The Price of Weed

The State of Washington introduced the consulting firm that won the job to help develop their legal weed regulatory model. They chose Botec Analysis Corporation, a think tank led by UCLA professor Mark Kleiman who has advised the Office of National Drug Control Policy and others on drug policy issues. Kleiman is an interesting pick, as he is certainly not “pro-marijuana” by any means, even publicly opposing California’s Prop. 19 initiative in 2010. But he is not “anti-marijuana” either, which gives him a generally objective view from where to view the cannabis marketplace.

The most interesting points I think he touched on in the many interviews he has done since his selection is cannabis pricing and how that will play out in real time. His analysis and thought on how price will affect the legal environment of cannabis are worthy of consideration, and in some respects are playing out in quasi-legal medical cannabis markets right now. Here is one thing Kleiman said in an interview with CNN:

“You don’t want the price to be so high that it generates a black market inside the state,” Kleiman said. “You don’t want the price to be so low that it generates an export black market.”

So right now there are a few different cannabis markets to explore. We have a California market that is really several sub-markets where pricing varies greatly, but the markets are still relatively high priced, and most organizations operate as not-for-profits. There is the highly-regulated Colorado market where forced vertical integration and saturation have made for a more fierce and competitive for profit market resulting in lower pricing, but less selection and quality; but quality continues to improve with time. There is the Washington State model, where in Seattle at least there is a saturation of providers and competition has resulted in reasonable pricing, and production continues to increase rapidly. Oregon’s weed market is more limited, but it is growing and has always had a reputation for value. We see an emerging Arizona market with huge barriers to entry that are resulting in higher prices, but it is still too early to tell much there. Maine has very few state run dispensaries and a robust caregiver program, but are realizing the need for change because of lack of competition and high pricing there. New Jersey opened its first couple of shops in the most restrictive market ever and prices there are brisk, even with totally vertical integration. This mosaic of weed markets gives great insight as to what happens to the price of weed dependent on the rules and restrictions applied by the powers at be.

California is by far the market with the most history to look at. There has been an ebb and flow of market forces here, and because of the massive size of the state and it very regional regulations and guidelines, it has allowed for many different types of markets to flourish. Some have come and gone, and some are coming back again. It is different from city to city and county to county, and the price and quality of weed can differ greatly where you go as a result. The one place where the California market flourishes is product quality and innovation. Because there are no real barriers to entry on the production side there are a lot more small batch high quality producers that can enter the market with very little oversight.

The “collective and cooperative” model has evolved so many times over the last decade that it is really hard to keep track of. California began opening dispensaries in the mid-90’s. With no real guidance from elected officials or lawmakers on how to operate businesses, growing pains have certainly taken place. But California is also a great success story. On any given day, hundreds of thousands of people have access to a variety of high quality cannabis at many convenient and well-lit clean facilities with very little incident. That is a victory by any measure, no matter what industry you are in.

Where the California market has somewhat failed, at least in certain areas, is in competition at the retail level. In many markets a very limited amount of providers makes for higher prices. Also, increasing tax burdens, massive permit fees, regulatory compliance matters, and a bunch of red tape have made it more difficult for dispensing collectives/cooperatives to operate without charging $50 or more an eighth. At last check, the nation’s largest retailer of cannabis on the planet, Harborside Health Center, had several $60 eighths on their menu. Harborside will be the first to tell you that they have A LOT of bills to pay over there; but where this phenomena is playing out is on the backs of the growers.

It is easy math to do….at $60 per eighth and 128 eighths per pound the collective grosses $7,680. But the price of cannabis has come down substantially at the wholesale level, dropping off from nearly $4k per pound or more at one time to roughly $3k at the top end and a lot of good weed moving for $2,500 per pound. But even if we gave the benefit of the doubt that the collective paid $3,500 for a pound, which is virtually unheard of these days, that is still a 55% margin. It is more likely around 60%. Why? Because over-regulation, high tax rates, growing barriers to entry, and running a top notch organization has gotten super expensive in a lot of areas. Couple that with increased pressures from the Federal government in the forms of raids, asset forfeiture, and IRS invasions; and the result is $50-$60 eighths, while the grower who risked his ass continues to see his rate drop.

Before the most recent round of enforcement began in October of 2011 there was a much more competitive market happening. After the Feds released their infamous Ogden memo, opening the floodgates for would-be cannabis providers to set up shop all over the state, there were certain markets that were fiercely competitive where expansion was rapid. There were no shortage of advertisements for great deals promoting $25 eighths and freebies in every weekly in the state. There was a certain glimpse of what a free market might look like….at least in some areas.

In other areas, where competition was limited more by local ordinance there was less competition and prices did not fluctuate nearly as much. In these markets, innovation and professionalism began to be more key trademarks versus a race to the bottom in pricing. Service and quality are what drive success in limited markets, as well as competitive markets.

Some great experiments have resulted from the chaos that have enabled us to see what happens when certain barriers are in place, or when free markets are allowed to evolve. In competitive environments organizations have to perform and offer greater value than their competition, or risk losing their share of the market. This results in greater value for the average weedhead. Simply having good weed is not enough in these markets, as people want to be catered to for their loyalty. If not, they will go somewhere else that does cater to them more. There are a million ways to run a dispensary, but knowing what your competition is up to is necessary to survive in a competitive market…and the price of weed is a huge factor in that.

We see it happening in Denver, Colorado for sure. In a relatively small city there are about 250 retail outlets for weed. The State also forced retailers to produce 70% of their own medicine, resulting in dispensaries being able to offer more wholesale direct pricing for their in house products. Weed is down to $25 an eighth there or maybe $35 for the super duper. Quality can vary and there are less flavors to choose from sometimes, but from what I hear the quality continues to improve. The usually dry climate can cause for some curing issues, so shelf life and freshness also matter in this market. But overall the competition has resulted in a lower price for weed and weed accessories across the board. Also, less interference and forced vertical integration has contributed to people being more comfortable with giving more for less. In California, the cost of rent alone for dispensaries continues to skyrocket, wherein Colorado more property owners are comfortable with the state run program because it has had little issue with asset forfeiture there….at least for now. I am unaware if the IRS has begun to audit dispensaries in CO either, as they have in CA. Denver is also a for-profit market, which means smaller margins are okay when you get to keep most of them.

Seattle, WA is a lot like Denver in the sense of densely saturated markets; but they do not have nearly as many regulations…yet. Apparently, they are working on some; but for now there are just normal business licenses issued for dispensaries and if they pay their taxes and have no complaints, there has been relatively little enforcement by the locals, state, or feds. In less liberal areas of Washington State there has been enforcement and major issues. There is a lower price scale there, generally around $35-40 an eighth, with a few still doing their fire at $50; but for the most part, a competitive environment has resulted in lower priced weed for the end user.

In both Seattle and Denver, and even Oregon, the cost of living is generally substantially lower than California too, so operating costs are much lower overall. At some point, I wonder if Californians just expect to pay more for things, and become cautious if something is priced too low. I am not sure people could wrap their head around a $30 eighth of the super chronic in West Hollywood. It is almost like people feel superior, or better about themselves, if they pay more for something. “It must be better…it costs twice as much.” In some ways this is similar to the wine industry too, where people pay crazy shit for a bottle of old grape juice.

The medical market leaves a lot to be desired for the population it serves. It has become far too burdensome due to the need for clandestine growing and production facilities (indoor lighting is a bitch), and the snowballing regulatory costs and taxing associated with dispensary operation. In California the porridge is too hot. In Colorado and Washington State, the porridge is too cold. In Arizona and New Jersey, they may never get any real porridge; and Maine is likely too limited to really gather meaningful assumptions at this time. In Maine, prices at dispensaries are high, but I hear the caregiver’s there have great numbers.

But there is no truly free market that allows for no restrictions on production or retail, so we have no idea what a retail adult use market will look like. We likely will not really see that even in Colorado and Washington, as their new legalization laws take effect because there will be a knee-jerk reaction to try and limit the programs severely to appease the feds. Maybe this strategy will be successful, or maybe it will be unnecessary. I believe the feds are ready to give on this issue. The dam of public opinion is breaking too quickly and they will get on the right side of history sooner than later. But even if the announced a no enforcement policy tomorrow it would still take time for a nationwide series of laws to develop and begin really affecting the market in a huge way…but it is coming.

One day weed will by $50 per ounce…unless people like Kleiman use the fear of yesterday to convince us that we must continue black market extortion pricing to “prevent diversion.” Once there is no more black market to worry about the product being exported to, we will likely see a boom in production to meet global demand and a number of great weed products being sold for incredible prices. We will also see a robust connoisseur market, just like wine, where specialty grown weed and finished products with reputation will hold superior value in the market for those who can afford it.

But for now the price of weed is too damn high, or too damn low…It is hard to tell. If you are a grower seeing $60 eighths while losing 25-35% of your income then it is probably too damn low. If you are a patient in California paying $60 an eighth it is definitely too damn high. If you are a patient in Colorado or Washington paying $35 an eighth, but having a more homogeneous and limited experience then I do not know what the fuck it is.

When we look at the possibilities of what will be in a legalized adult use global weed market it is clear that the best option is freedom. It will likely take us some time to achieve real and meaningful cannabis freedom, but we will not stop until that goal is achieved and I can get a $10 lid again….

Weed will be legal. What it will eventually cost will be the big mystery. Most people do not brew their own beer because it is cheap enough to buy. But high class liquor and spritis can sell for a mint. But it will take a truly free market to bring weed prices back to earth. I am sure it will get more volatile before it evens out and the larger market develops. At least we hope. Sounds like a lot of work, so we should get started this summer…..