Cannabis banking exec expects Michigan prices to continue falling, more M&A in 2023

Prices in Michigan’s cannabis industry plummeted in 2022, leading to some closures and layoffs, and could fall even further in 2023 as more players enter the business. That’s according to Ray Zillgitt, senior vice president of risk management and general counsel at Lake Trust Credit Union. Zillgitt, who oversees and manages cannabis banking for Lake Trust, expects even more closures and layoffs to occur next year as mergers and acquisition activity heats up, particularly with larger operators acquiring smaller competitors.

What’s the state of Michigan’s cannabis industry as 2023 approaches?

In flux. I think it’s a time of uncertainty. Obviously, the price of cannabis has dropped drastically in the last year. I think it’s down 46 percent from last year and in the mid-70s percent from the year before, which is putting a lot of pressure on some of these smaller operators. Even the larger operators are feeling it, too. There’s just a flood of product on the market and demand is flattening out. It’s not increasing as it has in the past. The increase has slowed down, so when you have those kinds of economic factors, it puts a lot of downward pricing pressure into the marketplace. 

The growers are really getting impacted the most. The dispensaries buy at a lower price and sell at a lower price, but the growers are the ones that have all of the overhead, especially the indoor facilities. They’re the ones that are struggling the most financially.

Was 2022 the year that the industry hit market saturation or maturation?

Clearly, it has. The applications are still rolling in. I don’t know if it’s naivete that’s playing a role in people getting into it. We’re really starting to see M&A activity pick up a bit (with) smaller companies getting bought out by larger companies (and) larger companies looking to buy and coming to us with more capital requests to help them through that process. It’s hit the saturation point. … I’m confused at the state not trying to tighten down the faucet a bit, because I can’t imagine the price reduction’s not hurting its tax revenue to a degree.

Do you see things worsening or getting better for the industry in 2023?

There are two theories here. You have some people saying the price of cannabis will start to level out and rebound a bit in 2023. Others say that they still see some continued drop. I tend to side with those that see the continued price drop. You’re putting more people online with more product. At some point, demand is really, truly going to flatten out. At some point, people have enough product that they need.

I think you’re going to see that the demand is going to flatten out, but you’re still going to have a lot of product in the marketplace. We’re seeing right now where some of our clients just can’t unload their product. They’re sitting on it, so they have to turn it into distillates and other sorts of oils and things like that so at least it has a longer shelf life and they can keep it around.

I tend to feel that the price is going to continue to come down until the number of licenses plateau and the amount of product being produced plateaus.

Will we see more closures or more M&A in 2023?

I think a combination of both. You’re going to see increased M&A activity (and) you’re going to see failures in the next year (because) not everybody is going to be able to be bought up. So, I just see more consolidation. That’s what’s happened in Colorado (where) you’ve seen lots of consolidation and you’re getting a lot of Canadian (operators) coming in and buying up some of these facilities.

The big players are still going to want to look for businesses that have a good product and a good supply line. It’s going to be these one-off smaller businesses that are really going to take the bite.

What’s your best advice for a small operator doing business in this climate?

We have a cadre of clients (in the industry) and the ones that have been the most successful and growing in terms of revenue are those that have really strong brands in the market, whether it be in flowers or edibles. That really plays a big difference in the marketplace. Developing a strong brand is what’s the most important thing for some of these smaller operators.

With the new Congress coming into office in January, is there any chance of legalization occurring on the federal level, or at least passage of the SAFE Banking Act?

I just don’t see 60 votes in the Senate to legalize or deschedule marijuana, and I’m not seeing 60 votes in the Senate for the SAFE Banking Act. It doesn’t even get a vote in the Senate, it seems like, and I don’t know what the new House is going to do (with Republicans in control by a slim majority). The right wing of that caucus doesn’t like marijuana laws being passed. I don’t know if it can get out of the House in the next Congress, let alone the Senate where it’s going to face a huge uphill battle to get a vote on the SAFE Banking Act.