to understand. The past year has been brutal, with seed prices dropping from $ 1.00 to $ 0.10, basically overnight. And although far less hemp from Oregon was planted than originally allowed per year in both 2019 and 2020, the price of biomass is still at $ 2.50 or less per pound from $ 40 or $ 45 two years ago. The situation in Oregon is similar to that in the rest of the country. This means – unfortunately – that our hemp CBD litigation attorneys were busy again this year.
What is causing this market depression? A big problem is the total leftover biomass from 2019 which is estimated at 68,000 tons. Because of this flooding, we have several customers who just picked flowers this fall and let the biomass rot in the fields. Aside from this oversupply problem, there are also myriad growing problems associated with a new industry, including a lack of infrastructure, a lack of buyers at all levels, and a lack of expertise among rookie farmers. The ongoing political quagmire resulting from the confusion of the Farm Bill in 2018 has been brutal.
Oregon is probably doing itself no favors with its entire THC testing regime or with its recent restrictions on the import and export of hemp and hemp products. We think it’s good that the Oregon Department of Agriculture (ODA) recently withdrew its hemp plan submitted to the U.S. Department of Agriculture, and we believe the ODA is otherwise invested in the success of the local industry. But stronger federal budget management is vital, from defining controlled substances to regulating CBD in food and beverages.
We believe US hemp will one day be a huge industry on a par with corn and soybeans. The international hemp trade will be even bigger, and Oregon will play a key role in that. But we’re not there yet.
For previous posts in this series, read the following: