This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org

This article is from the

March/April 2014 issue.

Pot Economics

What’s the future of the American marijuana market?

BY DAN SCHNEIDER | March/April 2014

In November 2012, voters in Colorado and Washington state made historic decisions to legalize marijuana for recreational sale and use, flying in the face of anti-pot moralists, drug warriors, and a century’s worth of prohibitionist policy. At the start of this year, these policies began to take effect, with pot shops opening for business for the first time on this side of the Atlantic.

Once thought to be a mere pipe dream, legalization now seems like an inevitability; at the time of this writing, no fewer than eleven states are considering some form of legislation to allow marijuana to be sold over the counter, and at least a dozen others are considering decriminalization or medical-marijuana measures. Tired of federal foot-dragging, states as disparate as Alaska, New Mexico, and Vermont are cautiously weighing the potential benefits of legalization, persuaded not only by abstract arguments about individual liberty but also by hopes of pumping money into their economies. Meanwhile, advocates have been quick to promote marijuana as just the medicine states need to fill their coffers, create new jobs, and cut costs by keeping nonviolent drug offenders out of jail (see sidebar, “The Drug War: Wasting Lives and Dollars,&rdquo).

But what would the economic impact of widespread legalization be? There are dozens of factors to consider, particularly on the revenue side of the equation: How many people will be consuming marijuana, and how much? What states stand to benefit most from growing it? Will big business take over its production and sale, or will it remain in the hands of independent growers and dealers? And how large, in dollar terms, might this whole sector end up?

The Drug War: Wasting Lives and Dollars At the end of 2011, there were over seven million inmates, parolees, and probationers under supervision by the U.S. corrections system—more than anywhere else on earth. Over 1.5 million of them were put into the system for drug offenses, with marijuana the most common drug represented. That same year, 750,000 people were arrested for marijuana-related crimes. The federal government spends billions of dollars each year enforcing increasingly unpopular drug laws, including $3.4 billion for marijuana alone in 2008, according to the conservative Cato Institute. Not to be outdone, the states spend over $3.5 billion, to fail at eradicating marijuana growth, distribution, and especially use. The result? The creation of millions of unnecessary “criminals,” the vast majority of whom are people of color. Despite the fact that white and black people use marijuana at approximately the same rates, a black person living in the United States is four times more likely to be arrested for simple marijuana possession than a white person. At every stage after that, the criminal justice system is structured in such a way that people of color and low-income people will face harsher penalties than their white or wealthy counterparts. The human cost of marijuana prohibition—and the War on Drugs in general—is a critical element of drug policy reform, although outside the scope of this article. For some essential reading on the subject, consider Michelle Alexander’s The New Jim Crow, Doug Fine’s Too High to Fail, or Jeffrey A. Miron’s Drug War Crimes: The Consequences of Prohibition. Through their research and activism, these writers continue to reveal truths about the failures of prohibition that numbers alone simply cannot.

The jury is still out on what the ultimate financial impact of legalization would be, but in the past few years a growing body of research has explored the possible contours of a new marijuana economy. This, combined with some publicly available data and the wisdom of a few folks who have watched the legalization movement grow over the last 40 years, can give us a good sense of how the plant might (or might not) live up to its proponents’ expectations.

It seems like high time for a little lesson in pot economics.

Out of the Shadows

Because marijuana is currently grown, distributed, and sold almost entirely on the black market and is used largely out of the public eye, assessing the value of the national market for marijuana (including imports and non-recreational uses, such as hemp fiber) is tricky. The trade journal Medical Marijuana Business Daily currently estimates that a fully legalized cannabis market could be as large as $46 billion per year, while more conservative observers peg it at anywhere between $10 billion and $40 billion.

There are about 7.6 million frequent marijuana smokers in the United States, according to the 2012 National Survey on Drug Use and Health. Nearly 23.9 million Americans use the drug semi-regularly. Marijuana is sold widely on the black market, and is readily available on street corners, in bars and nightclubs, and in high-school hallways (as 80% of students reported to the National Institute on Drug Abuse in 2012). Except for the relatively small number of people who have purchased medical marijuana through licensed dispensaries, the vast majority of these users buy their weed on this black market—either directly from dealers or from friends with access to a dealer.

In a world where marijuana is legal to buy and possess, this would not likely be the case for long.

Assuming that demand for the drug remains relatively stable (see sidebar, “The Demand Question”), a legal marketplace for marijuana will likely replicate the current distribution system for alcohol and be sold in stores with special permits. Where exactly it could be sold would largely be a matter for state and local regulators to decide, just as it currently is with alcohol; municipalities might allow lower-strength varieties to be sold in corner stores (like beer and wine are in many states) or coffee shops (à la Amsterdam), but it’s virtually certain that any store selling any quantity or type of weed would need to get a special license.

Whatever the market’s size, the governments of Colorado and Washington are hoping that taxing the drug will help to bring in some badly needed revenue. Washington placed a 25% excise tax on marijuana with its new law, and Colorado voters passed Proposition AA in November to approve a 15% excise tax and a 10% sales tax on recreational marijuana. These measures are expected to raise hundreds of millions of dollars in revenue for each state, including a projected $500 million for Washington alone by 2015.

A study by the RAND Corporation’s Drug Policy Research Center describes marijuana buyers as a “Wal-Mart, not a Whole Foods” market, generally preferring the less expensive Mexican strains to higher-quality bud from Northern California. However, the market for domestic marijuana has expanded in recent years. As NPR reported in 2011, commercial prices for marijuana in areas like California have been falling for years, down to as low as $2,500 per pound, as a crop of new suppliers has sprouted up.

This brings up the issue of whether marijuana will be allowed to move legally through international trade channels, just as alcohol is today. If marijuana is approved for importation, this could certainly drive down its price in the United States, just as Mexican imports already do. But Mexico isn’t the only player in the game: this fall Uruguay boldly announced that it would begin to allow the use and sale of legal, regulated marijuana nationwide, at the astonishingly low price of $1 per gram (compared to $15 or more per gram here). Tariffs and added costs for packaging, shipping, and distribution would certainly bring the costs up on its way to the United States, but if other countries follow Uruguay’s example, U.S. producers may have to lower prices to compete.

So while questions about who’s going to actually buy this newly legal good are of interest to regulators looking to collect taxes on marijuana to fund state and local initiatives (both Colorado and Washington have promised to spend millions of the initial revenue on education), they are likely to be affected by the rise of a legal supply of cannabis, both at home and abroad. A supply that comes, of course, from the farm.

Prohibition’s End and the Demand Question Prohibitionists have long held that marijuana legalization would cause rates of recreational use to skyrocket. While the source of this claim is likely rooted more in fear than solid research, it’s worth examining in order to better understand what the market for legal marijuana would look like if it became fully legal. First, it’s important to remember that marijuana use has not receded under prohibition, just as alcohol use barely receded during the 1920s. On the contrary, the practice merely receded out of the public eye, into private residences and illegal speakeasies. As Will Rogers once said, “Prohibition is better than no liquor at all.” After Prohibition was repealed in 1933, alcohol consumption did not rise as pro-temperance activists claimed, but remained largely steady. In 1991 and 1999, Harvard economist Jeffrey Miron described in papers for the National Bureau of Economic Research (NBER) how “prohibition had virtually no effect on alcohol consumption” nor on its strongest correlate for heavy users, cirrhosis death rates. While it’s impossible to predict in advance what the effects of legalization will be on marijuana-usage rates 20 years from now, many in the burgeoning marijuana industry believe that it will be approximately the same for marijuana as it was for alcohol. Some have held that legalization will lead to a brief increase in rates of usage, but as the novelty wears off that brief spike will recede. In researching the efficacy of Colorado’s new cannabis tax, economists at Colorado State University took it for granted that, with legalization, there will be a balancing convergence of those “inclined to consume larger quantities because it is now legal” and “those who lose interest in marijuana now that the ‘forbidden fruit’ aspect” is removed.

Growth Market

Although it has been illegal to grow marijuana in the United States for nearly a century, renegade grow-ops have persisted in the face of draconian crackdowns by local law enforcement and the federal Drug Enforcement Administration (DEA). In 2012 alone, the DEA eradicated just under four million plants (down from 6.7 million in 2011), over 92% of which came from outdoor grow operations. Nevertheless, ineffective enforcement policies and crafty concealment techniques have allowed farmers to continually move their product through back-channel distributors across the country.

In order to flourish in the outdoors, the cannabis plant requires fertile soil that is slightly acidic, daytime temperatures between 75 and 86 degrees Fahrenheit, and at least twelve hours of sunlight per day. There are numerous strains, which can be grown in somewhat different climates, and for the most part marijuana can be grown on a large scale throughout most of the United States during the summer months.

While property values, local water quality, and the timeline of legalization in each state will ultimately determine which states are able to take advantage of this new cash crop, we may already have an idea of who will be the biggest contender in the fight to be to marijuana what Georgia is to peanuts.

In 2006, Jon Gettman, a former head of the National Organization to Reform Marijuana Laws (NORML) and an adjunct professor of public administration at Shepard University in West Virginia, published a paper estimating the scale of American marijuana production. Through an analysis of government eradication efforts over the prior three years, Gettman found that marijuana would be one of the largest cash crops in the United States if it were legal, and was already “the top cash crop in twelve states, one of the top three cash crops in 30 states, and one of the top five cash crops in 39 states.”

In addition, “five states (California, Tennessee, Kentucky, Hawaii and Washington) had marijuana crops worth over $1 billion,” with the national pot crop worth more than our national soybean and wheat crops combined.

Not all of the money to be made will come from selling marijuana to consumers as a drug. While only the female buds of the plant cannabis sativa contain adequate levels of the chemical THC (tetra-9-hydrocannibol) to cause a “high,” the rest of the plant has a variety of applications that may pique the interest of small and big business alike.

Hemp—as the non-intoxicating parts of the cannabis plant are called—is used in over 25,000 products worldwide, according to a 2013 report from the Congressional Research Service, and is used frequently in products sold by companies like The Body Shop and Whole Foods, which are forced to import their hemp products due to U.S. laws prohibiting the cultivation of any kind of cannabis. The same report estimated the current size of the U.S. hemp market at about $500 million, with a large potential to grow should its products be more widely available for sale (both inside and outside of the United States).

From the Corner to the Boardroom?

These mouth-watering figures have been and will likely continue to be a part of the argument made by politicians and business types in favor of making marijuana legal. But it’s important to put them in perspective, and consider who really stands to gain. It’s not yet clear whether American pot growing and selling will, in the future, be managed by a dispersed network of independent producers or fall into the hands of large corporations.

Put simply, will smokers be buying from Mom and Pop’s Pot Shop, or going down to the corner store to buy a pack of Marlboro Greens?

In August 2013, a young entrepreneur named Brian Laoruangroch made digital headlines when a wacky commercial for his new company Prohibition Brands premiered, featuring Laoruangroch sporting a cowboy outfit and hokey southern accent. In it, Laoruangroch touted what he saw as an oncoming “green rush” in the marijuana industry as part of a pitch to raise “up to $50 million through venture capital groups, crowdfunding sites, and investors.”

Although most media outlets made light of the crass humor and sexy cowgirls Laoruangroch used in the commercial, it was interesting how the 2½ minute video put a face (in this case, a mustachioed face) on the fast-growing realm of Big Marijuana�”that is, corporate production of legal marijuana. When I interviewed Allen St. Pierre, the Executive Director of NORML and a marijuana advocate for several decades, he laughed at the mention of Laoruangroch’s antics, but said that the emergence of figures like him wasn’t surprising.

According to St. Pierre, the new generation of pot entrepreneurs is more motivated by monetary gains than their older, rogue counterparts, and often come from much different backgrounds. “These people have CVs not based on being the toughest guy on the block, but from having gone to Yale and Harvard,” he said.

Not that St. Pierre believes big business should be shunned. In the past decade many legalization advocates like NORML have been among the biggest proponents of a marriage between big business and marijuana, seeing a so-called “free market” approach as vital to marijuana’s successful transition from the black market.

“Do we gird against the idea of corporate tobacco? Yeah, because that industry has been shown to be really malevolent,” says St. Pierre. But “NORML doesn’t think that corporations are evil, or that capitalism is bad.”

There are other ominous signs of marijuana’s oncoming corporatization on the horizon. Last May, former Microsoft manager Jamen Shively appeared side-by-side with former Mexican President (and corporate executive) Vicente Fox to promote the launch of his own weed company, Diego Pellicer. To Shively, Pellicer could position itself early on to become the first national, Starbucks-like brand associated with marijuana, if it is able to get its financial ducks in a row and avoid the ire of the DEA. Even the weed magazine High Times has started its own $100 million private equity fund in anticipation of a coming windfall.

But just as the inaugural class of legal pot capitalists begins to rise, there are more than a few who see big business interests as anathema to the spirit of drug policy reform.

“My greatest apprehension is that profit, and only profit, will become the main determining factor in how cannabis is distributed,” said Steve DeAngelo, co-founder and executive director of Oakland’s Harborside Health Center, the largest medical marijuana dispensary in California.

DeAngelo says that while he understands that the mainstreaming of marijuana sales will inevitably lead some to seek wild profits, he fears for the day when weed will be sold not by an informed specialist but by an indifferent cashier at 7-Eleven or Wal-Mart. To him, the not-for-profit model developed by Harborside, which puts the needs of his patients ahead of profit—in the form of free patient services and charitable donations to the community—would be much better.

At Harborside this includes not only providing marijuana to those in need, but “wellness services”: a library, a “grow your own” seminar, a holistic care clinic, and a volunteer arrangement that allows needy patients to receive a gram of medicine in exchange for every hour put in. A system like this could serve as a community-centric model for future recreational sales. A profit-focused operation run according to the Big Marijuana ethos may only be interested in meeting its quarterly sales projections.

“If you have a non-profit environment, you’re more likely to attract operators who are really going to be dedicated to doing what’s best for society, and not putting the bottom line first,” he said. “Instead of being offered a variety [of services] to benefit people, they’ll be moved in and out as quickly as possible.”

(It should be noted that Harborside is not a legally registered, tax-exempt non-profi—DeAngelo merely operates “not for profit.” Due to marijuana’s current status under federal law, the IRS will not allow medical marijuana dispensaries to seek non-profit status.)

But St. Pierre and others argue that medical dispensary owners like DeAngelo are merely businessmen themselves, looking to protect existing market share by badmouthing new competition. One could hardly make the same claim about Scott Greacen, executive director of the Arcata, Calif.-based conservation group Friends of Eel River. Situated on the coastline of the notorious marijuana-farming Humboldt County, Greacen’s organization has witnessed firsthand some of the highs and lows for this new industry as it’s blossomed from a small handful of ex-hippies and cartel affiliates to a full-blown source of regional livelihood.

“We see that there are big groups waiting in the wings, ready to come in and start producing at large scale,” Greacen said. “I think that’s a pretty poor public-policy choice. Keeping it out of the hands of the corporations is one of the things we can do that makes sense.”

Of particular concern to Greacen is the environmental impact that large corporate producers could have, especially if met with lax, unspecific regulations for growing ever-larger crops. Many grow operations already make use of pesticides, rodenticides, and other chemicals potentially harmful to humans. With a $100 million dollar crop at stake, a company like Prohibition Brands or Diego Pellicer has a strong incentive to use such chemicals and cut other corners in search of maximum profits, according to Greacen.

But he stresses that not all is lost. Local government initiatives in Humboldt and Mendocino counties have proven promising to advocates for a sustainable, independent producer-oriented pot industry, with groups like the Emerald Growers Association lending their support in the effort to keep “homegrown” truly homegrown.

As to whether or not marijuana will ultimately go the way of alcohol and tobacco with such an enticing multibillion dollar carrot dangling on the horizon, Greacen gives the only answer he can so early in the game: “We’ll see.”

For the broader legalized market, the future may come sooner than some might think, given how much interest has been stoked by the ongoing experiments in Colorado and Washington. Those still skeptical of the march towards legalization and regulation ought to understand that the current early stage is the best time to shape the industry’s future character. Certainly not later, when entrenched interests will be fighting tooth and nail to protect their slices of the pie.

So for anyone with an alternative view of what the future landscape ought to look like—whether informal, independent growers and sellers, nonprofit and community—oriented organizations, or a small business—the time is ripe to get ahead of the would—be cannabis carpetbaggers.

is a freelance journalist and a member of the Dollars & Sense collective.

Sources: Marijuana Business Factbook 2013, Medical Marijuana Business Daily (mmjbusinessdaily.com); Washington Office of Financial Management, August 2012, (ofm.wa.gov); Michael Montgomery, “Plummeting Marijuana Prices Create a Panic in California,” National Public Radio (npr.org); Jon Gettman, Ph.D., “Marijuana Production in the United States (2006),” Bulletin of Cannabis Reform, December 2006 (drugscience.org); Renée Johnson, “Hemp as an Agricultural Commodity,” Congressional Research Service, July 24, 2013 (fas.org/sgp/crs); Charles Brown and Phyllis Resnick, “The Fiscal Impact of Amendment 64 on State Revenues,” Colorado Futures Center, Colorado State University, April 24, 2013 (webcom.colostate.edu); American Civil Liberties Union (ACLU), The War on Marijuana in Black and White: Billions of Dollars Wasted on Racially Biased Arrests, June 2013 (aclu.org).

Did you find this article useful? Please consider supporting our work by donating or subscribing.