In a new report, Whitney Economics assesses that the total output of cannabis cultivated in the U.S. exceeds 48.8 million pounds.
The figure from the 2022 U.S. Cannabis Supply Report includes cannabis in both the legal and illicit markets and covers all product types, such as flower, concentrates and edibles.
Beau Whitney, founder and chief economist at Whitney Economics, said total supply is up slightly from 2021. This year’s supply pretty closely matches the demand, he said.
Some cultivators in Northern California and Southern Oregon have bumper crops and cultivate more, Whitney said, adding, “But generally, the common practice is if they excess inventory one year, then they don’t plant as much the next year. This has been confirmed by my interviews in the legacy fields as well as my interviews with state regulators in multiple states.”
Whitney Economics projects total legal cannabis sales to be $29.3 billion in 2022 and tick up to $81.6 billion by 2030. The firm also forecasts that legal supply will surpass illicit supply beginning in 2026.
Whitney said the current legal cultivation capacity in the U.S., if utilized at 100%, is about 1.5 times greater than the total U.S. demand for cannabis.
“Some folks say, ‘Unlimited demand, unlimited licenses—that’s the best route to go,’” Whitney said. “Whitney Economics vehemently disagrees on that because it might work in a national market, but right now, when you have these state-siloed systems, you can very easily overproduce to the point where you have more supply than demand.
“Michigan’s a perfect example of this—Oregon, Colorado, California. You have more supply than demand, and then that’s actually harmful to the cannabis industry because it drives prices down; it’s a race to the bottom; it drives out margins; it hurts small businesses, women-owned businesses, minority businesses. It actually is beneficial to the MSOs because they can weather a race to the bottom because they’re well-funded and they have access to capital.”
Whitney said Whitney Economics is proposing to regulators that they annually adjust supply capacity relative to the timeline of each program’s regulatory rollout.
“Then you avoid this risk of oversupply, and it creates a healthier, more robust, more successful market,” Whitney said. “What that does is it incentivizes these consumers to enter into the legal space because prices are reasonable, but it doesn’t set up the operators for failure. So, it’s kind of a modified limited-license model, but not an arbitrary limited-license model. And states that we’ve been talking to are very, very keenly interested in learning more about that model.”
Illinois is an example of a state that could use more licenses, Whitney said. “They do have limited licenses there, and they just need more. They need more supply, and they need more access,” he said. “They limited the number of retail outlets, and as a result, there wasn’t a whole lot of access by the consumers. They just said, ‘Well, I’m not going to drive 30, 40, 50 minutes to get my cannabis when I could get it much quicker from the illicit channel.’
“So, our recommendation to Illinois is [to] increase your capacity for supply and increase the number of retail outlets so you can get more consumers greater access to the supply that is produced.”
The projections for industry growth outlined in the new report assume states with medical or adult-use programs will ramp up to meet consumer and patient demand, and that there will be greater normalization of cannabis, whether through federal legalization or interstate commerce, Whitney said.
Inflation could impact future cannabis supply and demand, and it’s already starting to influence declining consumer behavior, he said.
“And, because in many of these states, there’s oversupply, prices are going down. So, retailers may sell the same amount of cannabis, but they’re selling it cheaper. And consumers are not spending the exact same amount now,” Whitney said.
“But where inflation is really hitting the cannabis industry is in the startup costs,” he said. Those costs include facility construction, PVC piping, HVAC systems, to name a few.
“A lot of the mature markets—what’s going on is people are coming in and just buying existing operations. So, inflation doesn’t play a part in the construction inflation,” Whitney said. “But in these new markets, like New York, New Jersey, in the future, Maryland, Missouri, Pennsylvania—those are the states that are big in population, big for the growth percentage for the overall market, and those are the ones that could have suppressed sales, not because the demand’s not there but because the supply is not there and the operators are having a rough time getting started.”
A transition—from separate supply chains in individual states to the allowance of cannabis businesses across the country to legally and compliantly work together —is the future that Whitney said the industry needs.
“There’s a real compelling case on some of the more salient issues here that are being discussed at the federal level, especially SAFE Banking, especially interstate commerce, especially 280E, tax reform—all this stuff plays a role in the industry,” Whitney said.