Adam Jackson
As the U.S. cannabis industry grapples with the harsh realities of oversupply, falling wholesale prices, tighter regulations, and distribution problems, the outlook for cannabis cultivators remains concerning.
New findings based on the third edition of the U.S. Cannabis Cultivator Survey from Wells Fargo detail the issues and feelings behind the trends from operators on the ground.
The survey, which included responses from more than 400 growers across eight U.S. states, revealed a significant negative sentiment towards the market conditions among the cultivators. A substantial 58% of growers described their feelings towards the market as “bad” or “terrible.” In comparison, a mere 11% reported feeling “good” or “great” about the current state of affairs.
California, the state with the highest number of growers, had the most dismal sentiment, with 66% of cultivators expressing a “bad” or “terrible” outlook on the market situation. That negativity primarily stemmed from the relentless fall in wholesale prices, accounting for 34% of the frustration, followed by restrictive regulations at 29%, and a lack of distribution avenues at 10%.
Price pressure across the board is undeniable. Around 87% of cultivators say they are selling their wholesale flower for $1,250 per pound or less, a disheartening increase from the approximately 83% and 74% at that level in fall and spring 2022.
More alarmingly, a majority (59%) reported recent selling prices under $750 per pound, well below the average breakeven price of $800 per pound, making profitability an uphill battle.
Despite the obstacles, cultivators are showing resilience. Only 19% of growers plan for a partial or complete exit from the industry, down from 22% and 27% in fall and spring 2022, respectively.
On the other hand, this persistence to remain active could exacerbate the oversupply issues, prolonging recovery and potentially causing further price drops. A considerable 42% of cultivators plan to increase cultivation over the next 12 months, adding to the supply glut and market instability.
Still, the report also shows that growers are prioritizing investments in nutrients (65%) and soil (45%), reflecting the urgency to optimize production while minimizing costs. Fewer cultivators plan to buy high-cost items such as lights (32%), irrigation systems (30%), and extraction equipment (16%).
The survey’s results carry implications for the larger cannabis industry and related stocks. Companies such as Scotts Miracle-Gro Co. (NYSE: SMG) will need to focus on mitigating the damage caused by the downturn in the company’s gardening division.
Scotts is expected to pivot towards recovery strategies in the sector, limiting damage from its hydroponics subsidiary, Hawthorne, which is projected to contribute just 12% of sales and 0% of profit in fiscal years 2023 and 2024.
Other firms with direct market exposure, such as Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) and GrowGeneration Corp. (Nasdaq: GRWG), likely will face a tough road ahead due to these headwinds.
