Cannabis industry no longer riding high: Job losses, supply imbalances, dwindling profits hit sector
Washington debates ways to link the marijuana businesses with banking, ease tax burdens.
Western states such as California and Oregon are overflowing with cannabis, a supply glut that is driving down prices and sparking pleas for federal permission to sell marijuana across state lines.
Pot users in New Jersey are facing the inverse, with consumers confronting high prices as trade groups accuse the state of slow-walking licenses that could increase the number of cannabis operators supplying the legal market.
A trade group said Colorado had its worst April sales period in five years, a month associated with big cannabis sales.
The legal pot industry is experiencing growing pains from coast to coast, after a decade of rapid growth fueled by legalization in nearly two dozen states.
Industry representatives point to general stressors in the economy, including inflation and soaring interest rates. Venture funding is down, and demand for marijuana eased after a pandemic-fueled surge among people trapped at home.
“There’s definitely significant headwinds across the board, and part of that is there is oversupply in western states,” said Aaron Smith, co-founder and CEO of the National Cannabis Industry Association. “The industry is really over-regulated, overtaxed — we know that — and we’re competing against an existing underground market that has been thriving for decades.”
Turbulence in the pot industry is sparking calls for government rules that would allow interstate commerce and improve access to banking services. In turn, there is pushback from advocates who say legal pot is a failed experiment and doesn’t need a bailout from state capitals or Washington.
“I don’t think people who are in violation of federal law deserve any kind of congressional relief. That would be like saying we should give relief to those engaging in prostitution businesses in Las Vegas,” said Luke Niforatos, executive vice president at Smart Approaches to Marijuana.
Colorado and Washington state in 2012 became the first states to legalize recreational marijuana. Since then, 21 other states and the District of Columbia have joined them, though states have varying rules and approaches to sales. Minnesota launched its program this summer, making it the latest to join the fold.
Much of the angst around legalization centered on the potential harm from products with high levels of THC, the active ingredient in cannabis, or fears of an increase in drug-influenced driving and accidents.
Now, there is hand-wringing over the economics that underpin the sector after a period of explosive growth.
“Go-go investment in business expansion, with a goal of capturing market share, has given way to a focus on bottom-line sustainability — and to bringing payroll costs in line with actual revenue. Call it the great cannabis reset,” wrote Vangst, a cannabis jobs platform, in its 2023 jobs report.
The marijuana sector supported 417,493 full-time equivalent jobs in early 2023, or down 2% from a year ago, according to Vangst.
“After nearly a decade of unbroken double-digit job growth, the cannabis industry collectively pressed pause on new hiring in 2022,” the report said.
On the East Coast, pot advocates say a small cabal of operators in New Jersey are keeping prices artificially high because they face little competition.
The New Jersey Cannabis Trade Association released a late-August memo that said more than 700 applications to operate cannabis businesses are “still pending, leaving aspiring cannabis entrepreneurs unable to open their operations.”
“Consequently, potential tax revenue that would greatly benefit the state is lost as it continues to flow through the illicit market,” the association said.
The New Jersey Cannabis Regulatory Commission says individual businesses, including trade association members, set the prices that consumers face and everyone should work together.
“We hope their membership heeds their own call to action. High prices keep consumers out of the legal market and keep tax revenue low,” commission Executive Director Jeff Brown said. “New Jersey can be the premier cannabis market on the East Coast. The NJ-CRC looks forward to working with the NJCTA, and all stakeholders, to make that a reality.“
Out West, terrific growing conditions in Pacific states have led to marijuana surpluses that remain trapped within state borders because of the federal ban on marijuana. States would like to send excess supply to legal programs in other states that have legalized pot. For now, they face dwindling prices and profits.
Earlier this year, The Associated Press reported that in places like Oregon, “it’s an open secret some licensed growers have funneled product to the out-of-state black market just to stay afloat.”
Industry players said they hope the growing appetite for legalizing marijuana comes with a federal desire to let states shuffle their products around the country.
“When we’re talking about reforms, interstate commerce is vitally needed,” said Mr. Smith of the national industry group. “Just talking about prices being too high in New Jersey and the eastern states and too low in the western states — clearly, there’s a solution to that.”
Morgan Fox, the political director of NORML — a pro-legalization group — said there is room for optimism as more states authorize recreational marijuana. But the industry wants Congress to get moving on its wish list.
“One of the biggest complaints that any cannabis business has, particularly smaller and mid-size businesses, is lack of access to capital. And this is almost entirely due to the fact that banks are discouraged from working with cannabis businesses because of outdated federal laws,” Mr. Fox said. “Even if you are able to find a bank that is willing to work with you, oftentimes they charge exorbitant prices in order to provide those services much beyond what other businesses have to deal with.”
Senators in both parties are championing a bill that would give the cannabis industry access to banking without fear of penalties or high fees, saying financial rules must adjust with marijuana laws so that businesses are treated equally and workers are no longer paid in cash and exposed to robbery.
The SAFE Banking Act would prohibit federal bank regulators from penalizing a bank for providing financial services to a legitimate state-sanctioned and regulated cannabis business. It would also stop regulators from terminating a bank’s federal deposit insurance solely because it provided services to a state-sanctioned cannabis business or associated business.
The Senate Banking Committee held a hearing on the bill in May and advocates are hoping the panel holds a markup to advance the bill soon.
The Marijuana Industry Group (MIG) pointed to red tape and the lack of cooperation from banks as a driver of cannabis job losses in Colorado. Mastercard, for instance, said this year that account holders could not use their debit cards at dispensaries.
“Year over year increases in regulations and taxes continue to drive business costs up, while inflation, purchase limits, and a lack of merchant processing make it more difficult for patients and consumers to access cannabis, which drives them to the illicit market,” MIG Executive Director Truman Bradley said.
Senate Majority Leader Charles E. Schumer included “safeguarding cannabis banking” on his to-do list for the fall work period in a memo to colleagues, raising the likelihood the SAFE Banking Act will advance.
Also, the Biden administration in late August told the Drug Enforcement Administration it should move marijuana from the Schedule I list of drugs with a high risk of abuse to Schedule III, a less restrictive classification. The move, if accepted by the DEA, would not open the door to interstate sales but would have a tangible impact in allowing pot operators to deduct business expenses and save money during a challenging time for the industry.
During a recent appearance on Newsmax, Rep. Matt Gaetz, Florida Republican, said of the issue, “Perhaps the worst decision made by the U.S. government in 1970 was to begin the war on drugs through the Controlled Substances Act.”
For years, marijuana businesses have complained that listing marijuana as a Schedule I drug subjects them to “Section 280E” tax provisions that prevent them from taking traditional deductions for business expenses.
The lack of banking access and tax restrictions create “a situation where businesses are forced to charge very high prices in order to be able to stay solvent,” Mr. Fox said. “And that makes it much more difficult for them to compete with the unregulated market.”
Organizations that oppose the rush toward lax marijuana laws say it is time to reflect on whether the industry is good for Americans, rather than bail it out.
“It’s very clear this experiment has failed,” Mr. Niforatos said. “The black market is beating the legal market everywhere.”
Mr. Niforatos said Mr. Schumer might be championing the safe-banking measure but, even if it makes it out of the Senate, the GOP-led House won’t make it a priority. He also pointed to voters in Oklahoma, Arkansas and North Dakota and South Dakota who rejected legalization measures.
Pot-industry advocates say the march toward legalization is here to stay, so lawmakers should help them weather a rocky period. Over two-thirds of Americans, 68%, told Gallup last fall they think marijuana should be legal, up from 12% when the pollsters started asking about it in 1969.
“We’ve gotten to a point where it’s less about, you know, the opposition coming in with their doom-and-gloom predictions of what the industry is going to do,” Mr. Smith said. “It’s more about addressing general congressional dysfunction and the end of political divisiveness. That’s impacting every issue in America.”
