Oregon Cannabis: State of the State

Welcome to the seventh annual “State of the State” post on Oregon cannabis. For the first year since program launch, regulated cannabis sales fell in the state. We also saw significant legislative and regulatory changes, further contraction of the hemp industry and a myriad of interesting odds and ends. Overall, it has been a rocky ride (see: Tough Times in Oregon Cannabis). Let’s get to it.

Sales and prices fell

Last year at this time, I observed that sales had begun to decline, notwithstanding the record high of $1.184 billion that Oregon ultimately clocked in 2021. For 2022, based on Oregon Liquor and Cannabis Commission (OLCC) sales data through November, we are projected to land slightly under $1 billion. Pandemic and stimulus tailwinds are well in the rearview: it seems that near-term growth may be limited to select SKUs and product categories. Today, about half of all sales are flower, followed by: 25% in concentrate/extract; 13% edible/tincture; 5% inhalable; then “miscellaneous” categories.

In addition to decreased volume, prices are through the floor. We have been sitting at a median of $600 per wholesale per pound for the past few months. That’s a big dip from $900 per wholesale pound in December 2021. A sizable pullback in the recent “Croptober” harvest hasn’t made a discernable pricing impact yet (Oregon went from 4.4 million wet pounds harvested in 2021, to just 3.1 million this year per OLCC).

Overall, wholesale pricing today is as low as we’ve seen in the regulated market, including at the nadir following the crash of 2018. The pain isn’t limited to flower: in the extract/concentrate category, we sit at $4,356 median wholesale per pound as of November 30; that’s down from $4,990 in November of 2021. Retail pricing has generally followed these trendlines.

It may be no consolation, but what we’re seeing today in Oregon is endemic to regulated cannabis jurisdictions nationwide. Other than pain points arising directly from federal illegality (e.g. financial services headaches; tax burden), problems include: oversupply, unregulated competition, a generalized lack of consumer responsiveness to lower pricing, and even macroeconomic factors like higher gas prices. All of that said, it could always be worse. See Colorado.

There is a silver of hope. Economists predict that even without the possibility of usage-rate growth, sales will increase as Oregon’s population, income and spending grow. Also, existing operators will be shielded for the foreseeable future from an increase in the number of competing, local businesses. The number grew again this year, as OLCC continued to process applications that had been submitted prior to the HB 4016 moratorium (more on that below). But we should be at or near the top now. Here’s where things stand today compared to the same time last year:

Industry is beat up; still slowly consolidating

Quite a few businesses are struggling and others have failed. In many ways, the environment feels like four years ago when everyone was simply trying to hang on, and/or put together deals without any money. Here in the Portland office, our cannabis litigation team has handled a series of disputes around business upheaval — including big wins — for those who can actually afford to litigate.

For buyers, opportunities abound. Certain public companies are still out there poking around, usually offering a mix of cash and debt for distressed but attractive brands; or sometimes cash and convertible debt (typically parent company stock). Many of these are essentially offers on the come with low closing prospects. Most transactions are smaller, though, and M&A activity is not as robust as the last few years. Naked license “sales” may be the largest category of deal right now, though the new license moratorium (see below) has not levered prices higher from what we are seeing.

A few of the bigger operators in the state continue to grow. Nectar Markets is the largest outfit with 640 employees (39 stores); followed by Chalice Brands with 293 employees and Wyld with 209 employees. We’ve heard scuttlebutt from clients about changes in product sourcing and pricing strategies by some of the heavyweights, which has made life tough for smaller suppliers. Whether or not that is accurate, it’s probably inevitable.

Big regulatory changes

Seven years into regulated, adult use cannabis, Oregon’s program remains as dynamic as ever from a regulatory perspective. In 2022, we saw a greater number of significant legislative and administrative changes — actual, pending and proposed — than at any point since early days of the program.

Below is my list of highlights (or lowlights, depending on where you sit):

• The legislature put a moratorium on new license issuances (although existing licensees can continue to “sell” their licenses on the secondary market)
• The legislature gave counties the option to declare states of emergency and opt out of hemp production
• The legislature enacted prohibitions and penalties on providing or receiving water at an unregistered grow site
• Enforcement efforts commenced against illegal cannabis activity central and southern Oregon, buttressed by $25 million in funding passed last December
• The legislature passed new human trafficking reporting requirements
• The Oregon Health Authority (OHA) unveiled new testing requirements for virtually all products in the Oregon cannabis market
• OLCC increased potency limits on edibles (up to 100mg per package; 10mg per serving), and increased daily sales limits for adult use consumers
• OLCC banned sales of “artificially derived” cannabinoids, including delta-8 THC and CBN, subject to certain grandfathering
• OLCC announced its intent to “tighten the change of ownership option” for bad actor licensees
• OLCC extended pandemic era drive-through sales and delivery options
• OLCC launched an initiative against mislabeled THC products (including through retail shelf pulls) and proposed relabeling rules to address ongoing concerns over lab shopping and consumer misinformation
• Governor Brown pardoned 47,144 individuals for simple cannabis possession, on her way out the door
• Neighbor state California passed an interstate cannabis commerce bill, granting a sliver of hope to some in the Oregon industry focused on export
• Draft cannabis bills began to surface for the 2023 legislative session. The focus seems to be on perceived bad actors, in keeping with the current administrative and enforcement tenor– from OLCC on up

And then there are all of the changes within OLCC, on everything from policies to personnel.

As to policy, the Commission hardened its approach with respect to rules violators, starting with “change of ownership” requests in the context of alleged violations, and extending through settlement negotiations more generally. The Commission also has worked to address its lack of responsiveness and organization around public records requests. Elsewhere, it is rolling out a new licensing or “case management” platform, which our licensing paralegal will test in beta this January with a handful of invitees. And it caught up completely on business sale transactions: all of our buyers have been assigned investigators within a few days of applying since late summer.

As per usual, the Commission will continue to talk with the legislature and other agencies on matters of concern leading into the 2023 legislative session. Legislative Day is January 17th. One desire of OLCC, OHA, the Oregon Department of Agriculture, and even industry, is for a state-run “reference” lab, to assist with resting and research methodologies. This recommendation was first made in a Secretary of State audit back in 2019, but appears to have gained momentum with the new testing rules and THC “mislabeled products” issues mentioned above.

Finally, expect to see a fairly large compliance bulletin sometime this week, related to the permanent administrative order enacting multiple rule changes, filed by OLCC on November 21. (We already saw a smaller bulletin on a select portion of this order, covering drive thru and delivery rules, on December 16th.)

On the personnel side, we saw staffing shuffles at the Commission highlighted by Danica Foster rejoining the Commission as its Rules, Policy and Public Records Advisor; and Jason Hanson vacating the Director of Compliance chair (this key position will remain unfilled momentarily). We also saw a number of changes within the Administrative Hearings Division and up and down the Commission; too many to list here.

Hemp

Not much is moving. Oregon issued 285 hemp grower licenses in 2022, a precipitous drop from the heyday of 1,961 in 2019. Registered grow sites plummeted even further over that period, from 6,040 to just 282. In spite of it all, Oregon is still a hemp leader on the national stage. Last year, the Oregon crop was valued at $235 million in USDA’s National Hemp Report; California was a distant second at $61.5 million.

The continued downward trend can’t last forever. Congress is scheduled to renew the Farm Bill in 2023. Changes on the table include everything from raising the “hemp threshold” from 0.3% THC to 1.0% THC, to addressing regulation of intoxicating cannabinoids derived from hemp. Another big driver will be the continued adoption of hemp-based textiles and building materials. Even though Oregon hemp has slowed dramatically, expect the state to remain at the fore if and when the trend reverses.

Odds and ends

We’ve seen some interesting activity around the edges, which I’d be remiss to leave off:

• The Cow Creek Tribe continued to move toward participation in the Oregon cannabis market, following an intergovernmental agreement it signed with the State of Oregon almost two years ago
• Three of the local cannabis trade groups consolidated
• Oregon’s cannabis sales tax revenues dropped in conjunction with falling sales, and continued diverting in part to Measure 110 programs
• Curaleaf was once again in the news locally (and elsewhere) for all the wrong reasons
• Twists and turns for Dutchie, Oregon’s cannabis software unicorn

That’s a wrap

Let me know in the comments if you think I missed anything worth mentioning, or shoot me an email. There is always something. In the meantime, here’s hoping for better times for Oregon cannabis in 2023.

For previous posts in this series, check out the following:

• Oregon Cannabis: State of the State (2021)
• Oregon Cannabis: State of the State (2020)
• Oregon Cannabis: State of the State (2019)
• Oregon Cannabis: State of the State (2018)
• Oregon Cannabis: State of the State (2017)
• Oregon Cannabis: State of the State (2016)