(This is the eighth 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, Part 6 Alaska and Part 7 Michigan.)

Wholesale marijuana flower prices in Illinois are soaring as strong demand in the state’s nascent recreational cannabis program puts a strain on supply and cultivators scramble to build out facilities.

Illinois adult-use cannabis sales started gangbusters in January, with retail sales hitting $40 million in the first month – one of the strongest starts for an adult-use market since state-legal recreational sales began in the U.S. cannabis industry.

Sales dipped in February to $35 million, but the month had two fewer shopping days and some of the early excitement may have faded, if only slightly.

Marijuana Business Daily projects the Illinois recreational program could generate up to $2.5 billion a year, with the tourist market a large driver of sales.

Marijuana business owners in the state report pounds of wholesale cannabis flower are selling for:

Average-quality indoor: $3,500 ( $3,300 for medical marijuana a year ago)

Premium-quality indoor: $4,000 ($3,500 for medical marijuana a year ago)

“Demand is currently far in excess of supply,” said Donny Trivisonno, executive vice president of planning, insights and analytics for Chicago-based vertically integrated cannabis company Cresco Labs.

Supply strain to persist

Wholesale cannabis suppliers are selling out of their flower inventory every week, with no indication that the supply will catch up anytime soon.

According to Ben Kovler, founder and CEO of Chicago-based vertically integrated cannabis company Green Thumb Industries, the medical marijuana market sold about $250 million worth of cannabis in 2019, and he expects demand will be about five-10 times that going into 2023.

“It will take a while to build out that kind of supply,” he added.

Smokable flower is the one category of cannabis products that’s the most scarce, as it’s in highest demand and the hardest to produce, according to Kovler.

That strained supply is leading to high costs being passed on to consumers. An eighth-ounce of cannabis flower can cost as much as $60 pretax at a store, which is considerable for a recreational marijuana market.

Though Kovler said he anticipates those prices will fall as more capital is deployed to build out production and increase supply.

Future expansion

That initial high cost is because large-scale operators have spent so much money building out their facilities they have to defer some of that cost to the consumer, said Mark de Souza, CEO of Chicago-based vertically integrated cannabis company Revolution Global.

To De Souza, the support from regulators and legislators allowed his business to build out a large footprint and understand exactly what the rules required. The regulators created the “gold standard” of cannabis markets, he said.

De Souza expects it’ll take until 2022 for the entire supply chain to be fully built out, to the tune of around $500 million of capital investment.

His company is working on finishing the construction of its second building.

“We find ourselves working 18-hour days to build out and grow as fast as we can,” De Souza said.

Cresco Labs is also building out facilities to keep pace with the demand. One in Lincoln, Illinois, will contain about 170,000 square feet of canopy when it’s finished.

“We are working hard to bring more product to market in coming months through ongoing expansion,” said Trivisonno.

Though “supply will remain tight for a while,” he added.

Trivisonno said that both medical marijuana patients and adult-use consumers are demanding flower, so the company is focusing on making it available.

“Growing quality flower at scale in any market is challenging,” he added.

Regulators got it right

Cannabis business owners in Illinois seem pleased overall with the rollout of the recreational market, praising regulators and lawmakers for creating a program that’s friendly to the industry.

“The state did a great job bringing adult-use legalization to fruition,” said Trivisonno.

Sammy Dorf, chief growth officer and co-founder for Chicago-based vertically integrated cannabis company Verano Holdings, echoed that.

“If you look at the Illinois regulated model, it’s a really strong program that’s set up well,” he said.

Dorf highlighted that more retail stores are coming online this year, which should lead to better access for patients and consumers, and an increase in sales for cannabis companies. The state could allow up to 185 recreational retail stores this year.

Dorf’s not worried that the market will become oversupplied like the industry has seen in other recreational marijuana markets such as Washington state and Oregon. He expects the supply and demand dynamic to stay well-balanced.

While Illinois could license up to a maximum of 500 stores in the coming years, that is still relatively few for a state with nearly 13 million people.

“We love working in markets that are highly regulated,” Dorf said. “We believe it creates the best and most consistent product for the consumer.”

Bart Schaneman can be reached at [email protected]