Friday, April 20, 2018

Disruption - The Weed Market in Oregon

Oregon allows recreational marijuana. Originally, there were laws limiting growers to local Oregon companies (when it was a medical marijuana industry) which were effectively eliminated when the transition was made to recreational usage (allowing out of state funding). There was also a relatively small local market for growing cannabis.

Dispensaries cropped up everywhere, even in seemingly small, out of the way tourist towns with only a few hundred souls. It seems that you can't go far without seeing the "green cross" that symbolizes a marijuana dispensary. Unlike other states, Oregon allowed anyone meeting basic criteria to open a "weed store".

While it surprised many of the locals who curated their wares and made custom strains of local cannabis, the free market reared its head and drove down prices on effectively undifferentiated product and storefronts. From the local WWeek newspaper:
A gram of weed was selling for less than the price of a glass of wine... we have standard grams on the shelf at $4... before we didn't see a gram below $8... Wholesale sun-grown weed fell from $1500 a pound last summer to as low as $700 by mid-October.
As a result of this, there is significant consolidation in the market as smaller growers either bow out or are bought up and dispensaries are being purchased by large groups (often vertically integrated with growers) at fire-sale prices.
(the) Oregon cannabis industry is a bleak scene: small businesses laying off employees and shrinking operations. Farms shuttering.
One farm profiled in the article went into growing weed with the expectation of selling at $1500 a pound; when they finally had to liquidate most of their crop at a weed auction, they only received $100 a pound.

The entire Oregon recreational cannabis industry has played out exactly as you would expect in a market with few barriers to entry and a relatively undifferentiated commodity:
1. Suppliers rush in to take advantage of high prices for crops, turning what was originally a weed shortage (and resulting scarce supply) into a huge spike in supply which in turn drove down wholesale prices to almost nothing on the margin
2. Retailers who have little or no differentiation are being driven out of business by low profits or being forced to run at a loss

For me the interesting part of this is not the plain execution of basic market economics (in an industry with low barriers to entry, prices will drive down to near marginal cost of the most efficient operator), but in what that means to "adjacent" industries. For example, if a gram of (high quality) weed is the price of a single glass of wine (actually a lot less at $4... that is probably 1/3 of the price of a glass of decent wine at a standard restaurant), will customers switch from beer or wine to cannabis? From an economic perspective (cost / buzz) this would be a relatively clear-cut choice. Over time economists should chart the impact of low cannabis prices on both prices and consumption in adjacent alcohol industries.

Cross posted at Chicago Boyz

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