Price collapse reveals Washington flaws

By Greg James

A couple weeks ago I received one of those phone calls I knew I was eventually going to get, but dread just the same. A Washington State-licensed Tier 1 grower, who had been selling marijuana profitably since early summer, was in trouble. His predicament was fairly straightforward — when the wholesale price he sold his marijuana for was $7-10/gram ($3,500-4,000/pound), life was good. Once it dropped to around $4/gram ($1,800/pound), he was barely breaking even.

The same laws of supply and demand that govern everything from crude oil prices to orange juice futures hit him squarely in the face, as too much supply tried to squeeze into too few retail outlets.

Discussions with other producers and a couple retail buyers seemed to confirm that the price state-licensed growers are getting for quality marijuana dropped precipitously from the end of summer to where we are today. In rough numbers, it fell about 50% in a little more than two months.

The reason for the drop is clear enough — too much supply, too little demand. The factors behind the imbalance are a bit more complicated, but still fairly easy to understand and predict.

Let’s not mince words here. The licensed, regulated marijuana business is a very costly industry to enter. When you combine extraordinarily high tax rates with strict regulations that govern where you can locate, who can operate the business, mandatory security and reporting rules, inefficient storage and shipping regulations, and a whole host of other potential business killers, you end up in an industry where the end costs to the consumer are grossly inflated. Combine those costs and that environment with a parallel industry — medical marijuana — that is competing for the same customer, but with a completely different cost structure and minimal — or no — regulations and taxes, the results are predictable, and exactly what we’re now seeing. And it will likely get worse in the future.

Legal recreational marijuana in Washington is going to go the way of the Dodo and the typewriter unless something changes quickly. And, there are only two routes to a healthy legal recreational industry: (1) radically alter and modify the current rules and regulations that govern the legal industry. Make them simpler, less costly and more like any other regulated business. (2) Level the playing field. There is no way one industry can exist and be profitable, when another, selling the same product, has an enormous cost advantage at every level. Untaxed, unregulated medical marijuana sales are killing the I-502 experiment before it’s even had a decent chance to prove itself.

It’s that simple.

In 2012, Washington took the plunge to legalize and regulate a product that a huge number of people thought should never have been illegal in the first place. That was step one. Step two is a bit more complicated, but is critical to the new industry’s success: The marijuana business needs to operate in an environment that is more or less the same as liquor, tobacco or gaming. Taxed and regulated yes. Taxed and regulated out of business … no!

 

 

 

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