Montana prepared the launch of the $325 million adult-use cannabis market.

Montana cannabis entrepreneurs prepared to launch the country’s newest adult-use program on January 1, with significant changes in store for how they conduct business and concerns about shortages in a market expected to exceed $300 million in annual sales by 2025.

As of 2020, about 11.1 million people toured Montana. However, the estimated population of the Western state is just 1.1 million, and the entrepreneurs believe that the significant demand will be from tourists.

Recreational marijuana sales are expected to reach $90 million in 2022 and $325 million by 2025, according to MJBizFactbook. However, it has been speculated that the demand for marijuana in Montana might be invariably higher than supply.  The inability to meet the required demand for marijuana has been a problem faced by suppliers since their inception.

According to Pepper Petersen, the current CEO of Montana Cannabis Guild, an industrial organization stipulated that “The industry has only been able to expand about 30%.” With this statement, there is a need to increase productivity exponentially.

Also, Petersen added that “I’m struggling to see that there will be enough flower to meet the demand for residents, much less for the tourists.”

Industry administrators forecasted that some products such as vape and edibles could go very low on supply. However, it is not sure about the availability of other products yet.

Structural shift

The most significant business change is transitioning from a vertically integrated model to a horizontal system. Businesses will be only cultivators, processors, or retailers if they choose. In the future, companies won’t be able to sell what they grow and manufacture. Instead, they will be able to buy products from the wholesale market.

The cannabis world is changing, and businesses are getting creative to avoid missing out. Some existing medical operators are already changing their business model to align with legalization; entrepreneurs are creating online wholesale platforms to take advantage of the change in legislation.

Here is a summary of the adult-use legislation, which advocates disagree with. They claim that the new law is “watered-down” and contradicts what voters agreed to in November 2020.

A potency cap of 35 percent THC on flower products.
A tax of 20 percent on all cannabis product sales and an optional local tax of 3 percent.
Adult-use start date of January 1, 2022, rather than October 1, 2021, with a not-yet specified review to take place six months after the start date.

According to Petersen, he stipulated that “I wanted to make sure we kept a pretty tight lid on edibles,”, “because that seems to be the place where the most problems take place because ingestion (effects) are delayed.”

Existing dispensaries have been given a leg up on the competition, as they will be allowed to sell adult-use cannabis products while other applications are processed. The new regulations will expand their product lines, drawing in more customers and increasing potential sales. Recreational users will most likely appreciate these expanded offerings, as medical marijuana is often higher quality than recreational cannabis.

With over 437 licensed dispensaries, 392 cultivators, and 208 processors allowed for participation in the industry, Colorado is home to some of the most involved individuals in the medicinal marijuana realm.

But many growers operate at home with a single license to cultivate under one thousand square feet, while others are individual operators who sell to friends or family. These small-scale growers are not the heart of the problem; a small business can operate legally under current laws.

As of now, about half of the state’s counties have opted out of legal adult use. Though these are a minority, they contain most of the population and licensed growers.

Montana has designated the counties that have decided to participate in the adult-use cannabis industry as “green” counties, while those that have opted out of the market are “red.”

Montana’s Cannabis Control Division recently notified existing licensees that they might start adult-use sales on January 1.

Montana has registered 54,875 medical marijuana patients as of September 2018. As Montana’s adult-use cannabis industry matures, sales are expected to level out. In other markets, retailers have been forced to lower prices and even initiate marketing campaigns as business slowed.

Petersen backed this during his interview by saying. “I don’t think we’ll see a collapse in the system, but I think we will see a reduction of users of up to 30%,”

Kate Chowela, government affairs director for the Montana Cannabis Industry Association, another organization that focuses on the cannabis industry in Montana, has a different view of what might happen under recreational sales.

Kate Chowela reported that some organizations have some “ramp-up time” starting from now and tourism time. “All sorts of things could happen,” she continued. “I don’t think we’ll experience any immediate issues, but it’s possible with the tourist season that there could be a shortage. But I don’t know how we can predict that.”

For example, she said, the exception allows Tier 1 cultivators that measure less than 1,000 square feet to expand their operations to 5,000 square feet as of January 2018. Most licenses are in the tier one category.

While marijuana regulations are constantly evolving, one thing is sure: there are limitations, including the amount of concentrate a licensee is allowed to produce. As of 2015, for example, licensed businesses may only produce up to 15 pounds of concentrate per month before incurring additional fees. “It adds a high cost to the production of concentrate, so that could affect that market,” Chowela concluded. However, Chowela also stated that these businesses’ rules could be adjusted.

Finalizing rules

Unfortunately, Montana is behind in its policymaking for the adult-use market. It was expected that the state would release final rules by October 1, and significant changes have been made to the packaging and labeling regulations of edible cannabis products. She understands that companies will have a grace period before adjusting to the new changes. A spokesperson for the agency did not respond to questions from MJBizDaily about whether any retailers had applied for a license to sell cannabis ahead of the due date.

One of the most significant changes in the Montana cannabis business is that every other company can no longer function vertically.

Marc Lax, the founder of Spark1, hinted that he has changed the operating model of his business per the changes and focused more on wholesaling. “We recently shut down three of four retail locations,” Lax announced, noting that the Missoula dispensary will remain open. “They all went to different existing providers who kept the employees.” And he also stated that the main reason for taking such a decision was because it made financial sense. “The decision makes financial sense and allows us to be a wholesale provider,” he added. “We’re a well-recognized brand best known for our high-quality flower,” and the company wants to take more advantage of that, Lax concluded.

Marc Lax also believes that Montana’s marijuana market will have a stage of shortages, just like Petersen. “I think it’s going to take 18 to 24 months to adjust to demand” based on projections that the demand will require “all of us to scale up roughly by three times.”

Petersen also said that the market prices for cannabis baskets are on the rise. This results from the hoarding of medical cannabis in anticipation of supply shortages in the coming year. Lax stipulated that the same trend is applicable in Spark1’s Missoula dispensary. “There’s a little more panic buying,” he said.

Chawla also added that companies have been taken over or merged due to a vertical to a horizontal business model. Other industries purchase the tier 1 cultivation license to increase their production capacity to 5,000 square feet. Chowela concluded.

While other business owners are folding up due to the increase in the cost of operation. “It’s still entrepreneurial, but all markets move toward consolidation,” Chowela said, “and that will probably continue. “There are significant changes. We’re taking a vertical system and turning it into a wholesale plan. “We’re going to see business models emerge not anticipated by the law that was passed.”

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