A lesson in microeconomics for emerging CEA markets

A lesson in microeconomics for emerging CEA markets

While the market rules of supply and demand are essential to understanding "microeconomics 101," no textbook is required to understand how these rules affect growers' margins. This is especially true when considering conditions in start-up markets where a surge in demand is often followed by a plummet in prices.

Market insights from California, a state synonymous with start-up culture, show just how quickly profits from crops such as cannabis can plummet when supply floods the market and outstrips demand. Examples from the Golden State and other established growing markets show that a glut in supply may be followed by a dearth in profits.

Earlier this year, cannabis cultivators saw nearly a 50% drop in price per pound compared to pre-harvest price peaks in October 2020. And while indices reported price recovery in some established markets, steep price declines continued in other states.

Although pent-up demand often drives a price surge when new markets open, more growers typically rush into the market, leading to more supply and diminished margins. Start-up businesses must make it through a complex phase sometimes referred to as the "Valley of Death." During this period, start-up capital resources can deplete more quickly than sales income flows into the business. As a drop in market prices exacerbates this challenge, the business must arrive at a cost structure that is low enough to ride out cratering prices and maintain operations.

Continue reading.

Photo by CRYSTALWEED cannabis on Unsplash

Source: Greenhouse Grower

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