The Economics of Legal Weed Don’t Work

TColorado, a state that legalized recreational marijuana use in Colorado over 20 years ago. Other states soon followed suit, while several other states already have sufficiently loose medical marijuana laws that an estimated 40% can now legally purchase cannabis. Stars such as actors, sportsmen, and musicians have quickly entered the cannabis market to offer high-end marijuana products to those who are looking to get high. Some of these—Willie Nelson, Snoop Dogg, Seth Rogen—are unsurprising. Others are less likely weedpreneurs, including Bella Thorne, Jaleel White—the actor who played Steve Urkel in Family matters—and former NBA star Al Harrington. This new legal sector was expected to generate huge tax revenues for states and be multibillion-dollar in revenue.

But it hasn’t been that simple, according to the authors of the new book Legal Weed Can Win: Blunt realities of cannabis economics. It two economists from the University of California, Davis’s Department of Agricultural and Resource Economics found that the future of the legal cannabis business, hampered by regulation, competition and standard agricultural issues, is a bit hazy. TIME spoke to the authors, Daniel Sumner—who is also a former assistant secretary of economics at the U.S. Department of Agriculture—and Robin Goldstein, who is also the author of a controversial bestselling guide to wine, The Vine Trials.

The following interview was edited for clarity.

Half of American adults cannot legally buy marijuana. How’s business going?

Daniel Sumner: It’s been tough. There’s still a whole lot of illegal weed out there available to that same group of consumers, and most of them choose the illegal product because it’s half the price. Also, they have been consuming the product for the last 20 to 40 years; they’ve been dealing with this guy who knows a guy and they’re reasonably happy with the product.

Why is legal marijuana so expensive?

Sumner:You will need a consultant in order to get your license. You wait. In Vermont [which legalized recreational cannabis in 2018], for example, you’ve hired your consultants, you’ve gotten your venue for your retail store, you’ve purchased a greenhouse or rented one as your cannabis growing facility, and you’re still waiting. It’s been four years. Vermont has yet to issue an adult-use marijuana license.

Robin GoldsteinThe agencies in many states are not adequately staffed, making it difficult, slow, and time-consuming for individuals to complete the application process. So it can take years and years and in the meantime, they have investors, they’re burning cash and a lot of people have lost their money just by waiting.

Sumner:The illegal farmers are, in general, far from the grid at the farm-level. They’re not paying attention to labor regulations or pesticide regulations or other things that are the same for every farmer, not just for cannabis. This is an expense disadvantage for the legal man. And that’s one where almost everybody would say, “We really ought to enforce that.” I wish we could figure out a way to enforce it on the illegal guys, but we haven’t figured that out yet.

Were there not a lot of people who tried weed, but were put off by its criminality?

Goldstein: Yes, but it’s a small percentage. In many of these states that have legalized, the penalties weren’t that harsh already for the buyer. It was available for anyone who wanted to use it. Evidence from around the world, from places like the Netherlands that have had forms of legalization well before the U.S., suggests that you don’t see a big increase in the total amount of weed smoking just because you legalize it.

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So what’s happened to the medical marijuana industry as a result of legalization?

Goldstein: There was legal medical cannabis in some states for years. It was not regulated. Some of these people now break the law because there are so many new regulations. We don’t think it was the intention of the voters generally to make more weed criminals. [In states where weed is legalized] there’s not really that much reason for people to continue getting their medical recommendations. Once anyone can just walk into a dispensary and buy it, then what’s the reason to pay a doctor to get this recommendation? There have been some states where the medical system has survived, including Colorado, and Massachusetts, because they’ve got much bigger tax exemptions for the medical patients.

People believe that marijuana has the potential to grow and state like Colorado, are benefiting from its economic growth. Are you sure this is not the case?

Sumner:Some companies have been successful, while others have struggled. While there are some growers who are successful, many farms are failing to do well. Now, that’s true for other farms too. I’ve been looking at farm industries for a very long time, and that’s the nature of agriculture. Cannabis is still in flux. It’s been a gold rush and a few people have found some gold and a lot of people haven’t. What I like to say is the company that made a lot of money in the California Gold Rush was Levi’s. Levi’s was the company that made jeans for men who were digging for gold. There are companies who have provided the right supplies to supply cannabis businesses with modern equipment.

How about investors? In your book, you mention that ex-Republican congressmen and legalization critics Tom Daschle (and John Boehner) are part of the industry. Are there investments in VCs or investors?

Sumner:These two people are consultants. They may include lobbyists or the like.

Goldstein:You can’t make more money by taking flat fees. You can’t NotMake a lot of money by taking large consulting fees. However, the stocks of those who received their compensation through shares in big cannabis holding corporations haven’t performed well overall.

The legalization movement hoped that those who were most affected by the criminalization of it would be able to take advantage of this market. What has that resulted in?

SumnerMany people have worked in this industry for many years and know how to cultivate the crops. They thought that their experience would suffice to make it legal. What they didn’t know is how to run a legal business and that was a real eye-opener for them. Take somebody who’s been a small time criminal. You say, “Go to your banker and get a loan for a half a million dollars so that you can build a modern greenhouse. Come and fill out all the forms and keep very clear records because there’s a computerized track-and-trace system that you have to implement…”

Goldstein: Yeah, and “Go to your city council, or your county board of supervisors and get the local approval.” This is just a skill set that these people didn’t have. The access to capital is one aspect of the equation. Access to political capital, however, is another. In many cases they didn’t have either. They are no longer considered criminals, despite the many good-hearted equity programs. Having the financial resources is more important than being able to enter this industry.

Doesn’t there seem to be a billionaire in the weed industry?

Sumner:Although it is unlikely, there are certainly weed millionaires. The people that are trying to build it as an ongoing profit-making business—the honest ones—say we’ve got years to go here. Are they going to be Amazon? While it’s unlikely that one will become Amazon, is there a chance they could generate a steady few hundred million dollars per annum from the sale of merchandise in a dozen other stores? Probably, yes.

Is it possible to tell if these problems relate to efficiency and scaling, which are both common for startups and small-sized businesses? Or if they are related to regulation and how the market works.

Goldstein: One of the problems with scaling is that it’s all state-by-state at the moment. So, you have to basically craft a strategy within a state based on that state’s regulation and taxation system, and so forth. Expansion to other states is not the same as scaling up your business nationwide, but more like starting a new business in each state. If I were advising a cannabis company, I’d say try to try to compete on price. Each person wants to have their very own brand of weed, with a celebrity backing it. That’s a really tough market to compete in.

Sumner:Many people claim that this industry could be $100 billion. Robin and me are not convinced of this, however, it is possible for $10 billion to be an industry. This would mean a large amount of money, if only a handful of players share. But we don’t have any companies that are dominant in the market. There’s nothing like a Reynolds Tobacco that has the brands and does the manufacturing. We’ve seen nothing like the consolidation yet where the really big money could be coming. We haven’t even seen an indication that it’s going that direction.

Vermont was mentioned, although it is in principle legal, in practice there are no legal weed-dealers. Do you know of any other states doing better?

Goldstein:Washington’s legal marijuana sellers have more chance of winning market share than those in Colorado. That’s not just because of lower taxes and regulations. It’s also because those two states have been open for recreational and adult use the longest. Companies become more proficient at regulating, while regulators and legislatures adapt over time to learn from their early errors.

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Which industry does weed look the most similar to? Alcohol?

SumnerWhile there are some similarities, there are also big differences. This is partly due to the fact that weed was illegal much longer than alcohol, which was illegal almost for all of its existence, before it became illegal. You can also put in a lot of cannabis and still leave enough space for your children. Illegal weed is easier than manufacturing or moving alcohol.

Goldstein: I don’t think there’s any other industry that it’s really that much like and that’s one reason we thought it was worth writing a book about it, because it’s so unique and weird. There are many differences between the two. You can draw similarities from alcohol. The value per ounce of this stuff is just through the roof, unlike any other product that’s legal. It’s more expensive than white truffle or saffron or beluga caviar.

Are you proposing less regulation? A lot of people will argue against less regulation. Continue readingRegulation around brain function altering substances

Sumner: This is what we understand. But you can [have so many rules that you]Make sure you only have the highest quality product. No one will buy it. We’ll let all these kids go out and buy illegal weed and let that industry prosper. For example there’s a rule that says in California, you can’t buy it after 10 p.m., which is when lots of people are just starting to party. Why would you close the legal store at 10 o’clock?

Goldstein: The point certainly isn’t that it should be unregulated completely; no product is unregulated. The point is it’s a cost benefit analysis, every additional rule you put on, you have to ask how much is this going to take away from the legal market and shift to the illegal market, where you don’t have any safety standards at all. This balancing test should be considered for every rule passed.

How can you strike a balance between lowering entry barriers and the worry that there will be an increase in the consumption of cannabis?

Sumner: It isn’t clear that legalization caused an increase in total consumption. But when we see the price of cannabis coming down for the average consumer, it’s a legitimate question to ask: Is that a good thing for society? There are questions when it comes to something that’s having psychological effects. How can regulation and government intervention help? It’s not clear what you can do to be effective, given you’ve got this parallel industry that’s illegal. That’s a real challenge and we acknowledge it.

Wouldn’t one way to resolve this be not to make legal weed less regulated but make illegal weed more so?

Goldstein: This creates an enforcement problem. The intent of the voters was, Let’s keep people out of jail for marijuana offenses. And let’s stop punishing people for doing something that we don’t believe should be illegal anymore and if the result is, you end up with much more criminal crackdowns and more drawing more people in jail than you did before, you risk frustrating the purpose that voters had, or that legislatures had in legalizing it. There is an 80-year record of weed being illegally produced and sold all around the globe at very low prices. This pre-existing illegal market is so robust that to come in and try to just bust that up, it’s a logistical nightmare for law enforcement.

Sumner:The society has repeatedly stated that it is not comfortable to throw millions of young black and brown men behind bars for minor crimes of violence. However, I will tell you that there are individual growers or retailers who say “What the hell? I’m complying with all these regulations. And then there’s a kid standing on the corner in front of my store selling weed at half the price. Why don’t you arrest him?” So there are retailers and farmers who are very frustrated. But even most of them don’t say, “Hey, bust my brother-in-law.”

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