Why are cannabis prices falling when inflation is at record highs? The simple answer is there’s more supply than demand. Producers have excess inventory, and to sell it, they have to cut prices. According to Statistics Canada, prices for dried cannabis flower have dropped between 8.3 and 10.2 percent over the last year. Flower prices have dropped nearly 25 percent since legalization began in late 2018. And this controls for factors such as product size and THC levels. Other items like vape pens, edibles and beverages have also gotten cheaper.
But why? Why are cannabis prices falling in this industry but not elsewhere? Is it simply supply and demand? The Canadian cannabis industry is still competitive despite everything working against it. Instead of consolidating their market share, large licensed producers have had to compete with smaller, premium producers. In places like British Columbia, the legacy market isn’t going anywhere. If anything, the grey market has only grown on First Nations reserves where the government has been reluctant to act (and that’s putting it mildly).
But what about other parts of Canada? How is it that cannabis prices can fall when the cost of everything else is going up? One method of investigation is by looking at the numbers. Every major licensed producer, like Canopy or Aurora, is bleeding money. They are selling cannabis at a loss. They anticipated the legal Canadian cannabis market to be larger than it is. While retail sales continue to grow, it is not at a rate that producers can recover their losses.
What the Stats Say
According to the Ontario Cannabis Store‘s quarterly report, 61 percent of dried flower sales were between $3 and $6.50. The OCS thinks they’ve finally overtaken the Ontario legacy market thanks to cheaper flower.
But cheap, mass-produced flower isn’t everything. Canada’s largest licensed producers (Tilray, Canopy, Aurora, and Hexo) have seen their market shares crash from 54 percent of retail sales to 28 percent. While consumers love to see cannabis prices falling, many are interested in premium flower for a higher price.
Consumers would be wise to take advantage of falling cannabis prices. If one can buy 28-grams at $3 a gram, it might be worth stocking up for the future. Canada’s cannabis production is falling in line with consumer demand. Health Canada reports that indoor growing space is down 22% compared to 2020. And producers are closing facilities. Canopy recently laid-off workers (again), while Hexo closed down their Belleville, Ontario facility. Laying off 230 people in the process.
Investors piled into Canada’s cannabis industry expecting significant returns. The sobering truth is that Canada is a big country with a small population. Our cannabis market is simply too small to support the grand delusions many of these investors had. And therefore, producers are clearing out their inventory to keep their heads above water.
Natural Deflation Has Nothing to Do with Cannabis Prices Falling
Ultimately, this little episode in Canada’s cannabis industry highlights an essential economic lesson seldom illustrated in media or schools. That is, falling prices are good for consumers. It debunks the notion that consumers will wait until prices fall even further. I personally don’t know anyone who sees a $3-a-gram deal on cannabis and thinks, “I’ll wait until it’s cheaper.”
Falling prices are supposed to be bad for businesses, but this isn’t technically the case. If cannabis prices decrease, how can producers make a profit? Profit margins, of course, result from both sale price and production costs. If the production costs are falling as well, then profit margins either remain unaffected or improve.
Falling cannabis prices may be a temporary result of a previous miscalculation. But ultimately, falling prices are what a healthy economy provides. That is the point of capitalism, after all. Goods and services are mass-produced, so even the poorest can afford what was once luxury for the rich.
This process still takes place with electronics, for example, but inflation erodes this process. Inflation, far from being a natural aspect of the market economy, directly results from the central bank’s “open market operations” and the chartered banks’ fractional reserve banking policies.
If Canadians want falling cannabis prices to remain, that is, if they wish their money’s purchasing power to stay the same or improve, they should start using dollar alternatives like bitcoin or gold.