Regulations Are Out of Step with Economic Reality

February 14, 2023 · MG Magazine

Despite all the hype and optimism that characterized the initiation of adult-use legalization, the past ten years of both business and tax revenues have fallen far short of investor and analyst projections. Today, companies of all sizes are struggling to survive, while a healthy percentage of consumers across the country continue to favor the illicit market for their purchases.

In a book published last fall titled Can Legal Weed Win? The Blunt Realities of Cannabis Economics, two economists at the University of California, Davis, “take readers on a tour of the economics of legal and illegal weed, showing where cannabis regulation has gone wrong and how it could do better.”

The book’s authors are Daniel Alan Sumner, director of the UC Davis California Agricultural Issues Lab, and Robin Goldstein, an economist in the Department of Agricultural and Resource Economics. In addition to their own research and data collection, the two authors worked with California’s regulators starting in 2016. Reflecting back on that process, Sumner said he was particularly alarmed by the revenue projections experienced industry players were making for their companies and the industry as a whole.

“One of the things that surprised us is how people were doing economic forecasts that didn’t make any sense. They hadn’t really thought through the underlying economics,” he said.

The authors point out a few examples in the book: In 2018, market research firm Grand View Research projected a $146-billion global cannabis retail market by the end of 2025, and in 2020, “Wall Street’s top cannabis analysts” at Cowen & Co. projected an $85-billion retail market by 2030 in the United States alone. When the U.S. industry started its downslide in 2020, however, many of those same firms revised their predictions to something more reality-based. In 2021, Grand View projected a more modest $91.5-billion market in 2028.

Some of the more compelling conclusions and predictions in the book include:

  • Legal production will seek efficiencies by moving to areas with lower energy, labor, and regulatory costs.
  • As weed production and processing move, prices in all states will fall to compete with prices in the less-expensive states. Such arbitrage-based price declines can happen very rapidly when trade restrictions are lifted.
  • There is no obvious reason why the wholesale price of weed could not fall to $75 per pound or even $30 per pound someday.
  • Once giants like Walgreens and Costco begin to compete on retail sales, local weed retailers may be no more likely to stay in business than local shoe stores.
  • States with long-running legal industries and relatively light regulations, such as Colorado and Washington, could become net exporters of legal cannabis in an interstate market.

In their book, Sumner and Goldstein compare the cannabis industry to other, more established agricultural sectors and draw some interesting conclusions. “Our best assessment is that weed is not really like almonds, lettuce, or wine grapes, which are crucially dependent on climate, soil, or related conditions for yields and quality,” the book states. “Producing weed is more like producing eggs, where, because production is confined, general business costs, including regulations, affect location more than specific weather or soil conditions.”

While he concedes cannabis farmers in the Golden State will continue to face significant challenges, Sumner also is optimistic niches exist for companies that create unique or compelling business models. He currently is working with researchers at Humboldt State trying to determine how much of a premium consumers will pay for environmentally sustainable cannabis. “The answer is sure, there’s a small market there if you can grow it in a way people trust,” he said.

Looking to the future, Sumner believes government regulations will be a major factor in which states and regions create profitable and competitive markets. For example, some social-equity efforts and policies, as well-meaning as they may be, have spawned unexpected negative consequences. “It’s hard to want to criticize when you say, ‘Here’s a community that was negatively affected by these laws we now think were a mistake, so we should restrict the licenses to certain types of folks,” said Sumner. “Who could be against that?”

But consider that many social-equity regulations delay the licensing process and create burdensome restrictions that ultimately raise the retail prices of the resulting products. In addition, regulations in general have made cannabis prices on the legal market about twice as high as in the “traditional” (illicit) market.

“Here in California, we say to people between the ages of eighteen and twenty-one, ‘Either you go through the process of getting a medical permit, or you go and consume illegal cannabis for the next three years or so,’” Sumner said. “So we’re regulating cannabis mostly like we do alcohol, without giving it a lot of thought. That means if somebody begins using cannabis even a little bit as an undergraduate, they will have developed the habit of buying in the illegal market.”

Given the industry’s many regulatory anomalies, for any state that has a thriving black market with its own illicit manufacturing base, it is indeed difficult to predict when legal weed might finally win. (Full Story)

In category:Business
Next Post

Twitter allows cannabis ads in states where it’s legal

Twitter is allowing cannabis ads to run on its platform in U.S. states where cannabis is legal and in Canada, according to the company’s blog and Axios. Twitter updated its ad policy Wednesday, making it the first social media app in the U.S. to…
Read
Previous Post

Psychedelic mushroom producer First Person sets terms for $6M US IPO

Psychedelic mushroom producer First Person (FP) has set terms for a downsized $6M initial public offering. First Person, which raises mushrooms for nutritional, nutraceutical and therapeutic purposes, said in a filing that it's planning to offer 1M shares priced between $5.50 and $6.50,…
Read
Random Post

Efforts to Make Legal Cannabis Industry Equitable Are Falling Flat

More than a dozen states have created programs to give minorities who were disproportionately affected by the war on drugs a chance to participate in their legalized cannabis industries.  So far, those efforts haven’t worked.  Black and Latino entrepreneurs seeking to capitalize on the new…
Read
Random Post

Oregon Issues First Psilocybin Manufacturing License

Oregon regulators issued the state’s first business license under the state’s historic psilocybin therapy program last week, the Associated Press reports. The licensee, Satori Farms PDX LLC, received its license to begin manufacturing psilocybin products from Oregon Psilocybin Services — a branch…
Read
Random Post

Washington Senate Passes Ban on Cannabis-Related Hiring Discrimination

The Washington Senate has approved a ban on discriminating against cannabis use during the hiring process. The Washington Senate voted 28-21 in favor of a bill on Wednesday that would block employers in the state from refusing to hire someone…
Read
Random Post

Germany To Introduce Bill To Legalize Cannabis In The Coming Weeks

Germany is moving forward with its plan to legalize cannabis for recreational use, aiming to become the first European country to regulate the sale of cannabis products. But while supranational legal frameworks may pose obstacles to legalization, Lauterbach has received…
Read