How high can the weed business grow?

By on July 11, 2014

Canadians and Americans are watching the end of the prohibition of marijuana as business is trying to legitimately meet the high consumer demand . . . pun intended.

In Canada alone, the medical marijuana business is estimated at over $1 billion annually, and is expected to reach $10 billion in just five years as the number of medicinal users grows from 37,000 to 450,000 in 10 years.

So far, south of the border over half the states have decriminalized marijuana for medical use, and recently in Washington State and Colorado for recreational use. Yet federal regulations have restricted growers and retailers from using banks. After six months, Colorado estimates over $200 million in sales, only a third of which is recreational, while the state collected over $11 million in taxes. Colorado is also reforming it retailers’ approval process, making it easier to set up shop.

In July, Washington State will begin recreational sales but with only 20 approved retailers despite over 2,600 applicants. With limited legal suppliers, these approved shops are expecting a high demand with a low supply, generating high prices (up to $25 a gram) that must still compete with the existing underground marketplace. This is a highly regulated model that is sure to twist the system.

Canada’s entry into the legal marijuana marketplace began in 2001 with the Marijuana Medical Access Regulations (MMAR). Although there were over 30,000 registered producers, a great majority were licensed to produce small amounts only, for up to two people. Essentially, this allowed individuals to grow their own medical marijuana at about $2 a gram. It still requires doctor’s note and license, but doesn’t require them to purchase from retailers at $10 a gram.

Because of MMAR, by 2010 the street price for the illegal equivalent dropped drastically, from about $10 a gram to as low as $2 or $3. It’s amazing what happens to the price of illegal goods with the removal of the threat of prosecution. It allows growers to tap into the wider range of legal supports including financing, insurance, and police protection, thereby reducing the reliance on organized crime for protection, investors, and distribution.

Last year, Health Canada changed its licensing system from a consumer-oriented approach (MMAR) to a corporate-oriented approach known as the Marijuana for Medical Purposes Regulations (MMPR). Only government can kill a buzz with all their acronyms and over regulations.

Now, instead of thousands of small licensees, there are far fewer licensed producers who must go through the slow, arduous and seemingly arbitrary government-approval process. In fact, of the several hundred applicants only a few dozen have been approved, with most still in limbo. Canada has chosen the most regulated model.

The result is that individuals growing their own medicinal use are now once again in breach of the law if they have a couple of plants on their balcony. As well, the street price is back up, about $4 a gram and rising. Health Canada is trying to regulate a business commodity, with no understanding of the marketplace and the effects of its regulations.

Imagine running a lucrative business but not being able to write a contract, use cheques, or keep your cash in the bank? You are just asking for trouble. If you cut businesses off from the system, where else can they go for protection? (See Goodfellas for more details.)

B.C. is producing some of the most highly-prized stains of the crop sold around the world, both legally and otherwise. Its businesses have an opportunity to not only establish themselves locally, but become global players. These are early stages and we need to support our innovators.

To do that, we need to allow our growers to innovate new strains. We need our support industries – finance, transportation, and security – to adapt to the market requirements. We need to give our retailers the room to develop new products, to get into the edibles, the fastest growing market, as older consumers move away from the smokeables.

Canada and B.C. can learn from the U.S. experiments as well as our own experience. But we need to look at it from a business perspective, as well as from the consumer’s, especially for medicinal users. Regulation for the sake of busy-work can kill any industry, or keep it underground. -TroyMedia

Columnist Michael Izen is an economic and labour market analyst. He joins Dr. Roslyn Kunin to keep an eye on BC’s Business.

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