The California cannabis market, once a flourishing hub, is facing a challenging reality as small-scale farmers are increasingly abandoning their fields. The dual threats of destructive wildfires and falling prices are driving this exodus, signaling a troubling trend for America’s largest legal cannabis market. Industry experts anticipate this trend will continue as conditions worsen.
One key factor contributing to the farmers’ struggles is the lack of access to federal aid. Cannabis cultivators are ineligible for federal assistance due to marijuana’s classification as a controlled substance. Anthony Coniglio of NewLake Capital Partners, Inc. (NLCP) highlights the problem: “These operators don’t have the ability to go to FEMA (Federal Emergency Management Agency) to get reimbursement for losses in a federal disaster zone because of the federal classification.” The escalating severity of wildfires, coupled with this lack of financial support, renders the risks unsustainable for many farmers.
Adding to the financial strain, the economic landscape for cannabis in California has taken a downturn since 2021. An oversupply of cannabis has driven wholesale flower prices down from over $2,000 per pound during the pandemic peak to around $1,200. “The lower price point of wholesale doesn’t create enough margin for people to take on risk of wildfires,” Coniglio remarked, emphasizing the difficulty of maintaining outdoor cannabis farms in the face of these challenges.
Climate change is further exacerbating the situation by driving up insurance premiums, squeezing the already narrow profit margins. Morgan Paxhia, co-founder of Poseidon Investment Management, noted that rising operational costs for electricity, water, and labor haven’t been offset by crop pricing, pushing more farmers out of the market.
The retreat from cultivation is particularly evident in Lake County, a region in Northern California that was once a thriving cannabis growing area. Numerous farmers have relinquished their cultivation permits, with data from CRB Monitor showing a drastic over 20% drop in active business licenses in the first quarter of 2024 compared to the previous year.
This decline in cultivation is reflected in California’s overall cannabis market. With $5.3 billion in cannabis sales in 2023, the market is shrinking from its peak of $6 billion in 2021, now trailing behind Colorado. George Archos, founder and CEO of Verano Holdings Corp. (VRNOF), told Reuters, “Industry dynamics continue to pose significant challenges for legal cannabis operators in California. As a result, other state markets are seen as more attractive.”
The financial struggles of companies like Lowell Farms Inc. (LOWLF), which reported a 50% revenue drop in Q2 2024 after exiting cultivation, highlight the broader challenges facing California’s cannabis industry amid declining prices and profitability. The exodus of small-scale cannabis farmers from California paints a stark picture of the industry’s evolving landscape. The combination of wildfires, lack of federal aid, and declining prices is making it increasingly difficult for these farmers to stay afloat, leading to a decline in California’s cannabis market and a shift in dominance towards other states.
