Cannabis continues to progress into the realm of social acceptability. After multiple states expanded medical and recreational laws during the November 8 ballot, we now have to ask ourselves: “What happens next?”
This article will present a few key elements behind the shifting cannabis industry, and hopefully, readers will be able to draw their own conclusions about an issue that has no certain future.
Who Knows? Increased Demand, Legalized Supply, and a New Political Administration
Many experts and economists believe the price of cannabis will drop substantially as more cannabis markets are opened up, but as can be expected, there are valid points arguing the opposite. The truth of the matter is that it is impossible to predict the future, and industrial cannabis has very little precedent from other industries to guide national expansion.
We do not have a crystal ball, and now have a President-elect that has made conflicting statements about his intended approach to cannabis. Some days he fully supports medical cannabis and says he respects states’ rights, and other days he carries more conservative intentions that are reflections of Rudy Giuliani and Chris Christie, two potential Attorney Generals for the Trump administration.
The uncertainty surrounding cannabis has positioned the nascent industry on some pretty shaky terrain. Banking is not available for businesses, leaving the cash-dependent industry vulnerable to consumer dissatisfaction and violent crimes like robberies.
Responsible investors are staying clear of cannabis and its many drawbacks from a financial returns viewpoint. Hungry investors are flooding out of the woodwork, throwing money at everything from the “Uber of Marijuana” to the “Facebook of Pot,” often without seeking diligent answers about industry protections.
Cannabis Prices Will Probably Drop, According to Experts
Now that California has legalized cannabis for recreational use, the dynamic of American cannabis cultivation will shift. California was already the biggest exporter of cannabis on black and gray markets, and now all of the farming operations in the state have the opportunity to bask in legal compliance – for a price.
Like many states pushing for recreational cannabis laws, California realized the tax revenue opportunities available through legalization. However, much of the opposition to Proposition 64 came from cannabis farmers who view the regulations and taxes as stifling to small businesses.
Prop 64 creates two excise taxes on cannabis. The first is a cultivation tax of $9.25 per ounce of flowers grown ($2.75 per ounce of leaves or trim material), with certain exceptions for medical products.
The second is a 15 percent retail tax on all California transaction of recreational cannabis products. It is more than likely that both the cultivation tax and the retail tax will be fully assumed by the end consumer. These taxes would threaten the average price of cannabis across the state, so why do experts and economists think the price will actually go down?
The answer is that prices already have gone down, just not yet for the consumer. Over the past five years, the amount of money a cultivator could expect for a pound of top-shelf cannabis has plummeted, but dispensaries have maintained the same retail prices across the board.
Consumers have come to expect eighths of cannabis flower to fall between 30 and 50 dollars typically, and so only someone with direct knowledge of wholesale cannabis pricing would see that retailers are inflating the price even with their suppliers making less. But now that cannabis is recreationally legal, a surge in business opportunities has presented itself, and new businesses are seeing ways to undercut existing dispensaries without hurting their own margins.
So on the one hand, cannabis will become more heavily taxed at a state level, and likely at a city/county level as well. But because cannabis retailers have inflated their prices even as their wholesale costs dropped, consumers can also expect for prices to reflect the actual cost of producing cannabis.
Additionally, an anticipated decrease in black market activity will remove the idea of premiums from cannabis transactions in general. Currently, the price of illegal cannabis carries a slight premium for the inherent risk to the dealer, but “legal” cannabis retailers have maintained similar pricing because they know consumers will likely pay an equal amount for the legal option.
So prices will likely drop, but not as substantially due to increased taxation. Just to be clear, no one knows exactly how this industry will adjust over the next few years. Comparing cannabis to other consumables like alcohol only works to a point. Because cannabis as a plant is so complex, and all of its potential forms take energy and effort to produce, basic models of the industry’s future are almost certainly overlooking a variable that could alter the results.
So be thankful, it looks like cannabis prices will drop, but remain cautious, because once regulators see the bountiful tax revenues, they will most certainly want more.
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