July 6, 2022: Last week, California’s onerous cultivation tax ($161/lb.) was officially eliminated. While far from solving all the issues for California operators, the tax change meaningfully reduces the break-even threshold for growers and particularly those with the biggest scale in capacity. In California, scale permits a meaningful wholesale price premium as retailers and distributors are typically willing to pay up to consolidate relationships as well as a lower total cost of production on greater volumes. The other driver of premium wholesale pricing is branded products. Brand power also tends to come with scale of operation given that brand success in the space is still largely predicated on distribution.
Some savings are likely to be passed on to distributors and retailers however without that we believe the total cost of production for outdoor growers is reduced by more than 40% with the elimination of the tax and the breakeven price for wholesalers is lowered from ~$375 to $214. The average price of outdoor grown flower in the state today is approximately $400/lbs and has been as low as $300 earlier this year.
