The cannabis industry is growing, year after year. Americans (and many others globally) have a taste for cannabis. But much like enjoying a hot dog and learning how it’s made, there is a vast gulf between enjoyment and knowledge, or frankly, a disappointing discovery (or appalling, in the case of hot dogs).
For cannabis, a cultivation operation may seem like a dream come true, but it’s an aspect of the business fraught with challenges, from having too much of a good thing, (the plant) to having too much of a bad thing, (costs). Read on to discover some of the basics of cultivation economics.
Oversupply’s Hidden Costs: Why Growing More Doesn’t Always Mean Earning More
It would seem to go without saying that the more products you have, the more revenue you’re likely to make. This may be true for some industries, but it’s not the case for cannabis. In fact, producing an overabundance of crops has long been a problem for the agricultural industry.
Historically, we can look at how, during World War I, farmers increased their agricultural output to feed the troops. Many farmers then invested their profits in land and machinery in the hopes of growing more crops. However, following the end of the war, farmers were now growing more crops than the country needed. Thus, they were unable to sell their surplus goods and couldn’t pay off their debts.
Cultivating an excess of cannabis can lead to a host of problems. Oregon’s oversupply of cannabis led to many operators selling the plant at a loss or having to close up shop entirely. And when we say they sold at a loss, Oregon (and Colorado) were at one point selling cannabis flower at half their usual price. For Maine, an oversupply of cannabis (along with the accompanying slashing of prices) was cited as one of the main reasons that registered caregivers are not renewing their registration with Maine’s Medical Use of Cannabis Program (MMCP).
As the National Cannabis Industry Association stated in “Committee Blog: Interstate Commerce – Breaking the Laws of Economics (Part 3),” oversupply benefits consumers in the short term but plays havoc on small- to medium-sized businesses in the long term. That is, the communities that rely on this agricultural cash crop suffer as these low prices cause small businesses to go under. Larger businesses sometimes cannibalize the smaller companies, using their assets to scale up. This, in turn, reduces employment and revenues in the “communities that produce cannabis and extract the profits for investors in the large firms.”
So while it may seem advantageous to grow as much cannabis as possible, this is clearly not the case.
TL;DR
- Producing more cannabis does not ensure greater revenue. Oversupply can actually reduce prices to the point where growers cannot cover their costs, sometimes leading to business failures.
- An oversupply of cannabis disproportionately hurts small and medium cultivators while benefitting larger companies (and, in the short term, consumers). This can ultimately lead to communities losing many of their agricultural jobs while large firms acquire their former competitors.
Fixed Cost Pitfalls: The Overhead Eating the Margins
The cannabis industry can be a lucrative one. According to the BDSA, a leading cannabis market research firm, U.S. cannabis sales should reach $46 billion by next year (about 75% of the global market). However, if you are looking to set up shop as a grower, you have a tough road (or field) to hoe in front of you.
Why? Set-up costs for a cultivation operation can be exorbitant. The average cost to design and build a cultivation facility (in the U.S., in 2025) ranges from $500k to $10 million.
Why is it so expensive? Well, the overhead is sizable.
A cultivation operation needs a truckload of items to be invested in: facilities, equipment, buildouts, maintaining your grow space, and utilities—security systems, climate controls, irrigation, and lighting systems.
But that’s not all.
You also need to pour money into labor and regulatory compliance. Labor costs eat up a significant amount of the start-up costs as well as the continued costs of keeping a business running. Compliance costs also take a significant chunk, with initial licensing and permitting alone ranging from $10,000 to $100,000. Other aspects of compliance, including technology and security infrastructure, can cost hundreds of thousands of dollars from the jump.
Yes, there is a lot of money in the cannabis industry, but many people fail to realize the Titanic-sized overhead that faces cultivators as they get things running (and keep them running). This massive overhead necessitates meticulous budgeting and planning on the part of operators.
TL;DR
- The cannabis industry is projected to reach $46 billion in U.S. sales by next year, but starting a cultivation operation requires huge upfront investment, depending on scale and location.
- Major overhead expenses include not only facilities and equipment, such as security, climate control, irrigation, and lighting systems, but also substantial labor and regulatory compliance costs, with licensing and permits alone costing between $10,000 and $100,000.
- Despite the lucrative market potential, many cultivators underestimate the gargantuan overhead needed to start and maintain operations, which can make profitability challenging and require careful budgeting and planning.
Cultivation Economics
Many in the cannabis industry followed a similar beginning. They either grew a few plants for personal consumption or for sale. Quite possibly both. Those who grew the plant themselves had a good working idea of how much labor goes into tending to the plant and probably a working idea of how expensive it would be to scale the operation. However, some may wear rose-colored glasses when it comes to opening a cultivation operation.
The costs can be prohibitive—with the multitude of requirements, e.g., labor, utilities, etc.—and if your operation produces an oversupply of cannabis, you could very well sink your new operation.
So before you decide to make the jump to cultivation, you’d do well to take a long, hard (practical) look at cultivation economics.
