Current Economics of the Cannabis Market

Cannabis & Money & Business

How are government regulations affecting the current cannabis economy?

Markets are funny things. It doesn’t matter whether the market is part of a capitalist economy, a totalitarian economy or somewhere in-between. Markets act independently of the governing structure of the nation where they’re located. Markets are always based on supply and demand, which might seem, at first glance, to be a duh. Of course, they are. A fairly new market, cannabis, is in the throes of typical new market gyrations and sometimes misguided governmental management.

Recently there have been a lot of ‘headlines’ about how the price of cannabis is falling in places like Oregon and California and how it’s tough to sustain the price for a gram of flower in Colorado. Lots of headlines, no reporting on how the market itself is doing. Markets always self-correct. The supply goes up because people see a path to ‘easy money’ and the price goes down. As the price continues downward, marginal suppliers either go out of business or flood the market with products that aren’t very good. The suppliers can’t make their margins to stay in business, so they go under. This is what’s happening in several states (i.e. Washington, Oregon and California) because of regulations around the cannabis business.

Oregon, in particular, hasn’t limited the number of grower licenses (until it stopped processing new applications recently) issued in the state. So, there are lots of growers. Lots and lots of growers. A lot of growers means there’s a lot of supply. So…the price has been going down. And down. And down. And what isn’t being taken in by the marketplace is going into the black market which was created when cannabis was outlawed in 1937. There was demand and no legal way to buy and sell. No big surprise there. If we study history and look at what happened to alcohol after the 21st amendment was ratified in 1933, there are a lot of similarities between the legalization of alcohol and the slow legalization of cannabis. There were a lot of places for alcoholic beverages to be sold (in states that set up a market) and lots of places that wanted alcohol but it was still illegal. Those markets had illegal sales. There was demand, so sellers came in to satisfy the market. Most of the alcohol was rotgut, but it was alcohol and there was demand. In the late 1980s, the American wine rush was in full swing. Wine, like cannabis, takes land. But unlike cannabis, wine takes a year to three years to bring to market. So, the winery must have enough capital to keep going while waiting for its product to mature. Cannabis is somewhere between 3 to 6 months from seed to market, so is nowhere near as capital intensive. That’s why a lot of people want to get in the growing business. That still doesn’t take quality into account.

Back to cannabis. Easy to grow. In a legal state, you get a license, buy a couple of lights, some pots for the pot and BAM! you’re a grower!! And, with a legal market for your produce. And…with a whole lot of other growers trying to take your share of the marketplace. Prices go down. And down. And the supply is huge. And you still need to pay for the electricity, seeds and fertilizer whether you’re able to sell it at a profit or not. If you can’t sell the cannabis profitably, you sell to the black market. Or you go out of business. Or if you’re patient, you wait for the market to equalize and start selling your product again. Or you start producing something that’s different and superior quality. There’s always a market for a superior product. Currently, at least where I’ve been, better quality doesn’t mean a higher price. It’s still a hit-or-miss thing. Cannabis is priced by the percent of THC in the flower. It’s a dumb way of pricing a market, but it’s what the market is responding to. Eventually, this will stop and we’ll go to a market based on quality, not quantity.

The market is topsy-turvy now in most places. It’s new. It’s to be expected. It will stop being a simplistic market when the market is ready for it. For now, we need to put up with what the market is doing, even if we feel it’s not right.

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