Lighter cannabis harvest is expected as growers await price recovery

California’s outdoor cannabis harvest, nicknamed “Croptober,” is in full swing to beat the fall rains and frost. But what’s weighing on the expected tonnage more than the seasonal weather and years-long drought is the economic climate for the fledgling legal industry.

“It looks like every farmer has taken advantage of the opportunity to go fallow,” said Samuel Rodriguez of Good Farmers Great Neighbors, a Central Coast cannabis farming advocacy group whose members also have substantial North Coast acreage.

The scale of those cutbacks in production are ranging from 30% to half of previous levels — to fully not harvesting, Rodriguez said.

“It was driven by the shock and awe of 2020–2021, the depression of the price per pound,” he said.

Estimates of pricing for outdoor growers vary, but it is ranging from $200 to $500 per pound, Rodriguez said.

The average price in Sonoma County’s inaugural report on the legal crop was $570 a pound last year, amounting to $121 million for the 212,548 pounds harvested from nearly 50 acres, all but 3 acres of that in outdoor grows.

“But supply and demand is stabilizing, so there will be a fair price,” Rodriguez said.

The U.S. wholesale spot market index, according to Cannabis Benchmarks, was $999 a pound as of Oct. 21, down from around $1,300 as recently as May, $1,384 a year ago and $1,658 in October 2020.

But the Connecticut-based tracker of the legal trade nationwide noted that pricing for indoor-grown flower is holding ($1,284 a pound), while pricing for greenhouse (“hoop house”) and fully outdoor flower has been faltering, at $688 and $424 a pound, respectively.

“California and Oregon indoor product prices are moving higher on demand for what many connoisseurs will say is the best cannabis in the world,” the company wrote in an Oct. 21 research note.

Impact of regulation and illegal pot

But what has impacted other cannabis businesses, from cultivators to distributors, is competition with the continuing — and some say, increasing — illegal side of the industry, where operators are unlicensed, unregulated and untaxed.

California cultivators started raising an alarm nearly a year ago about the weight of state taxation on their profitability and potential as ongoing concerns. That led to Gov. Gavin Newsom’s signing a slate of legislation this summer, most importantly a cut in the cultivation tax and shift excise tax collection from distributors to retailers.

Daniel Sumner, an agricultural economist at UC Davis, said regulatory and taxation reform for the industry is a good start, but officials have to come to terms with the context for legal cannabis.

“There has been a lot of cannabis in the North Coast for very long time,” said Sumner, co-author of the recently published “Legal Weed: The Blunt Realities of Cannabis Economics.” “Regulators may forget that people in the field have a tough competitor that doesn’t have to pay attention to the rules.”

And that’s not just the maze of cannabis licensing and regulatory rules.

“I’ve talked to cannabis companies that say they are compliant with the cannabis rules, and now (regulators are) changing the environmental rules,” Sumner said. “The (illegal) cannabis industry has had a bad reputation of not following environmental rules. Many still use pesticides on cannabis that is not safe and dump waste in streams. Environmental regulators know that cannabis growers (historically) cut corners, so they’re really going to be strict. That raises costs.”

But Sumner has been arguing that cannabis crop prices are too high, considering what is seen in other mature agricultural commodities, such as tomatoes. Long term, as innovations in production reduce operating costs and boost production, prices and producer costs come down.

But in recent years, North Coast cannabis advocates have been pursuing a premiumization of the industry, similar to what’s been happening with the wine business. While average wine grape prices per ton may be below $1,000 across California, tonnage prices in premium growing regions such as Napa Valley and Sonoma County can be several thousand dollars.

Cannabis real estate market softens further

Demand for indoor spaces to house cultivating, processing, testing, distribution and retailing operations has plateaued in Sonoma County since the initial real estate boom in the year leading up to California adult recreational-use legalization in 2018, according to Stephen Skinner.

He’s a commercial real estate agent in Keegan & Coppin Co. Inc.’s Santa Rosa office who brokered a number of the purchase and lease deals for several hundred thousand square feet of buildings in Santa Rosa, Cotati and surrounding unincorporated areas.

“Anybody who was able to secure a location and able to get up and running and pay back investors has done so,” Skinner said. “We’re starting to see a few deals with some turnover of some spaces that were not built out, partially built out or fully built out.”

One such building Skinner is now marketing again is 1809 Empire Industrial Court, a 3,700-square-foot Santa Rosa light-industrial building where a producer of cannabis extracts and a maker of edibles tried to get started.

The latter was 707 Cannakitchen, a commercial rental kitchen tailored toward makers of cannabis consumables such as what would be produced by its affiliated business, Aces High Chocolates. It was a venture by notable vintner Paul Hein of P.B. Hein Vineyards in Napa Valley. A tenant-improvement permit was applied for in July 2019, and the final inspection was secured early last year, according to city records.

“Unfortunately, it ends up being a very sad story,” his nephew Matt Graham told the Business Journal.

As the kitchen was being finalized, Hein’s health faltered. They tried to find a buyer for the business, but a lack of takers and plans by the building owner to sell the structure led to just winding down the business.

Jeff Quackenbush covers wine, construction and real estate. Before coming to the Business Journal in 1999, he wrote for Bay City News Service in San Francisco. Reach him at jquackenbush@busjrnl.com or 707-521-4256.