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Pot Economics
Whats the future of the American marijuana market?
B Y D A N S C HN E I D E R | MA R C H/A P R I L 2 0 1 4

n 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 centurys 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 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.

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
systemmore than anywhere else on earth.
Over 1.5 million of them were put into the
system for drug offenses, with marijuana the

Out of the Shadows

most common drug represented. That same year,


750,000 people were arrested for marijuana-

Because marijuana is currently grown, distributed, and sold almost entirely on the black

related crimes.

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 federal government spends billions of

The trade journal Medical Marijuana Business Daily currently estimates that a fully

dollars each year enforcing increasingly

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.

unpopular drug laws, including $3.4 billion for


marijuana alone in 2008, according to the

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

conservative Cato Institute. Not to be outdone,


the states spend over $3.5 billion, to fail at
eradicating marijuana growth, distribution, and
especially use.

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 result? The creation of millions of


unnecessary criminals, the vast majority of

the vast majority of these users buy their weed on this black marketeither directly from
dealers or from friends with access to a dealer.

whom are people of color. Despite the fact that


white and black people use marijuana at

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

approximately the same rates, a black person


living in the United States is four times more

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

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

system for alcohol and be sold in stores with special permits. Where exactly it could be

low-income people will face harsher penalties

sold would largely be a matter for state and local regulators to decide, just as it currently is

than their white or wealthy counterparts.

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 ( la Amsterdam), but its virtually

The human cost of marijuana prohibitionand

certain that any store selling any quantity or type of weed would need to get a special
license.

the War on Drugs in generalis a critical


element of drug policy reform, although outside

Whatever the markets size, the governments of Colorado and Washington are hoping that

the scope of this article. For some essential


reading on the subject, consider Michelle

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

Alexanders The New Jim Crow, Doug Fines


Too High to Fail, or Jeffrey A. Mirons Drug

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

War Crimes: The Consequences of Prohibition.


Through their research and activism, these

state, including a projected $500 million for Washington alone by 2015.

writers continue to reveal truths about the


failures of prohibition that numbers alone

A study by the RAND Corporations Drug Policy Research Center describes marijuana
buyers as a Wal-Mart, not a Whole Foods market, generally preferring the less expensive

simply cannot.

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 isnt 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 Uruguays
example, U.S. producers may have to lower prices to compete.
So while questions about whos 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.
Growth Market

Although it has been illegal to grow marijuana in the United States for nearly a century,

Prohibitions End and the Demand Question

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

Prohibitionists have long held that marijuana


legalization would cause rates of recreational

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

use to skyrocket. While the source of this claim


is likely rooted more in fear than solid research,

policies and crafty concealment techniques have allowed farmers to continually move their
product through back-channel distributors across the country.

its worth examining in order to better


understand what the market for legal marijuana
would look like if it became fully legal.

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

First, its 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.

may already have an idea of who will be the biggest contender in the fight to be to
marijuana what Georgia is to peanuts.

After Prohibition was repealed in 1933, alcohol

In 2006, Jon Gettman, a former head of the National Organization to Reform Marijuana

consumption did not rise as pro-temperance


activists claimed, but remained largely steady. In

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.

1991 and 1999, Harvard economist Jeffrey


Miron described in papers for the National

Through an analysis of government eradication efforts over the prior three years, Gettman

Bureau of Economic Research (NBER) how

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

prohibition had virtually no effect on alcohol


consumption nor on its strongest correlate for

30 states, and one of the top five cash crops in 39 states.

heavy users, cirrhosis death rates.

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

While its impossible to predict in advance what


the effects of legalization will be on marijuana-

national soybean and wheat crops combined.

usage rates 20 years from now, many in the


burgeoning marijuana industry believe that it

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

will be approximately the same for marijuana as


it was for alcohol. Some have held that

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.

legalization will lead to a brief increase in rates


of usage, but as the novelty wears off that brief

Hempas the non-intoxicating parts of the cannabis plant are calledis 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).

spike will recede. In researching the efficacy of


Colorados 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.

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 its important to put them in perspective, and consider
who really stands to gain. Its 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 Pops 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 2
minute video put a face (in this case, a mustachioed face) on the fast-growing realm of Big Marijuanathat 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 Laoruangrochs antics, but said that the emergence of figures like him wasnt 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 marijuanas 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 doesnt think that corporations are evil, or that capitalism is bad.
There are other ominous signs of marijuanas 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 Oaklands 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 profitin the form of free patient services and charitable donations to the
communitywould 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, youre more likely to attract operators who are really going to be dedicated to doing whats best for society,
and not putting the bottom line first, he said. Instead of being offered a variety [of services] to benefit people, theyll be moved in and out as
quickly as possible.
(It should be noted that Harborside is not a legally registered, tax-exempt non-profiDeAngelo merely operates not for profit. Due to
marijuanas 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, Greacens
organization has witnessed firsthand some of the highs and lows for this new industry as its 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 thats 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: Well 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 industrys 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 likewhether informal, independent growers and sellers,
nonprofit and communityoriented organizations, or a small businessthe time is ripe to get ahead of the wouldbe cannabis carpetbaggers.
DA N SC H NE I DE R is a freelance journalist and a member of the Dollars & Sense collective.
S O URCE S : 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); Rene 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).

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