Posted by: Josh Lehner | April 20, 2023

Oregon’s Marijuana Outlook

Today is April 20th and there has likely never been a better time to be a cannabis consumer in Oregon. Prices are at record lows, having fallen significantly in the past couple of years. Given the large number of retailers in the state, product is widely available at these low prices. Specifically, wholesale prices for usable marijuana are down 54%, while retail prices are down 30% since March 2021. Extract prices are down 15% and are also at record lows.

While the oversupply of production and saturated retailer market that continue to drive prices lower is not new news, these ongoing issues have really come to a head in recent quarters.

First, today’s lower prices do not appear to have resulted in an increase in quantities sold. Now, OLCC estimates that the total amount of THC sold in 2022 increased compared to 2021 but at the product level the number of pounds of usable marijuana, or the number of edibles and the like is steadier. Consumers in the past year appear to have stable consumption patterns and have pocketed the savings or had to spend it on other items in their budget due to high inflation.

Second, if the volume of sales is relatively steady but prices are declining that means business revenues, and tax collections are declining as well. It’s a complicated picture of businesses struggling with market conditions and being unable to pay all their bills. As firms struggle with profitability, we have seen a rise in tax delinquencies. The cascading impact is for those lower on the priority list, be they growers on consignment or the taxing authorities to see the biggest impact. Now, our friends over at the Oregon Department of Revenue are of course working with firms who are behind on their taxes, as they always do with taxpayers and through enforcement activity some revenues are likely to be regained.

The bottom line for the outlook is our forecast has been lowered both today and over the entire 10 year forecast horizon due to these dynamics. Specifically, resources in the current 2021-23 biennium have been lowered by $25 million in the past two quarterly forecasts. More than half of this reduction is due to lower-than-expected tax payments relative to actual sales. Now, sales themselves have been a few percent lower than previously forecasted, but even after taking this reduction in the outlook, recent tax collections are even weaker than that. Looking forward, sales and tax revenues will grow, however all future biennia’s forecasts are revised downward by 5-10 percent relative to previous expectations.

I want to circle back on the supply and demand imbalance piece of the outlook.

Typically, in a mature market, sales would more closely track incomes and inflation or the cost of production. However in the current marijuana market this is not happening due to the ongoing price declines, a result of increased competition. These dynamics are bad news for firms trying to operate a profitable business.

Now, an initial supply response occurred this past year. Total harvest in 2022 declined 13 percent compared to 2021, with an even larger 19 percent decline during peak harvest season. That said, the market still is not in balance. Some of our advisors indicated another similar decline this year, bringing harvest closer to 2019 or 2020 amounts would likely bring the market into better balance. While early in the year always sees the lowest harvest volumes, harvest continues to be down year-over-year in recent months.

We are also starting to see businesses adjust to the market in terms of employment. At OLCC licensed firms that our friends at the Employment Department are able to track in the unemployment insurance system, jobs are down 8 percent year-over-year. Much of this decline is in the agriculture and manufacturing sectors which is where a reduction in harvest and production is likely to be felt the most. Employment in trade, transportation, and warehousing (likely mostly retail) is down the last couple of quarters but unchanged on a year-over-year basis.

The other source of market balance could come from increased consumer demand. That said the low-hanging fruit for demand growth is behind us. Marijuana usage rates are steady in recent years, after increase considerably in the past decade. Many former black market consumers have converted to the legal market, and those that remain may be harder to switch. And underlying population growth has slowed during the pandemic, with only a modest rebound expected in the outlook. [In the just-released 2021 SAMHSA data, marijuana usage rates in Colorado, Oregon, and Washington all held steady at around 19-20 percent.]

Overall, expectations are the market will stabilize in the not-too-distant future. Sales and tax collections will remain relatively steady this year and next. Sales did perk up in March, an indication a sales bottom may have been reached. Overall revenue and resources will be unchanged from the current 2021-23 to 2023-25 biennium. As supply and demand are expected to get into better balance, some pricing power and profitability will return to the market. Overall sales and taxes will increase with a growing population and economy in the decade ahead. Usage rates and consumption as share of income are expected to hold steady in the longer run. Ultimately our office expects marijuana to be a normal good, where sales and consumption generally rise with income gains, even if that has not been the case in the past year due to the price declines. Revenue upside and downside risks primarily lie with what happens to prices, and not so much from an economic/income/population perspective today.

This post is largely based on our office’s most recent forecast, along with updated data where available.

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