Cannabis exchanges have been cropping up across the country claiming to help recreational and medical cannabis producers sell their product and retailers restock their inventories easily.
Some are more automated, others are more hands-on, some are costly ... and all are quite new. So how do you tell if it’s really worth your investment?
To answer your questions, here’s a list of frequently asked questions to help you understand what online cannabis exchanges can do for your business and what some of the issues surrounding them are.
Q. What is an exchange?
A. Simply put, an exchange is any kind of physical or electronic location where commodities, stocks, futures contracts and other derivatives are traded. Even simpler, it’s a place where business deals are made.
Exchanges like the Chicago Board of Trade (CBOT) act as physical and online spaces where traders make deals by being either sellers or buyers. For example, one trader could be selling bushels of wheat and another could be looking to buy his product. The exchange lets these people meet and hash it out.
In traditional markets, these deals take the form of a futures contract: an agreement to deliver a commodity at a future date, but at a price agreed upon today. Once the contract is up, a clearinghouse — a third-party organization that basically acts as the holder of the contract, regulator for the delivery and keeper of the deposits made on contracts — makes sure the agreement is fulfilled and both parties leave with what they agreed upon previously.
These futures contracts allow sellers and buyers to lock in a sale price today, meaning they can rest assured that the commodity’s price won’t fluctuate based on the market.
Another big advantage of an exchange is that it allows for transparency.
“One of the main benefits [exchanges] provide to a market is price transparency in seeing what ‘fair market’ is,” Steve Berg, CFO at O.penVAPE, says.
For any kind of seller, it’s critical to know where the market is in regards to what they’re selling. A wheat farmer selling his product below market value is probably not getting the best return on investment, while the one who is selling above market might be left stranded with his merchandise.
Q. How is a cannabis exchange different?
A. Despite not being called a “traditional market,” a cannabis exchange is like any other exchange, but there are a few differences.
One major difference is the absence of clearinghouses in cannabis exchange markets.
“In legal state markets, if one is … actually handling the plant, you have to be licensed by a state regulatory authority,” says Berg, who is also the co-founder of the ArcView Group and the editor of the second edition of the “State of Legal Marijuana Markets” report.
“Right now, there is no license for a clearinghouse,” he continues. “So right now a cannabis exchange is kind of limited to being an online platform, number one, and number two, ends up being a matchmaking service.”
This also makes it difficult to set up futures contracts as there is no regulatory body to oversee the delivery.
While some exchanges content themselves with being like a Craigslist for cannabis wholesalers, others have developed strategic partnerships or found other workarounds to address this problem.
Online exchanges can help sellers get a sense of current market pricing for products similar to theirs.
The American Cannabis Exchange (Amercanex) has partnered with Blue Line Protection Group, an armored escort and regulation compliance company, to help with their clients’ transportation needs in Colorado.
“We feel that here in Colorado, the MED [Marijuana Enforcement Division] will move toward compliant and regulatory transportation, third-party transportation,” Robert Ruiz, Amercanex’s vice president of sales, explains. “We believe that is going to happen, and we have already created a partnership with Blue Line Protection Group to … make that happen.”
Sohum Shah, CEO of the Cannabis Commodities Exchange (CCX), has addressed this problem by founding a separate company and acquiring a Registered Vendor license just to transport the product when his clients’ can’t handle the deliveries themselves.
Tru Cannabis CEO Bruce Nassau says, “If you’re going to an exchange … the problem that you run into as a marijuana business owner is you are then going to have somebody out there setting your pricing.”
Photo courtesy: Bruce Nassau
“Generally we just try to facilitate [the transaction] and let them do their own delivery or pickup, and at that time they exchange money,” Shah says. But when clients are too busy to complete the sale, Shah says, “that’s where the vendor license comes in to play, and I can actually go and physically pick up the product, drop it off at the buyer’s spot, and we have decent enough terms with our sellers that they trust us and we will come back with the money.”
Q. How can it help me?
A. Apart from the big bonus of having a price-discovery tool, online cannabis exchanges can help cut costs and help increase your market exposure, says Ruiz.
He says in a market where the price of cannabis might be dropping, but your company’s costs of business are growing, putting your product on the Amercanex platform allows you to have “full exposure to every single licensed participant …” and potentially reduce your sales budget.
More sophisticated exchange platforms like Amercanex also will let you track personal and market trends to help you make better decisions on what products you should be growing and selling. “In the future, charting is going to be a necessity,” Ruiz says, adding that Amercanex is working on “acquiring the charts and the data so people can … utilize this data to make future decisions.”
Each exchange also comes with its own methods and benefits. Amercanex, for example, is a fully automated system that allows users to complete transactions online and is run by a team of former Wall Street executives, including a former New York Mercantile Exchange (NYMEX) chairperson.
On this system, sellers buy a seat just as a broker does at the Chicago Board of Trade (CBOT) or the New York Stock Exchange (NYSE), get vetted by the exchange, post their product online (complete with lab test results, a product description and company bio) and set their prices based on what the market is like. A transaction is only complete after the buyer visually inspects the delivery and accepts it on the Amercanex platform, where the money then goes to the sellers account.
CCX began to offer a manual way of trading after noticing that buyers were weary of making purchases online without being able to see or smell the product.
Buyers call CCX and place an order that includes what they are looking for at what price range. The exchange takes care in making the connection with a listed seller who Shah knows meets those criteria.
From a cultivator’s perspective, this manual system allows you to avoid fielding calls from dispensaries searching for a product you don’t have, without having to put your products and prices on an online platform.
Shah is also collecting data on product batches in order to develop a more sophisticated quality rating system on the online CCX platform “that accounts for the smell and the touch and the look” of the product, something he sees as “the crucial linchpin to enabling business owners to buy and sell flower online.”
Sohum Shah founded another separate company and acquired a Registered Vendor license to handle product deliveries when his clients need it.
Photo courtesy: CCX
Another way exchanges can help a business is by enabling it to access diversified products. “The variety of products that will be placed on that platform is probably far greater than what you might consider growing commercially,” says Tripp Keber, co-founder and CEO of Dixie Elixirs, a trading member and equity investor in the Amercanex platform. Dixie Elixirs, which produces cannabis-infused products, uses the Amercanex platform to buy raw plant material, from which the company extracts compounds for its concentrates, as well as to sell its cannabis-infused products.
“If you want to go out and look for some seasonal variety,” Keber says, “the platform … can be looked at as a grocery store offering you a multitude of choices.”
Q. What are the downsides?
A. Cost is a definite factor for many of these services. For example, Amercanex, which operates like a traditional commodity exchange, requiring you to have a “seat” at the exchange, charges $10,000 for a seat (although the company plans to roll out a low-cost monthly seat “rental plan” in the coming months).
Other services, like CCX, charge a fee depending on the quality and volume of the product a cultivator is selling. Others still ask for a monthly subscription fee.
There is also a question about the reliability of the price discovery on these exchanges. “The utility of any exchange is greatly dependent on market liquidity, meaning how frequently the platforms are being used to trade on,” Berg says. “And until you have a lot of liquidity, you don’t really get the primary benefits of an exchange which include … clear price discovery and transparency where you really know where ‘the market is’.”
Dixie Elixirs CEO Tripp Keber says online exchanges can act as “grocery stores” for retailers looking to mix up their inventory.
Photo courtesy: Dixie Elixirs
Part of that lack of clarity comes from the fact that most major exchanges operate almost exclusively in Colorado and have to contend with the fact that vertical integration is standard practice for established and successful cannabis businesses. (Amercanex also operates in California, which passed legislation prohibiting vertical integration late in 2015.) “If you’re going to an exchange … the problem that you run into as a marijuana business owner is you are then going to have somebody out there setting your pricing,” says Bruce Nassau, CEO of cultivator and dispensary Tru Cannabis in Colorado. According to Nassau, growing a pound of marijuana can range in cost from $600 to $1,000. For vertically integrated businesses, buying wholesale at over double is not always in their best interest, he says.
Q. So … should I join one?
A. Without saying that it’s a must-buy service, Berg says that cultivators should have these online exchanges on their radar “because at some point these will be actively traded exchanges.”
He adds that the more the cannabis industry matures and the exchanges grow with it, “the exchanges will become viable, the utility for growers will begin to increase.”
“At this particular time, I think that we are much better off [continuing] to grow our own,” Nassau says. But he’s quick to add that this is a seller’s market, as there currently is not enough supply to meet demand (at least in Colorado).
“As you see more and more grows come in,” Nassau continues, “I think you’re going to see overall prices coming down to a point where it might make sense for an individual to be able to buy [their marijuana] at a reasonable price from these exchanges.”
“Risk equals reward,” says Dixie Elixirs’ Keber about those thinking about joining an exchange. “The earlier you embrace or adopt a technology … the greater risk it is,” adding that “like all industries … you have to look forward ‘over-the-horizon.’”
About the Author: Brian MacIver is a recent graduate from the Medill School of Journalism. He writes about drug policy and trends, sports and anything else that catches his eye. You can find him on Twitter at @TheBrianMacIver, where he sometimes pokes fun at celebrities and politicians.
