Commodity Price Volatility in the Cannabis Supply Chain: The Biggest Growing Pain?

Eric Limon/Adobe Stock

As I write this on the eve of participating in a conference panel discussion about how corporate communications can better work with trade media firms, I can’t help but think about my relationship with the legal cannabis industry — and particularly its supply chain.

Sounds like a stretch, right?

Not so much. The reason for the connection: over the past half-year or so, it seems as though the cannabis industry is putting out a new press release every other day. And due to relatively recent state-by-state legalization, cannabis’ economic boom and the growth of its supply chain seems legit enough to spawn this spate of news.

In fact, just before beginning to write this article, I received another release on the latest industry growth numbers. And news just broke that the county in which Spend Matters HQ is based may get legal marijuana on an advisory referendum next March. Salad days for the green goddess!

I’d be lying if I said the initial release we got didn’t catch our editorial and even analyst teams’ collective interest — hence the handful of stories we’ve run about the industry (see Related Articles at the end of this one, or start here.) Was it that the apparent supply chain risks were so compelling? Or simply that it gave us an excuse to write about doobies?

Well, turns out it’s really the marriage of the two.

Consider some of these numbers, put forth in the the most recent report by the Brightfield Group:

  • The global cannabis market will reach $7.7 billion in 2017 and is expected to hit $31.4 billion in 2021, hiting at a CAGR of 60%.
  • The Canadian recreational market will open in 2018, and by 2021 is expected to reach $5.7 billion, nearly half the size of the US market. Together, the US and Canada will make up more than 86% of global cannabis sales in 2021. European markets, dominated by Germany, the Netherlands, Spain and Switzerland, will follow with 12% of the global market.
  • Prior to 2015, most medical marijuana programs outside of North American had sales of less than $3 million per year. By 2021, a dozen countries will have viable medical marijuana markets, and six will have viable recreational marijuana markets.

If those projections hold true, that will be a lot of legal pot available in a short period.

"Cannabis legalization is pushing forward internationally, and by 2021 the United States will drop from 90% of global cannabis sales to 57%,” said Bethany Gomez, Brightfield’s Director of Research, in a press release.

“However, much of the hype about international markets is overblown,” Gomez continued. “Only a handful of countries are opening the door to viable business opportunities and in order for companies to be successful they will need to have a shrewd understanding of the nuances and challenges of each specific market."

Ultimately, due to legislation evolving around the world, formalized trade rules will soon follow, new markets and exchanges would likely open, and eventually the way the legal cannabis industry operates will resemble what happened to steel markets – pricing becoming a global game.

And with that comes something we and our readers know all too well: commodity price volatility and the inherent risk that stems from it.

Cannabis (vs. Other Commodity) Price Volatility

In their recent report shared with Spend Matters, Cannabis Benchmarks (in some ways the MetalMiner Benchmark for the green sector), we can see how volatile cannabis prices are compared with other agro commodities:

Courtesy of Cannabis Benchmarks

Not surprisingly, the report states that “market price volatility can be troublesome for all the participants in the value chain.” That is precisely why most supply chain players should begin thinking strategically about managing supply — and not just price — risk (more on that in the next section).

Also not surprisingly, while traditional supply and demand factors such as weather drive many agricultural markets, “significant price jumps in regional cannabis markets appear to still be driven largely by regulatory decisions,” which we’ve reported on in detail. With cannabis remaining illegal under federal law, this is a trend unlikely to change in the short term, according to the report.

The paper goes on to outline the basics of hedging for participants in the cannabis supply chain — including the 101 on spot versus forward buying and contracts, OTC markets and swaps — with some examples to lay out what’s possible for the buyers and sellers within the nascent market.

Managing commodity price volatility and risk requires beginning to think about it strategically. Lisa Reisman, executive editor of Spend Matters’ sister site MetalMiner, knows a thing or two about that.

3 Reasons for a Commodity Management Strategy

Here’s more on how to begin framing the need for hedging strategies from Reisman (read the full article for more detail and examples):

  • Cost
  • The notion of supply chain transparency. Knowing how each entity within the supply chain prices its products and services only helps the buying organization better understand total cost of ownership (TCO).
  • Margin risk. By leaving the burden of extending quote validity periods or holding current pricing for longer periods of time to suppliers, the buying organization cedes control of its own ability to manage margins.

Ultimately, the cannabis industry is such a nascent frontier that now is the time for participants can begin hashing out their own agreements, using benchmark indexes, specifications and the basics of hedging, according to the Cannabis Benchmark report.

“In other commodity markets, such contract standardization has been created by participant pools, cooperatives, federal entities, and international organizations,” the report states. “Given the projected volume of transactions and currently planned centralization of distribution, the first actively traded hedging markets for cannabis could conceivably occur in California within a year.”

“It is contingent upon the industry to come together and create the framework and standards for this potential to be realized.”

Need more specific guidance around commodity price risk management strategy? Contact us!  

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