Despite legislative advances in many states, cannabis growers are struggling under the full weight of the law. The law of supply and demand. Supply is up and prices are dropping. Fast.
The law of supply and demand describes how changes in the price of a good or service affect its supply and its purchase/consumption. As the price increases, supply grows while demand declines. Conversely, when prices drop, supply constricts while demand grows. Farmers know this law well, prospering or not under its consequences. 2022 was a lesson to others that it’s a law that impacts us all. For instance:
During Covid there was a substantial imbalance in the US housing market with low supply spurring buyer competition that pushed prices to new highs. Recent rate hikes by the Federal Reserve have reduced demand somewhat, though local zoning and other restrictions will continue to impact supply. Here in Eastern MA, prices remain high.
Chip and other key component shortages kept new car inventories below normal levels throughout 2022. Waits of six months or more for a new car were not unusual. Prices, not surprisingly, were up. New cars were selling for more than the MSRP; used car prices increased by almost 40%. The situation is easing now, but a “return to normal” may not occur until 2024.
The pandemic cut air travel by 70%. To survive, airlines cut staff, cut back unprofitable routes, and retired aging airliners. The supply of available seats shrank. Demand for leisure travel has since rebounded, with prices now 25% higher than pre-pandemic levels. Those prices are not expected to drop in the near term. It will take time to train pilots, increase staff, and add new planes and flights.
A heat wave in Alberta and Saskatchewan, combined with the war in Ukraine created a shortage of the brown gain mustard seeds so valued by French mustard makers. Supplies disappeared while prices soared. French consumers were forced to consider lesser quality, substitute products. (No, not ketchup, mon Dieu!)
Due to limited supply and increased Chinese demand, the prices of rhodium, palladium, and platinum are at all time highs. Since all three of these precious metals are used to manufacture catalytic converters for automobiles, record numbers of catalytic converters are being stolen and sold for scrap. For a few minutes work, thieves can make up to $250. Sadly, absent new sources of these precious metals, high prices will continue to temp the unscrupulous.
So, there you have it. Be aware of the long arm of the law of supply and demand. Pay attention, or it will surprise you.
Peter has spent the past twenty-plus years as an acting/consulting CFO for a number of small businesses in a wide range of industries. Peter’s prior experience is that of a serial entrepreneur, managing various start-up and turnaround projects. He is a co-founder of Keurig.