The Cannabis Boom: The Financial Promise of a Regulated Market

Legal Marijuana ShopsOn January 1, 2014, Colorado became the first state in the U.S. to legalize marijuana for recreational use, formally introducing the latest legal cash crop into the U.S. economy and opening the door to what some see as enormous economic benefits to the state. Now just over two-weeks old, the project seems to be delivering on its promise: sales are booming, and customers are lining up to purchase the once banned drug at a cost of around $65 for an eighth of an ounce. One suburban shop owner, Brooke Gehring, says she has served over 2500 customers since January 1, each one spending an average of $100 on their cannabis product of choice. Shop owners across the state estimate that total first-day sales reached over $1 million – every penny of which was taxed by the state. With sales revenues expected to reach over $600 million this year that translates into about $67 million in tax revenue in 2014 alone.

marijuana-marketNot everyone is impressed with these numbers, however. Jeffrey Miron, a senior lecturer in economics at Harvard University and a senior fellow at the Cato Institute, called the $67 billion in tax revenue “chump change” in relation to Colorado’s $20 billion budget for 2013. What’s more, significant barriers to entry mean that tightly regulated pot sales may level off more quickly than proponents expect. According to Gehring, the cost of setting up her dispensary — which, according to current Colorado law, must grow at least 70 percent of the product it sells — reached millions of dollars, including $115,000 in annual licensing fees and $27,500 in application fees so that her dispensaries could begin selling recreational pot. Additionally, each plant she owns must be tracked from “seed to sale” with an RFID tag and entered into the state’s Marijuana Enforcement Tracking System. According to Gehring, she spent $22,000 this year on tags alone.

Financing, too, is a major hurdle for would-be pot entrepreneurs. Due to federal regulations, which still classify marijuana as a Schedule I narcotic with “no approved medical use,” even bankers who might be interested in providing start-up capital typically are prohibited from doing so. Nevertheless, for those with a proven track record and the right kinds of expertise, private venture capital is available. The New York-based magazine for marijuana enthusiasts “High Times” announced recently that it was launching a private equity fund to assist new cannabis-related businesses. Moreover, private investors, such as Jeffrey Friedland, owner of Friedland Global Capital, are searching the state for promising opportunities for a controlling interest in pot shops. Like Friedland, they believe that the public will continue to flock to these legal dispensaries regardless of the price. It also should be noted that the market might partially evolve into home growers who are able to cultivate their own cannabis seeds in any enclosed and locked space. One plant alone supposedly could produce an average of 50 joints.

As for the typical amount of marijuana in a joint, Kilmer and Pacula (2009) found that a number of studies reported the amount to range from 0.3 to 0.5 grams. — RAND Drug Policy Research Center

high-times-fundNevertheless, domestic issues such as federal opposition and state regulatory nightmares may not be the most important challenge to the U.S. pot industry. As more countries across the globe legalize marijuana — Uruguay just become the first to completely deregulate everything related to marijuana production and Peru is poised to follow suit — competition from around the world is looming large. With centuries of experience in herbal medicine, Chinese firms, which already have filed 309 of the 606 patents relating to the drug, see legalized marijuana as a perfect opportunity for even greater penetration into global markets, including the U.S., where some analysts believe legal marijuana sales will reach $10 billion by 2018. Moreover, as the world’s largest producer of industrial hemp, a close cousin of marijuana with a lower concentration of the psychoactive component THC, China’s presence in the cannabis market is already quite large. Many of the country’s existing patents are for medicinal remedies that are currently banned in the U.S which might receive approval if the federal cannabis regulations change.

Obviously, there is still much to learn from the Colorado experiment. Nevertheless, with nearly 60 percent of Americans in favor of the legalization of marijuana, it appears that — for better or worse — it is here to stay.

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