Here we are at the end of 2020 (thank goodness!), which means it’s time for the fifth annual “State of the State” post on Oregon cannabis. The year 2020 was remarkable for the Oregon cannabis industry, mostly due to COVID and its effects, including record sales on the THC side. But there were also key regulatory changes, raging wildfires and other unforeseen developments as we take stock on a harrowing year, and look ahead to 2021.
Oregon passed the $1 billion sales mark
This happened sometime in late November, according to data provided by the Oregon Liquor Control Commission (OLCC), which was widely picked up in the press. To put that number in perspective, 2019 sales through the same period were $726 million, which puts the state at a 40% gain year-over-year. And it’s not like Oregon was coming off a slow stretch, either: 2019 saw retail sales rise 24.1% over 2108; and 2018 saw a 29.1% increase over 2017.
There are likely a multitude of factors driving the 2020 increase. The big one is probably COVID and its related effects, including federal stimulus checks, enhanced 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 may also be contributing, like general state population growth. But overall, it seems that people just love cannabis in Oregon.
It’s still a very competitive environment
Just because retail sales are high, does not mean everyone is crushing it. There are so many operators. Today, Oregon is up to 719 licensed retailers (versus 664 a year ago; an 8% increase), with 200 more in the pipeline. If you estimate an average of 700 retailers active throughout 2020, you wind up at $1.1 billion in sales, or $1.57 million average annual sales per store. That’s pretty good, but you’ve obviously got low stores and high stores. We’ve seen plenty of both.
Cannabis production remains high but relatively static with 1,177 licensees (there were 1,152 at the same time last year). Numbers for processors, wholesalers and labs have also remained relatively static. I expect that to change somewhat in 2021– in tandem with OLCC’s new streamlined licensing process, the agency recently shook loose an avalanche of inchoate and stalled applications, going back to the infamous 2018 pause on application acceptance.
Related to all of this, wholesale prices are again trending downward and retail pricing tends to follow. That’s somewhat typical for the end of the year, when: 1) dispensaries tend to demand and hold less inventory for tax considerations related to Internal Revenue Code § 280E, and 2) a crush of outdoor flower makes its way through the supply chain. There is also a wild card at play in 2020– the effect of the Oregon wildfires. These horrible fires were devastating to many farms, but could have the net effect of nudging prices up a bit heading into 2021.
The secondary license market will change
Buying and selling Oregon cannabis businesses can be an exercise in patience. For the last few years, we’ve seen the regulatory approval timeline float between 5 and 9 months, which is an eternity for buyers and sellers. Recently, with streamlined licensing, we’ve seen changes-in-ownership come in as quickly as two months, and we expect to see new license applications processed on an accelerated timeframe too. Our prediction is that for every class of license outside of production, buyers will be less willing to pay a premium to sellers for the license interest itself in 2021.
Production is different, of course. Senate Bill 218 is still in effect, which means that OLCC does not accept new applications for marijuana production licenses. The only way to receive one of these licenses is to find a willing seller, and we do not expect to see much change in the $125K to $175K these sellers often demand. I’d like to be wrong here.
Overall, we are still running a lot of Oregon cannabis M&A deals (including with real estate), and I’ll be interested to see if that years-long trend continues in 2021. My guess is that it will, even if the focus is more on brands and non-“license” assets.
Regulatory Dynamics
We saw some big changes in 2020. The first area of movement relates to OLCC rule changes. Aside from all of the COVID- and wildfire-related changes, key changes here are: 1) the soon-to-be permanent rules on streamlined licensing; 2) the recently enacted ban on certain vape additives, coupled with new ingredient disclosure requirements; and probably 3) the “fix it or ticket” approach to certain rule violations.
I’d like to say this is the end of program tweaks and refinement, but honestly it feels like we will be writing about new OLCC marijuana rules 20 years from now. It just seems to be the nature of the beast. There will also be indirect local effects with more states coming online and federal prohibition ending at some point. More immediately, the Oregon legislature may also get back into cannabis policy here in few months, starting with a hard look at a $100 million social equity bill.
The second, more captivating regulatory dynamic at play in 2020 has been an industry groundswell advocating for enforcement reform. The Oregon Cannabis Association has shown strong leadership here, arguing that licensed cannabis businesses “deserve to be treated like businesses to be regulated, not 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 over-zealous and unfair; and the general process too heavy-handed. Most businesses simply do not have the funds or the wherewithal to fight an administrative allegation. So while “fix it or ticket” was a good start, it will be interesting to see what 2021 brings.
Hemp
Hemp is hard to figure. Last year was brutal: seed prices dropped from $1.00 to $0.10, basically overnight. And though far less Oregon hemp was planted in both 2019 and 2020 than initially permitted each year, biomass pricing is still at $2.50 or less per pound, versus $40 or $45 just two years ago. The situation in Oregon is similar to what is happening all around the country. This means, sort of unfortunately, that our hemp-CBD litigators were busy again this year.
What’s causing this market depression? One big issue is all of the leftover biomass from 2019, estimated at 68,000 tons. There are also myriad growing pains associated with a new industry, including lack of infrastructure, lack of buyers at every level, and lack of expertise by rookie farmers. Underpinning all of this, the ongoing policy morass arising from 2018 Farm Bill confusion has been brutal.
Oregon probably isn’t doing itself any favors with its total THC testing regime, or with its recent limitations on import and export of hemp and hemp products. We do like that the Oregon Department of Agriculture (ODA) recently withdrew its hemp plan submitted to the U.S. Department of Agriculture, and we believe that the ODA is otherwise invested in seeing local industry succeed. But more federal housekeeping is critical, on everything from controlled substance definitions to regulation of CBD in food and beverages.
In our view, U.S. hemp will be an enormous industry one day, on par with corn and soybeans. The international hemp trade will be bigger still, and Oregon will be a key player in all of this. But we aren’t there yet.
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For previous posts in this series, check out the following:
