(This is the seventh in a series of stories from Marijuana Business Daily examining wholesale prices in U.S. recreational marijuana markets. Part 1 covered Nevada, Part 2 Washington state, Part 3 Oregon, Part 4 California, Part 5 Colorado and Part 6 Alaska.)

A tight supply of wholesale recreational marijuana flower in Michigan, one of the youngest adult-use markets in the U.S., is leading to sharply higher prices as producers struggle to keep pace with growing demand.

Many of the state’s municipalities remain opposed to recreational marijuana commerce and strict testing standards are causing a bottleneck in the supply chain, both of which are exacerbating the shortage as recreational growers bring cultivation facilities online.

Low-quality indoor: $3,400-$3,600 ($2,400-$2,600 for medical marijuana a year ago)

High-quality indoor: $4,500-$5,000 ($3,500-$4,000 for MMJ a year ago)

“It’s a good time to be a producer,” said Vishal Rungta, president and CFO of C3 Industries, a vertically integrated cannabis company based in Ann Arbor. “Pricing is high and there’s demand for everything.”

Adult-use cannabis sales began Dec. 1, 2019, with totals reaching almost $6.5 million during the first month. Since then, cultivators have slowly increased production.

Recreational marijuana sales could reach $1.4 billion-$1.7 billion a year when the market reaches maturity, according to Marijuana Business Daily estimates.

The market is predicted to find its footing and increase supply, but that could be months away as production facilities take time to build out and growers need to dial in methods.

“The market is undersupplied,” Rungta added, and demand is still outpacing any increases in supply.

Michigan also has a robust program of medical marijuana caregivers who make up a significant portion of the flower supply and compete with the cultivation companies that work in both the medical and recreational markets.

“The caregiver market plays a huge role,” said Omar Hishmeh, president of vertically integrated cannabis company Exclusive Brands, based in Ann Arbor. “Without it there would be a huge shortage.”

More municipalities needed

When the adult-use rules were created in Michigan, regulators didn’t limit the number of recreational marijuana businesses but gave municipalities the choice of whether to opt in or not.

As of December 2019, nearly 80% of the cities, towns and counties (about 1,400 communities) in the state had opted out of allowing adult-use cannabis sales.

For example, Detroit, which could have roughly 50 retail locations, extended its ban of adult-use cannabis sales through March 31 until regulators could develop a social equity program.

But more municipalities are expected to come around in the near future, said Matt Ruhle, purchasing director for Utopia Gardens, a vertically integrated cannabis company in Detroit.

Until that happens, though, “we’re only going to see prices go up for the time being,” he added.

With fewer towns on board, there will be less flower supply, and consumers are willing to travel to the areas that allow adult-use sales.

The lack of cultivation companies is pushing the cost onto consumers, which creates a challenge for retailers, said C3 Industries’ Rungta.

“There’s a need for a lot of supply … because a lot of municipalities have opted out,” he said.

Although cannabis cultivation is not allowed in certain areas, strong enough demand still exists in the areas that permit recreational sales to strain the supply.

Rungta also expects to see more of the conservative areas come on board with cannabis sales.

Tough testing

According to several industry insiders, stringent testing requirements are slowing down the flow of the supply chain.

Rick Thompson, owner of the Michigan Cannabis Business Development Group that’s based in Flint, said the regulators have moved the “goal posts in regards to testing standards.”

The state added a test for vitamin E acetate after the vaping health scare broke out last year, leading to a recall of more than 9,000 vape cartridges from one Detroit dispensary alone.

It also recently included an expanded test for heavy metals.

According to Ruhle, multiple growers, both large and small, have failed testing and have been forced to destroy product.

One reason for that is Michigan has low limits for acceptable pesticides. Another is growers are still learning how to comply with the testing rules.

The industry is working to appeal to regulators to ease the limits somewhat, but that process is still ongoing.

“If you can pass the testing, you’re making prices that are unheard of for flower,” Ruhle said.

The tough testing requirements have even caused some investors to shy away from building larger grows (300,000-500,000 square feet), according to Hishmeh.

He said he’s waited as long as three weeks to get products through testing.

“It is a struggle right now to get product,” Hishmeh added.

Looking ahead

Thompson highlighted Michigan’s history for throwing cannabis-themed parties and festivals, and he expects to see more of those this year.

Those consumption-heavy events could strain the supply of flower even further, he added.

Rungta said some large greenhouses are in production, and he also figures a lot of multistate operators will plant their flags in Michigan in the future.

Hishmeh said his company went from 60 employees to 175 in less than 60 days, mostly because of the demand for manufactured goods.

His company is adding another 22,000 square feet of production for processing and manufacturing, effectively doubling the size of that portion of the facility.

“The demand is very high,” Hishmeh added.

Bart Schaneman can be reached at [email protected]