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This story was republished with permission from Crain’s Detroit and written by Dustin Walsh. 

The planned, and unceremonious, end to Skymint’s growing operations is a cautionary tale as old as the earliest strains of Hindu Kush from the ancient mountains of Afghanistan.

A company chasing an industry boom — the “green rush” in this case — that leverages its entire business based on shaky growth projections to expand as rapidly as possible only to be clobbered by an inevitable decline of profit margins. The company entered receivership in March.

The pied piper stops accepting IOUs, eventually.

Skymint management’s feet never seemed planted on the ground and their projections were, well, in the sky. The company projected sales in 2022 of $263 million, or 11% of the total Michigan market, a far cry from what it ever reached. Their aspirations made little sense, considering the company held just 3.5% of the state’s total retail licenses and less than a percent of the state’s total growing capacity. Marijuana is a commodity and most wholesalers and retailers are commanding similar prices for similar products.

The end of Skymint’s growing operations, though, isn’t a harbinger for continued failure in the industry.

Yes, plenty of pain is abound across the sector that’s continually plagued by basement low prices and a near cursory federal tax rate. But the Skymint failure is viewed as opportunistic across the industry.

Its weed will be sourced elsewhere — vacuum-sealed marijuana doesn’t, in fact, grow in a vacuum. But competitors will Hoover up any residual demand left from the hole left by Skymint.

“I think the entire market is benefiting,” said Mike Elias, CEO of the state’s largest grower Common Citizen, a major competitor to Skymint. “It’s especially good for smaller operators trying to get a foothold. Keep in mind they’re still operating a fairly large portfolio with a third party now taking the cultivation risk.”

Andrew Sereno, CEO of Manchester-based Glacial Farms, which operates a much smaller grow than Common Citizen or Skymint, told Crain’s that removing Skymint weed from the market could potentially stabilize prices and raise margins for his operation.

“Overall, it’s good for growers and customers,” Sereno said. “It means better quality on the market and less need for growers to artificially depress prices to compete with a large grow, such as selling at a loss.”

What remains unknown is whether San Diego-based Innovative Industrial Properties, the country’s largest marijuana commercial real estate developer and owner of Skymint’s soon-to-be-closed Harvest Park building, has a suitor for the turn-key operation. Another large player stepping in using the 56,000-square-foot facility’s entire capacity would likely do nothing to shuffle prices.

Even if there is no suitor, it’s not totally clear the void Skymint leaves on the cultivation side would really have much impact at all on the market, said Lance Boldrey, cannabis attorney for Dykema Gossett law firm.

Skymint holds seven Class C medical marijuana grow licenses and seven Class C adult-use and adult-use excess marijuana grow licenses, with each license allowing the growing of 2,000 plants. So Skymint had a capacity of growing 28,000 plants, and it was unlikely growing that many.

Skymint held just 0.7% of the state’s total grow licenses.

“… Many of those statewide licenses aren’t being fully utilized, but Skymint is only a modest-sized grower and its production a drop in the bucket,” Boldrey said.

The reality is that many growers, and retailers, are simply hanging on as victims of market conditions.

While prices plummeted between late 2020 through early 2023, they’ve largely stabilized — though at a low point — and risen throughout much of the year. The average price of an ounce of adult-use marijuana flower in October was $97.62, up from $80.16 per ounce in January. But the industry started in 2020 with an average ounce of flower retailing at more than $500.

Michigan’s marijuana sector has largely been saved by near-insatiable consumer demand.

The low prices have kept consumers active in the market and the total sales of adult-use marijuana in the state has risen dramatically. The state sold $258.5 million worth of marijuana in October alone and is on pace to reach nearly $3 billion in sales this year, up from $2.3 billion in 2022.

But Michigan is bound to crest the sales peak at some point. At least one expert predicts the total market size as $3.2 billion. Slowing sales seems certain.

Still, there is one potential near instant-growth boost on the potential horizon.

The federal government is deliberating whether to move marijuana from a Schedule I drug to a Schedule III drug, which would be the most consequential regulatory move the Drug Enforcement Agency has made on marijuana since classifying it as having “no currently accepted medical use and high potential for abuse” under the Controlled Substance Act in 1970.

Rescheduling marijuana eliminates the IRS Tax Code 280E, which prevents individuals from writing off business expenses involved in the trafficking of narcotics, translating to a 70% or sometimes higher effective tax rate for marijuana dispensaries instead of the regular 21% corporate rate.

And while classifying it as Schedule III doesn’t make marijuana federally legal, it would open the door to research grants, banking opportunities for cannabis businesses and their employees and, most importantly, would end a rigid tax regime that until now has stifled growth in Michigan’s regulated industry.

Marijuana not falling under 280E effectively means instant cash flow for the industry — and more windfalls and fewer Skymints.

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