While Federal prohibition of marijuana continues, state by state legalization is rapidly gaining ground. Currently 29 states permit medicinal marijuana and 8 (plus Washington DC) permit recreational use. This hip new legal status has made marijuana readily available to adults and has reduced the legal risk of it’s use. One might expect this would create a huge new demand but it’s still too soon to know. One unexpected consequence of legal cannabis has many small marijuana producers and law enforcement agencies concerned. It all boils down to supply and demand.
Colorado was the first state to decriminalize recreational use. This meant that any adult, either resident or visitor, could legally purchase and consume marijuana products. A great number of both recreational and medicinal marijuana users flocked to the Colorado to take advantage of legalization. This liberal piece of Colorado legislation put the centennial state on the map as a Mecca for forward thinking people and drug reform. Today, Colorado’s marijuana industry has grown to around $10 Billion annually.
In the wake of Colorado’s success came the west coast states. By the time California decriminalized recreational cannabis use, Oregon was already beginning to see a problem. Too much marijuana!
In most industries, as supply increases, the cost decreases both at the wholesale and retail level. Lower cost creates more use of the product as consumers substitute one product for another. For example, as the cost of Marijuana decreases people might switch from drinking alcohol to smoking weed for purely economic reasons. What prevents this with Marijuana is that high taxes result in a minimum cost that it can’t really fall below. This prevents consumers from simply smoking up the extra marijuana. Additionally, the legality and therefore cost is not uniform from market to market. Whenever there is a significant difference from one area to another, someone will step in to fill the demand. In this case it means moving legal weed from one market like California or Oregon to another state where it is not legal and the cost is much higher.
In 2017 more than 2,600 pounds of Oregon’s finest was seized as smugglers attempted to export it to other states. Who knows how much left undetected. Oregon currently has around 900 licensed growers and an additional 1100 application are pending approval. The state is simply producing more marijuana products than it can sell and consume within the state.
I don’t have a number for the amount of marijuana that is seized flowing out of California but the quantity is likely much larger. One expert says California produces 8 times the marijuana it consumes, while another source places the number at 12 fold. Despite the problems with legal overproduction in Oregon, commercial development in California moves forward undaunted. Do investors expect Colorado’s success to be echoed in the west coast states that already produce more than they can use?
With time and money on their side, large investors will probably still see ample returns but only because the laws continue to support industrial marijuana production. The cost of entry into legal production is already foreshadowing a sharp decline in legal “mom and pop” cannabusiness. At the same time, the eradication of illegal and unpermitted gardens continues.
It’s the end of an era. Move aside handcrafted artisan grade flowers, make way for the Walmart of Weed.