Posted: August 22nd, 2011 by Militant Libertarian
Much of America is embroiled in a new economic bubble akin to the 1990?s Tech Bubble that saw extremely fast-growing Internet companies hitting the market with a lot of venture capital and not much else. These companies, of course, bubbled, burst, and investors went on to the next one. The housing market bubble was slower to grow, but otherwise had the same modus operandi.
Today, we’re seeing a Green Bubble with exactly the same characteristics. Only this bubble involves patients, caregivers, dispensaries, and marijuana growers. In relative terms, the (legal) marijuana cultivation and distribution industry in places like California, Arizona, Montana, and other MMJ states is very new. Although the Tech and Housing bubbles saw their fair share of wild entrepreneurship and crazy investment schemes, not since the 1800s with the Gold Rush have we seen the kind of economic foolhardiness that is going on today in the medical cannabis industry.
Sadly, like the bubbles before it, the Green Bubble will also lead to ruin and economic destruction for many people and possibly much of the industry itself. If history is any lesson, in fact, only the big, powerful, robust conglomerates will really come out on top when it’s all said and done. You think the still privately-owned mega-farms are something? Wait until the corporate giants of agriculture get into MMJ. It’s only a matter of time.
Most of the problem lies in the fundamental economic principles that are largely ignored in the grow op portion of the MMJ market. Medical marijuana dispensaries are largely run as businesses from the get-go and are providing a public, visible service. Their suppliers, however, are of one of three breeds:
1) Long-time growers who’ve adjusted to the new, more open market now available to them.
2) Fly-by-night growers who have obtained a card and are growing surplus to sell, but are not reliable in their technique, product, or availability.
3) Green Rush growers who have recently dived into the MMJ waters and are hoping to strike it rich by growing “weeds for profit.”
Of the three, it’s the third that is the poison arrow about to strike the heel of the industry. Sure, the news and most editorial commentary talks about the feds ignoring state law and prosecuting people in the medical cannabis industry. Those are great headlines. But they aren’t really the problem.
The problem is, quite frankly, cheap weed.
A few minutes talking to any experienced grower makes this patently obvious. Ask what it costs to produce a pound of good buds and what they can sell that pound for to a dispensary and you’ll see that even Walmart likely gets better profit margins.
The general assumption the public has about marijuana growing is that it’s “just a weed” and that it “grows anywhere.” As if all you need are a couple of pots, some dirt, and some seeds and you’re in business. While that might be marginally true for the fly-by-night grower or the home gardener with a personal stash, it’s nowhere near the truth for the commercial grower. A serious bud tender must produce consistent quality and do so in quantity.
The grower faces three serious risks associated with cannabis as a crop: the risk of theft or destruction (by legal or illegal entities), the risk of total crop loss due to any of a number of agricultural problems, and the risk of loss of capital when either of these two things happen. Whatever your notions of the medical cannabis industry are, one thing is clear: people do not get into growing, distributing, or supplying growers and distributors simply because they are compassionate and care. The MMJ industry isn’t full of Mother Theresa’s out merely to help the sick and injured. No, it’s full of entrepreneurs – people who, ultimately, are in it to make money.
Like Everything Else, It’s About Money
Although most collectives and many grow ops are “non-profit”, like most other non-profit industries, this doesn’t mean there isn’t money in it. The only difference between a for-profit corporation and a non-profit corporation, no matter the business, is how the profit is distributed. Bud tenders, like any other specialized technicians, expect to be paid according to their skill level and have rent to pay and mouths to feed like anyone else. Just because someone goes into the business of growing marijuana instead of becoming a florist doesn’t mean they should have any lower expectation of making money.
Whatever your personal rose-colored glasses may say about MMJ, it’s a for-profit industry. So is cancer research (those researchers get paid), mainstream medicine (doctors and nurses get paid), and so forth. The world works on profits.
Once that is realized, then it’s apparent that if there is no profit in the growing of cannabis, then those in the industry of growing it will leave for better pay.
Growing Ain’t Kind
Now, back to those three risks mentioned earlier. The first risk is on the theft or destruction of the grower’s crops and/or harvest due to legal or illegal actions. If marijuana were legalized tomorrow, the risk of theft would still remain, but the risk of destruction or confiscation by authorities would not. That’s a big part of the risk associated with growing cannabis, but in those areas where MMJ is legal, that risk has largely already been abated. It is not, however, the number one direct cost associated with growing buds. In fact, in the prohibition market of illegal marijuana, the greatest risk associated with it is in distribution, not cultivation. Most marijuana busts by police (federal or local) are capturing those moving the already-harvested marijuana, either transporting it to another location or actually selling it. By comparison, grow ops are rarely caught.
The second risk, the risk of losing a crop or production due to mundane problems is far more real. Any number of things can affect a marijuana grow, whether it’s indoors or out. Outdoor grows generally have less overhead associated with them – it’s cheaper to grow outdoors – but they have higher risks of crop failure and destruction due to pests, disease, weather and climate, etc. Most grow ops are indoors, some in greenhouses, some hydroponic. While the risk of diseases and weather is much lower, the overhead in maintaining the grow is much, much higher. The equipment required to grow indoors is expensive and operating it (usually on electricity) is also not cheap.
Another cost that growers face is labor. There are no machines to automate the planting, trimming (there’s a lot of trimming), and harvesting of MMJ. So while economies of scale may lower costs related to equipment (per pound produced), they will not lower labor costs and may, in fact, add to them.
About a year ago, the RAND Corporation made a splash when they claimed that marijuana prices would drop more than 900% to about $38/ounce if cannabis were legalized. At that time, I described how theWalmarts and Wild Oats of the pot industry would separate themselves through quality of product (vs. price). So while some costs will definitely drop (and are dropping), most of those are to the benefit of the dispensary, not the grower or the patient. The problem is, right now, no separation of the higher quality versus the lower cost stuff is being made.
Today’s Chronic is Yesterday’s Ragweed
Many who have been in the cannabis cultivation industry for a long time are talking about the current influx of cheap, low-grade buds that are filling the market. Like Japanese radios in the 1970s, this stuff is destroying the market for higher-quality, better-grown chronic. Most buyers today are unaware of the difference, having been told that if it’s “purple” or “has a yellow tinge,” it must be the good stuff. There’s more to it than that.
Most growers agree that the best buds come from well-tended Sativa strains. These, however, are generally the least productive of the marijuana plants. Those who merely make cookies or soda pop out of their buds may not care how smooth and effective the buds are, but those who smoke it should.
Smoother means: easier to inhale, better absorption by your lungs and blood, faster effects, and longer benefit. The low-grade stuff will cause you to cough (wasting medicine with early exhales and constricted vessels), takes longer to have an affect, and the effect doesn’t last as long because the THC levels are lower and less is absorbed.
In short, the better the bud, the more time and effort required to grow it and the less of it that will be produced in the same amount of space. That means more expensive. In today’s market, those more expensive strains are being pushed out by cheaper, less effective ones.
For the grower, this means choosing between high-quality that may not sell for the price it should or lower quality that will definitely sell, but may not be as good for the reputation.
The Green Rush
What all of this culminates into is this: many with little or no experience in marijuana cultivation are rushing in to cash in on the assumed paydays available for “growing weeds.” The growers who are coming into the industry with experience behind them are often experienced in growing only for the illicit market and usually not on the scale that they plan to implement for the legal medical cannabis market.
Most are entering the market with unrealistic expectations about profit margins and wholesale prices.
With the influx of grow ops come the investors. Those who don’t want to get hands-on with the MMJ industry, but who want to make money in it. These investors mean a lot of money is circulating around many of the ops that are being put together. Some of these grow ops are buying land and putting up buildings and purchasing equipment to the tune of millions of dollars. Someone, somewhere, is banking on that money being returned from future profits.
The trouble is, the cheaper cannabis on the market is coming thanks to lower profits for the grower. For the most part, even with much of the risk removed for them, dispensaries are still reaping high profits per sale. The reason for this is that although the risks have changed (little risk of being busted by the cops), the costs associated with distribution and sales haven’t dropped. Dispensaries are store fronts, with all of the costs and overhead that goes with that. So while Joe on the corner sold pot at a few bucks a gram, the now-legitimate Joe behind the counter still has to sell at that price in order to turn an actual profit.
But the demand from consumers is for cheaper product. How do you get cheaper product? You purchase it (wholesale) from the lowest-priced supplier. Hence the industry is driving down costs, but only at the expense of the grower and the strains of cannabis being produced, not because of any lower overhead for the industry itself.
The Green Bubble is plunging headlong towards a needle. When the burst comes, there will be a lot of collateral damage as investors, growers, dispensaries, and perhaps even patients see much of the MMJ market crash around them.
Naysayers, of course, will say that this will lead to more home growing operations and less profit-seeking. That’s all well and good, but how many wheelchair-bound patients in chronic pain or bed-ridden chemo recipients can grow their own? Really? And how many house fires and robberies are happening thanks to in-home grow ops? Like it or not, many of those who depend on cannabis as medicine are seen as easy targets by criminals. Since legalization on a national scale is not very likely anytime soon, there will always be profit in stealing someone else’s stash.
The industry and those in it have some hard choices to make if things are going to improve. Much of this is just the growing pains of a fledgeling market. Like others before it, the MMJ industry will have to grow up. The challenge is going to be letting it do that without the huge corporate interests taking it over first.
For a more in-depth look at the growing side of things and the state of wholesale MMJ prices today, read The Plummeting Price of Wholesale Pot by Jade Kine.