A fascinating look at a big problem in the cannabis market.
Along the West Coast, which dominated U.S. marijuana production long before states began to legalize it, producers face what many call the failed economics of legal pot.
There is vast supply, thanks to great growing conditions and a wealth of expertise, but any surplus remains officially trapped within each state’s borders due to the federal ban on marijuana. Prices have plunged and producers have struggled.
“I’m at rock bottom,” said Jeremy Moberg, who owns CannaSol Farms in north-central Washington and, like many licensed growers, complains that the state’s 37% cannabis tax leaves virtually no profit margin for producers. “I’m tired of running a failing business.”
No one in the industry expects a fractured Congress to help out anytime soon by legalizing the drug, allowing pot businesses to deduct expenses or even just easing banking restrictions that frequently cut them off from loans or credit.
Instead, some are pinning their hopes, however faint, on President Joe Biden’s administration clearing the way for marijuana trade among states that have legalized the drug. That would allow the West Coast — with its favorable climate and cheap, clean hydropower for indoor growing — to help supply the rest of the country, they argue.
Twenty-one states have now legalized the recreational use of cannabis by adults. Sales just began in Missouri, are expected to begin in July in Maryland and totaled $300 million in the first year of New Mexico’s program.
How states have set up their markets has implications for how their industries are doing now — and how they might fare should businesses be allowed to sell out of state.
Washington and Colorado were the first states to legalize recreational marijuana in 2012. Many of the early regulations Washington adopted to keep the Justice Department at bay — including restricting the size of growing facilities and banning out-of-state investment — remain in place.
That has helped some smaller growers thrive. But it could hamstring those hoping to compete in an interstate marketplace alongside larger, more efficient producers from Oregon or California, who operate under fewer limits.
In Oregon, where sales began in 2015, large growers have achieved some economy of scale that could give them a leg up in a broader market. But in the meantime, the state’s oversupply is considered the nation’s worst.
In February, the Oregon Liquor and Cannabis Commission reported marijuana businesses were sitting on about 3 million pounds (1.36 million kilograms) of unused cannabis, as well as 75,000 pounds (34,000 kilograms) of concentrates and extracts.
Steve Marks, then the commission’s executive director, said Oregonians already buy as much weed as they can use. Federal inaction poses “an existential crisis” for Oregon’s industry, he warned.
“Cannabis in Oregon is like corn in Iowa,” said TJ Sheehy, an analyst for the commission. “If you put a box around Iowa and said you can only grow corn in Iowa to sell to Iowans, you’d have exactly the same dynamic.”
None of this has anything to do with Texas right now, of course, because we only allow a narrow medical use of cannabis. As you well know if you’ve read this blog for any length of time, it’s highly unlikely that situation will change in any meaningful way as long as Dan Patrick is in charge of the Senate. But nothing lasts forever, and things will eventually change, so it’s worth considering what the prospects for Texas-grown cannabis might look like some day. If the federal restrictions remain in place, then Texas growers would have sole access to the Texas market. Good for them in terms of limiting competition, not so good in terms of growth potential. If the federal restrictions are removed or at least weakened, then established suppliers will be racing in to meet the demand we’ll surely have. Not so good for the local growers, though being the “locally sourced” option can be an advantage, but potentially great for the consumers, who will have more choices and thus hopefully lower prices.
All this is theoretical, of course. At the rate we’re going, the rest of the country may be growing and selling cannabis before Texas ever gets around to allowing it here. I’ll leave it to you to decide how business friendly that would be.