Cannabis Economics

 

Agricultural economics are described as the “production, distribution and consumption of [agricultural goods and services” [1],

We find ourselves today at an interesting junction in the Cannabis industry both here in Canada and abroad. The march of progress ticks along with states legalizing, medical marijuana being featured nightly in mainstream media, and the creation of a nascent free market via the MMPR here at home. The modern “Green Rush” is upon us;  producers are seeking those with deep pockets to invest, and speculators hope to cash in on the next big commodity market. Although I agree that the growth potential is considerable across the board, I think we all overvalue not only the market as a whole, but the product it’s built on.

Why is Cannabis still feast or famine?

First and foremost I think it’s important to establish that Cannabis is clearly an agricultural product. Across the world agricultural costs attributed to processing, distribution, and marketing have all risen while the costs associated with farming have declined.[2] The current consumer pricing structure of both medical and recreational Cannabis is based on decades old trends set not by real production costs but by artificial externalities like prohibition, false scarcity, and the necessity of clandestine indoor production.

Cannabis is by nature a non-perishable good. The plant is harvested, dried, and cured before either being processed into a derivative (value added) form, or made available to the consumer as is. In either case, the finished product has a shelf life measured in years if produced and stored correctly. Cannabis is grown indoors not because there is a staggered supply as a result of  seasonal production and shelf life limitations, but because prohibition has driven domestic producers in the United States and Canada to seek refuge in basements and garages. The “feast or famine” pricing pressure makes no sense in a consistent and healthy free market.

Why do we grow indoors?

The substantial costs associated with indoor Cannabis production are unnecessary in an open and legitimate market. Large scale greenhouse or outdoor production of Cannabis has never been attempted in North America. The illicit outdoor markets have faced considerable pressures both economically and logistically that limit efficient production and quality. Imagine converting large swaths of Canada’s Okanagan wine country to seasonal Cannabis production. Farmers could be incentivized to innovate over the long term, reduce input costs through proper soil management, and avoid pesticide usage by growing in a semi-arid climate.

A tiered system of quality to meet varied demand could still be achieved while avoiding the burdensome costs of either indoor or “hot-house” production methods. There is no reason to think that given enough innovation and experience green-house Cannabis produced in a fear free, and open market could not meet the expectations of the modern consumer. Given the opportunity to invest in the technology needed to create a mature derivative market, bulk Cannabis produced with little concern for appearance or “extreme” potency would suffice. Utilizing novel technologies like supercritical CO2 extraction with bulk low-cost Cannabis might drastically reduce price.

Why is it still priced like a finite resource?

Current price models in the new legal medical markets in both Canada and the United states are nearly mirror reflections of the pre-existing black markets even though they face few of the same hurdles. Producers under prohibition were forced to amortize their capital expenditures over an extremely short period of time, for fear of losing their investment to the police. The new free markets benefit from being able to innovate over the long term, utilize economies of scale, and avoid much of the costs associated with prohibition. Cannabis can now truly become a renewable resource again if given the chance. A recent study published by the Rand corporation confirms much of this by suggesting “the untaxed retail price of high-quality marijuana could drop to as low as $38 per ounce”[3]

Having said all this – whatever the market will bear is where we will sit until some real competition arrives.

[1] “Agricultural Economics”. University of Idaho.

[2] Sexton, R.J. (2000). “Industrialization and Consolidation in the US Food Sector: Implications for Competition and Welfare”. American Journal of Agricultural Economics82 (5): 1087–1104.doi:10.1111/0002-9092.00106.

[3]http://www.rand.org/news/press/2010/07/07.html