Premium flower demand drives Colorado wholesale marijuana prices to nearly five-year highs

Wholesale marijuana flower prices in Colorado have climbed to levels previously seen in 2016, fueled by increased demand during the coronavirus pandemic and growing consumer interest in pricier, premium flower brands.

The Colorado Department of Revenue reports that as of Jan. 1 the average wholesale market rate for a pound of marijuana flower was $1,721, a price not seen since July 2016. Since October, wholesale flower prices are up more than 30%.

The price gains could help to explain how sales of medical and recreational marijuana in the state hit $2 billion for 2020 – even before December transactions had been tallied.

The gains are a welcome turnaround for marijuana cultivators, who were confronting wholesale flower prices in the $700-a-pound range only two years ago.

On the flip side, the more than doubling in the wholesale price means marijuana manufacturers and retailers must pay higher prices for product.

As the cannabis market matures in one of the country’s oldest recreational programs, so too have consumer tastes.

Several cannabis cultivation executives say that more-refined customers are keen on paying more for small-batch, premium flower brands such as Snaxland and Cookies.

“People are willing to pay for the higher quality,” said Zachary York, inventory manager for Denver-based vertically integrated cannabis company Lightshade.

When the pandemic began last year, the initial trend was for consumers to stock up on the most affordable product on the market, which is typically budget flower.

As customers cleaned out the bottom shelves, they worked their way up to higher-quality marijuana.

York said once consumers recognized the difference in the quality of products, they weren’t willing to go back.

That in turn has led wholesalers to set their prices higher knowing that consumer preferences had shifted.

Brand power

On top of that, the rise of branded flower has driven up prices on the high end. Certain brands can sell for up to $4,000 a pound wholesale, according to York.

“Brand names are really saying our product is of another quality tier and you’re going to pay more for it,” he added.

Those branded flower companies are using advanced marketing techniques such as product drops to build hype and draw attention.

Tim Cullen, CEO of Denver-based vertically integrated cannabis operator Colorado Harvest Co., said these businesses are helping to drive demand for premium marijuana flower.

The brands are easily recognizable and have avid social-media followings.

When these companies announce on social media that a particular strain of flower will be available at a specific location for a limited time, “it gives you the sense that this is a higher-end product and it’s harder to get,” Cullen said.

The buzz these brands are getting is causing retailers to “step up their marketing game” in order to compete, he added.

The quality of the flower in these product drops warrants the attention.

“The whole market is creating small-batch, artisanal products that are really in limited supply,” Cullen said.

Jon Spadafora, partner and head of marketing for Denver-based Veritas Fine Cannabis, which grows flower for the Cookies brand in Colorado, also said the demand has increased for premium flower.

“We’ve enjoyed a really strong market for a while,” he said.

Spadafora attributes that buying behavior to an evolution in consumer taste.

“Consumers have become more mature in what they want,” he said. “It’s a reflection of a market as it evolves.”

COVID-19 impact

As the pandemic continues to rage, tourism to Colorado has declined. So much of the increase in demand for marijuana product seems to be locally driven.

“People are coming to terms with the idea they’re not going on vacation,” Cullen said.

Consumers spending their disposable income on cannabis rather than restaurants, movie theaters or other entertainment is another explanation for the increase in wholesale prices.

Alex Levine, co-founder and chief development officer of Denver-based vertically integrated cannabis company Green Dragon, said the coronavirus pandemic drove demand and prices up.

He said his overall sales are up more than 30% from last year.

“When you limit consumers’ options and people can’t go to concerts, the movies, you have less things to buy and cannabis is still available. So that shapes consumers’ behavior,” he added.

Brooks Lustig, founder of Denver-based vertically integrated marijuana business Seed & Smith, agreed that the pandemic is driving up demand.

On the wholesale side, the company has seen a more than 3o% increase in order size.

Lustig also attributed the increase in buying to the lessening stigma around cannabis, especially after Colorado declared medical and adult-use dispensaries “essential” last March and allowed them to remain open.

The average ticket size at the retail level has grown a little bit during the pandemic, Lustig said. He’s seeing both new and existing customers trying other product types.

“You’ve got a lot of people at home not going out and doing the things they would do,” he said.

Lustig is also seeing a lot of people buying their maximum limit of flower, an ounce of recreational cannabis or 2 ounces on the medical side.

The company had to limit some of the medical ounce sales during July and August because demand was so strong.

Market implications

Cullen said the upward trend in pricing has saved the state’s businesses.

About 18 months ago, pounds of indoor-grown wholesale flower fell to around $700 a pound.

“We almost lost the whole thing then,” Cullen said.

Businesses were forced to figure out how to dial in their production costs. And as the quality of flower has improved, companies followed with higher prices.

Levine said the larger unknown is what’s going to happen once the pandemic clears up.

“The big question for every operator: Is this a COVID blip?” he asked. “Did it jump more than it should’ve and is it going to go down?”

Bart Schaneman can be reached at barts@mjbizdaily.com