As Cannabis Legalization Continues, What Would a Free Market Look Like in the U.S.?

Columns - Tomorrow in Cannabis

As Oregon cannabis businesses fight for interstate commerce, growers should be thinking three steps ahead.

July 1, 2019

Given that Oregon’s cannabis reserves reportedly are more than six times its yearly consumption rate, interstate commerce seems like a logical solution to the state’s oversupply issue. (Also being considered is allowing on-site sales directly from farm-to-customer, therefore bypassing the dispensary, and another bill (S.B. 218) that would halt the issuance of new licenses during the glut.)

The Oregon Senate's passage of S.B. 582, the interstate commerce bill, and the related efforts to get it passed can be summarized as a call for a free-market economy. That call makes me wonder what the cannabis industry would look like if it operated as a regulated free market where the product, produced legally in one state, can be shipped to any other legal state. Odds are the West Coast would rule the market.

But what if the cannabis industry was a truly free market product, coming with all that entails? Given that is what we are all fighting for, it might be good to start thinking about our rapidly approaching new reality.

Cost-Effective Consumers

Free market is defined as a system in which the prices for goods and services are determined by the open market and by customers. It can be assumed that, in a free market, a majority of consumers will consume the most cost-effective cannabis, meaning they will gravitate toward the highest quality products offered at the lowest possible prices. To be competitive in that type of market, growers need to have their production costs in check.

So, what is the cost of production in Oregon versus other states? Specifically, what is the difference in production costs in a climate perfect for cannabis cultivation, such as Oregon, versus cannabis produced in the desert, such as in Arizona or Nevada? Or at a 5,000-foot elevation, or next to a Great Lake that experiences lake effect snow in the winter? The extreme seasonal swings in those areas will demand more environmental control inputs, whereas growers in Oregon, Washington or California have a near ideal climate naturally and should be able to reduce the use of environmental control inputs such as air conditioning, dehumidification and heating.

In this regard, Oregon and the entire West Coast seem well positioned to compete with growers in different states when it comes to cost of production.

Additionally, Oregon, Washington and California would have a head start on the market, as they have a strong reputation for producing quality cannabis. In fact, many of today’s popular cultivars were bred there or are directly linked to genetics from those states, and consumer favorites often hail from the Pacific states.

Indeed, West Coast cannabis is revered and respected worldwide and has been for many years. California has many specific appellations within counties such as Mendocino and Humboldt. Along with Trinity County, these counties make up the world-renowned Emerald Triangle. Some farms there are today cultivated by third- or even fourth-generation cannabis growers.

Some of those legacy cannabis growers are migrating to the California Central Valley in areas where cannabis production is allowed. The latest cannabis cultivation trend is the retrofitting of currently existing flower production greenhouses, of which there are thousands throughout central California, covering tens of millions of square feet of production capacity.

That’s not counting the acres upon acres of some of the most fertile soil on Earth, ready for outdoor hemp production.

The Global Hemp Factor

Interstate cannabis commerce comes with interstate hemp commerce. And when it comes to domestic hemp production, whether it be for CBD, fiber or food, no one is going to top California.

California is an agricultural juggernaut. It has a relatively tepid climate in the Central Valley, which is capable of producing a crop of one form or another year round, and is commonly referred to as the “World’s Fruit Basket,” a name well-earned, as it produces more fruits, nuts and vegetables than any other place on Earth. An ideal climate and decades of experience growing crops at scale results in the Central Valley having a low cost of production at commercial scale compared to other geographic locations.

Besides the climate and brainpower advantages, California is the world’s fifth largest economy, surpassing the U.K., and the California agricultural industry generates billions of dollars toward the state’s GDP.

Most of that revenue is generated by commercialized industrial agriculture, aka “big AG,” with much of the product being exported to other state or international markets.

When it comes to hemp, however, I suspect California and other U.S. farmers are going to be supplanted by producers in other developed emerging markets such as China and Colombia. These countries have already begun to stake claim to the hemp market and are expected to play a role in hemp cultivation and CBD refinement in the years to come, thanks to lower production and labor costs.

The looming global presence in the hemp market makes me wonder whether the lifting of the ban on interstate commerce would somehow legalize the importation of high-THC cannabis and CBD-rich hemp or their derivatives. In all practicality, interstate commerce is regulated by the federal government, and any action to legalize interstate commerce would probably have to follow the path toward legalized cannabis.

Many business plans and proposals put forward by several publicly traded companies (mostly Canadian) have provisions for the import and export of marijuana, hemp and their derivatives. Some intend on producing in countries such as Colombia, Portugal, Greece, Australia, New Zealand and others, all with the intent to be able to export their products to Europe and any other countries that allow for importation.

Indeed, much like any other commodity, I believe it will be hard to compete with foreign-produced cannabis products, whether they are cannabinoids, terpenes or plant fiber. Recently, I have seen Chinese extraction facilities capable of extracting 80 tons of hemp per day, which is astronomical by today’s standards. If that is tomorrow’s big AG, how can today’s hemp farmer or CBD refinery compete?

The implications of a free-market cannabis economy are many, and growers will be left to figure out what will happen when there is a major influx of West Coast cannabis available across the country for a lower price because of West Coast producers’ lower cost of production. Just as important as dealing with the West Coast is preparing to handle an influx of foreign-produced cannabis available for a substantially lower price.

Free Market Opportunities

This is not to say there will not be immensely successful companies in all state markets. But the successful companies that don’t have a West Coast or global footprint will be companies that have another strategic advantage, whether it be desirable proprietary genetics, superior brand recognition, proprietary intellectual properties, superior products for a superior price, etc.

Finding which of your company’s distinguishing features resonates with customers is every brand’s challenge. Will customers desire, care about or respect the history of West Coast-grown cannabis? Or will a majority of consumers only care about the lowest price regardless of where, by whom or how it was produced?

That said, as proven many times over, a certain segment of the consumer populous always wants the best, no matter the cost (to a point). This customer is educated in all things cannabis and cares deeply about how a plant was grown or how an extract was produced. This customer demands cutting-edge products that truly express the flavor and aroma of a given cultivar. This customer cares that a product was produced both organically and sustainably, does not want to compromise quality in any fashion, and, again, they’re willing to pay for it.

Businesses that cater to this customer will inevitably be successful, and no matter where it is produced, that product will be desired in all geographic locations, including the West Coast.

Kenneth Morrow is an author, consultant and owner of Trichome Technologies. Facebook: TrichomeTechnologies Instagram: Trichome Technologies