The drive to legalize recreational marijuana is a wave washing over North America and across the world. Legalization could be very good for demand, but it will also impact prices in ways you may not expect.
Opportunities and Risks
Legalization opens marijuana to a whole new audience. Those previously unwilling to break the law will give marijuana a try, resulting in new customers and higher demand.
Legalization makes it attractive for new legal supply to enter the market and compete with the black market, which is already the supplier of choice. The battle for customers between the legal and black ultimately leads to lower prices. Not good for producers and retailers.
Where Prices Are Going Post-Legalization
The optimism is palpable in the marijuana community. One by one, state after state is moving to legalize recreational marijuana use. Canada is only 6 months away from countrywide legalization. However, with legalization comes unintended consequences. We’ve analyzed all the recently legal and maturing markets like Colorado, Oregon and Washington to give you insight into what prices will look like in your town once legalization arrives.
A Quick Note on Commodities
Marijuana flowers are a commodity. A commodity is something widely available and unspecialized. One lump of coal is the same as any other, just like oil, copper, coal, tomatoes and many other agricultural goods and metals.
Even though the THC content and strain can vary, as long as the knowledge and technology to grow specific types are freely available (which they are) then all marijuana is a commodity. Even when marijuana is refined into oils or gel caps the technology to make these new products is easily available to all, so the commodity label still applies.
Because commodities are all the same, one producer can’t charge a different price than another or else the customer (you and me) will just buy from another producer with a lower price. Keep all this in mind as we talk about marijuana.
Long before legalized marijuana sales, consumers were happily buying marijuana. The supplier of choice was the black market (aka your local dealer). The black market has been around for decades and by now is very good at growing and supplying product to anyone willing to risk arrest to buy it. Prices are reasonable too, despite a price premium built in to compensate growers for the extra risk of a SWAT team kicking down their door in the middle of the night.
According to a study done by Public Safety Canada looking at the price of real black market purchases, the retail price of marijuana on the black market from 2011 to 2015 was surprisingly stable and only traded in a range of about $7.00-$8.00/gram, while getting cheaper at the same time. This is telling us the black market is fully supplying the public and the competition among dealers for customers is driving down prices. If this weren't the case, prices would be steadily rising as consumers had to pay more and more to get their hands on scarce supply.
Source: www.publicsafety.gc.ca
But what happens when legal growers enter the market?
When a market legalizes marijuana, most illegal growers can’t just turn around and apply for a license as they are persona non grata with the authorities, so new legal growers start up to supply this new “legal” market which isn’t really a new market at all. Consumers already have all the weed they could want, so to entice them to try the new legal marijuana producers will have to price their supply cheaper than the black market.
But do you think the black market is just going to lose their customers without a fight, NO WAY! They will also cut their prices as they try to hold on to market share. This battle causes prices to fall over time, benefiting the consumer but hurting growers.
Legalization also allows more experimentation with growing techniques and the use of sophisticated equipment, driving the price to grow marijuana down further. Growers can now charge less for their supply while still making the same profit so everyone wins.
The fight for market share and falling grow costs combine to drive marijuana prices down after legalization, even with increased demand from new customers who are no longer afraid of arrest.
This all sounds good in theory, but prove it!
Colorado is the best example of legalization driving down prices. Marijuana has been legal in Colorado for almost 4 years, giving us significant data to work with. Data from the analysis firm BDS Analytics show us that prices peaked 6 months after legalization and have been falling ever since. Lower prices have worked in the legal markets' favour with demand continuing to grow as prices fall.
Source: BDS Analytics
Washington, which legalized in July 2014, tells a similar but more dramatic story. Prices peaked only 1 month after legalization and fell from $23.00/gram to only $5.00/gram by late 2017. Legal demand responded to these prices and consumers are now buying almost 8,000 kg a month of legal marijuana, up from 0 at legalization.
Source: BDS Analytics
Oregon, unlike Colorado and Washington provides an interesting lesson on what happens when prices don’t fall right away.
In Oregon there were not enough legal growers initially, and the market remained under-supplied for almost two years. However, because prices stayed so high, consumers kept buying from the black market and legal volumes flat-lined until prices started to come down.
Source: BDS Analytics
So what have we learned?
A new market for marijuana doesn’t appear just because it's legal. The black market is already fully developed and supplying consumers throughout the world. Legal supply must win over consumers just like any other commodity market and the only way to do that is to be cheaper than the dealer in the apartment below you.
The story is always the same. Prices peak a few months after legalization then begin a long slide until both black and legal market supply is equal to the amount of weed consumers' demand.
Eventually, the legal market will win as prices fall so far that the profit from growing illegal weed no longer makes up for the risk of spending the rest of your life behind bars. The price when this happens is anyone's guess, but in the meantime just enjoy the ride, and to anyone thinking of entering the growing business, you've been warned!
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