Michigan Marijuana: Black Market Battles, Plummeting Prices

Cannabis nug Michigan marijuana
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It’s been a great year for Michigan marijuana customers, who are paying less than ever for increasingly potent cannabis.

As of November, the average retail cost for an ounce of Michigan marijuana had dropped to a record low of $95 with some strains dipping to near $60 an ounce in retail stores.

It’s also been a healthy year for the industry as a whole. Retail Michigan marijuana sales are currently on track to surpass $2 billion in annual revenue by year end.

But the year has presented struggles for others, including businesses facing shrinking profit margins as prices plummet and state regulators engaged in a seemingly insurmountable battle with the long-entrenched black market.

Here’s a look back at highlights from the year in Michigan marijuana with a glimpse forward to 2023.

New Leadership
More than half way through the year, Gov. Gretchen Whitmer made a significant leadership change in August, replacing departing former Cannabis Regulatory Agency Director Andrew Brisbo, who helped launch the recreational marijuana in December 2019, with Director Brian Hanna.

Hanna, who has a law enforcement and investigations background, was named the “acting director” in September and elevated to the full-fledged agency director on Dec. 2. He made it well known that he wanted to step up enforcement of illicit marijuana making its way into the regulated market.

“We’re hearing about this illicit product in the market, that’s in the regulated market — we want to find that,” Hanna told media on Oct. 25. “We want to expose that. We want to make it known.”

Hanna and the CRA have taken noticeable action.

The CRA disciplined eight businesses with fines or suspensions in September, a dozen in October and five in November, including the indefinite license suspension of Green Culture, a retail store in Flint accused of selling suspected unlicensed products.

Black Market
The Michigan CRA temporarily suspended both the medical and recreational licenses for Green Culture after an investigation revealed the company had been selling improperly labeled hemp products that contained THC over the legal threshold. The investigation also revealed products had been improperly delivered and labeled, according to the agency.

The CRA on Oct. 10 suspended business for 30 days at and fined the House of Marry Jane, a medical marijuana retailer in Detroit, $75,000 after a surprise inspection in May 2021 revealed duffel bags of untagged and potentially black-market marijuana seemingly intended for sale.

Michigan requires all licensed Michigan marijuana products to pass safety testing and be logged into a statewide tracking system before sale.

Later in October, Hanna indicated there is plenty of other suspected unscrupulous activity going on within the industry.

There are “rumors of trucks driving around with (THC) oil, going licensee to licensee, offering illicit oil at a cheaper price,” Hanna said. “That’s the kind of stuff we’re looking for.

“I think this is the first time I’ve heard of a truck driving around from another state with oil … That’s pretty eye opening.”

Michigan has a theoretically tight tracking system but there are ways to subvert it.

For instance, a marijuana processor could obtain THC oil, which is commonly used to produce vaping cartridges, from an unlicensed, black-market source and combine it with existing, licensed oil. If the business then reports the inflated combined quantity of oil to the CRA tracking system, the illicit oil would get legal tags and become nearly undetectable.

Based on simple math, that’s what some in the industry believe is happening. THC oil, or distillate, is extracted from cannabis, often the less desirable parts of the plant known as trim.

“I have to imagine there are some loopholes in the system where you are able to slip it in somehow,” said Harry Barash, who founded the 8,200-member Michigan Cannabiz Professionals Facebook group and operates Meet. Connect. Puff, a Hazel Park-based cannabis event planning business. “When you look at the amount of trim that the CRA reports, and how much distillate is being produced from that, the numbers are out of whack,”

Prices Plummet
For consumers, the story of the year was pricing. Michigan maijuana customers are getting more for less as the market saturates with an increasing number of growers and retailers.

The average retail price for flower has seen a monumental decline. In two years, between November 2020 and November 2022, the average retail price for an ounce of flower plummeted from about $376 to $95, a 75% decline. There’s been a nearly 50% dip in just the last year.

“The consumer is definitely the winner, right now,” Barash said. Barash. “I just don’t know how long this model is going to be sustainable for the licensees.

“Either there’s going to be failures and less product being produced, which will drive up prices, or everyone is going to have to learn how to live on lower margins,” Barash said.

As companies are forced to achieve those lower margins, there are fears that product quality may suffer. This is the equivalent of craft beer versus mass-produced Budweiser.

“As the market becomes more price friendly, it does become less quality conscious,” said Rick Thompson, who leads the Michigan chapter of the National Organization for the Reform of Marijuana Laws (NORML) and sits on a consumer advisory committee for the CRA. “If the market price is so low that you can only produce lower quality in order to remain competitive, then that’s what industry growth will do.”

The state added more than 100 retail businesses this year, increasing the total to 591, as of November, according to the CRA.

While there’s a cannabis store for nearly every 17,000 Michigan residents, the locations are clumped disproportionately in communities that have not banned recreational commercial sales. Almost 1,400 of the Michigan’s 1,700-plus cities, townships and villages have opted not to allow recreational sales.

But the price crunch isn’t coming from the retail end. On Nov. 30, there were 1,673 various grow licenses issued among medically and recreationally licensed businesses in the state.

“There’s been more product grown than what the consumers can reasonably consume or that the retailers are able to sell,” said Robin Schneider, director of the Michigan Cannabis Industry Association with more than 430 business members. She insists marijuana quality in the state has yet to suffer and remains among the best in the nation.

Detroit, Finally
Helping to find customers for the glut of excess marijuana, Michigan’s largest city, Detroit, after years of litigation and planning, joined the state’s recreational retail market when it awarded 33 licenses on Dec. 22.

City leaders plan to eventually issue a total of 60 retail licenses which would account for about 10% of Michigan’s pot shops.

“But it’s probably going to result in a lot more overall sales, just because of the density,” Barash said, citing the 600,000-plus population in Detroit. “There will probably be a lot more stores in Detroit that do better than stores in some of these smaller-town markets. Detroit could make up 15-20% of the overall rec market and that by itself could” drive statewide prices up.

While Detroit was one of the first Michigan cities to join the regulated medical marijuana market when it opened in 2016, city leaders wanted to be more careful with recreational business licensing. City politicians and administrators said they wanted to create a business climate that offered opportunity to more than just deep-pocketed investors and huge multi-state marijuana operations, often with little connection to the Motor City.

They wanted residents and those who have previously been harmed by past marijuana prohibition and police enforcement to have a better chance at sharing in the prosperity offered by the emerging industry.

After crafting an early version of an ordinance intended to accomplish those goals, a series of lawsuits were filed, claiming the law gave unfair preferential treatment to longtime residents.

U.S. District Judge Bernard A. Friedman previously placed the Detroit program on hold and called the ordinance “unfair, irrational and likely unconstitutional.”

City leaders passed a different version of the ordinance that resulted in further legal delays after more lawsuits were filed in May, but Judge Friedman on Dec. 21 ruled against a request for an injunction in the most recent case, clearing the way for the license program to begin.

Detroit plans to issue a total of 60 retail licenses with half going to “legacy” businesses affiliated with Detroit residents that meet certain criteria.

Potency Inflation
Misrepresenting the potency of marijuana, known as potency inflation, is an issue that’s infected nearly every state marijuana market.

“THC potency inflation is a national problem,” Thompson said, “and Michigan’s case is just a microcosm of what we’ve seen on a larger scale.”

High THC potency drives the profitability and value of marijuana in the current market.

Marijuana producers like to see high potency numbers but there’s a conflict of interest surrounding how those potency figures are determined.

The result, many in the industry believe, is unreliable potency labeling that is increasingly surpassing 30%. According to the DEA, marijuana seized and tested from the early 2000s had potency averaging less than 8.5%.

In today’s market, marijuana producers pay licensed safety labs to put marijuana products through a gauntlet of tests checking for contaminates as well as potency. Those results are then linked to the marijuana product until its purchased from retail shelves.

For this reason, there are instances of producers “lab shopping,” that is, sending multiple samples of a harvest out for testing by various labs and selecting the one that provides the highest THC potency results.

This creates a scenario in which the lab that provides the highest potency results gets the business and accuracy is not the driving factor.

“Potency inflation is an ongoing, longstanding, widely known issue across cannabis in the U.S. right now in legal markets … ” Lev Spivak-Birndorf, founder and chief science officer for Ann Arbor-based PSI Labs, told MLive in June. “I call it the cycle of potency inflation: people want high potency, so then stores are under pressure to try and deliver that … and that drives growers to seek labs that give the highest results, and thus, we have this rampant lab shopping that we have going on.”

Spivak-Birndorf said the highest potency marijuana tested at his lab has reached 32%, much less that the 40%-plus potency advertised on labels for some strains in recent months. The CRA audits any marijuana that tests above 29%.

While industry insiders don’t believe the problem is limited to a single testing lab, the CRA has raised concerns about the potency results issued by Viridis Laboratories, which operates locations in Lansing in Bay City.

Viridis Laboratories
Viridis and the CRA are engaged in an ongoing legal battle that began when the CRA issued a recall in November 2021 on an estimated $229 million worth of marijuana. The CRA claimed safety test results issued by Viridis Laboratories — the lab that tested all that marijuana — were unreliable.

The CRA claimed Viridis gave passing results to marijuana that it later determined through retesting was contaminated with potentially harmful pathogens.

A more recent complaint filed by the CRA against Viridis focused also on potency testing.

Viridis Laboratories has developed a reputation for issuing marijuana THC potency results that some businesses, competing labs and the CRA feel are suspiciously high, if not impossible.

As of May 19, the CRA said nearly 80% of all potency audits involved marijuana previously tested by Viridis exceeded the threshold potency of 29% at a rate more than seven times higher than other labs across the state.

Viridis leaders claim the CRA has a vendetta against the company because it has a lopsided grip on the testing market, which attorneys for Viridis in court documents previously estimated to be in excess of 70%.

Viridis in November obtained independent certification for its potency method, which it insists is accurate and reliable. The CRA has declined to comment on the issue, citing ongoing litigation.

“Not A Good Look”
The Michigan marijuana market is not shrinking, but there is an economic pinch being felt. That’s expected to continue through the new year.

“A number of businesses will likely sell, go out of business, we’ll see more mergers and acquisitions as businesses attempt to combine resources and stay afloat,” Schneider said. “It’s really turning into a scenario where the best brands will win, and the consumers are dictating the winners and losers.”

In Saginaw, there’s a newly constructed building that was intended to open as a marijuana shop.

It sits empty, listed on real estate websites for $1.9 million, waiting for a buyer. While the price is steep, marijuana-approved retail locations have been highly sought after by investors looking to enter the market in recent years.

This property has been on the market for greater than three months in a city of 43,000 with already eight active recreational retail licenses, nearly one per every 5,300 residents.

Barash, who works as a vice president and cannabis industry specialist for Southfield-based real estate firm NAI Farbman, said the eagerness to dump big money into unproven marijuana businesses and real estate is dwindling.

And there are other signs of economic stress.

“People not paying their bills is a big issue theses days,” Barash said. “People are screwing over licensees, they’re screwing over realtors, leaving a lot of people holding the bag. It’s not a good look for the industry.”

And as businesses struggle to pay bills, they’re shifting resources and sometimes cutting corners, whether it’s by reducing quality or taking more desperate steps, like purchasing cheaper black-market product.

“The business model has changed,” Barash said. “The profit margins for Michigan marijuana are not what they used to be … High risk, high return. Well, now it’s high risk, low return, so that’s a bad combination.”