In October of 2017 in response to oversaturation of licences and usable cannabis, and on the heels of several high profile arrests of members from Oregon licensed cannabis companies caught transporting their legally grown offerings over state lines (presumably for sale on the illicit market) I drafted a white paper that was sent to several members of the OLCC and Oregon state legislature. I updated and drafted the following article from that white paper.
I understand this will not sit well with everyone, and I welcome your comments and insights.
Author – Noah Persin
Editor – Jon Russell & Noah Persin
Part 1.0 Producers, Licenses, and Production
The Oregon cannabis market is a closed loop system (and a very small one); all cannabis products produced in Oregon are sold in Oregon and all cannabis products sold in Oregon are produced in Oregon. For as long as I’ve lived in Oregon (nearly 30 years), Oregon has always seemed to have a much higher Producer to Consumer ratio than any other state. So the fact that Oregon is supersaturated with legal cannabis shouldn’t come as a surprise to anyone considering there are no limits on recreational Producer licenses, or yields, and the barrier of entry to a license is virtually non existent; with more coming online everyday.
As of (03-20-2018) there were 959 OLCC licensed cannabis producers in Oregon (with more on the way). Producers grew a combined total of 1,150,800 pounds of usable cannabis flower in Oregon for 2017, an average of 1,200 pounds per licensed producer.
Considering our consumption rate has been estimated at 186,100 to 372,600 pounds of cannabis annually, or a medium consumption of 279,350 lbs (of not just usable flower, but usable flower, Extracts, Concentrates, Topicals,and Edibles.). At current production levels this leaves Oregon with a 871,450 lbs of surplus.
Part 1.1 Production vs. Consumption
Keeping in mind that the addressable or Consumer market, remains relatively static (give or take an influx of tourists for the occasional solar eclipse). Current numbers of Consumers (people who use a cannabis/ hemp product a minimum of twice a month) are estimated at around 693,000, with daily cannabis users comprising about 17% of that number or just over 117,810.
At the lowest estimate I could calculate on this year’s estimated supply, every end user will have to consume roughly 1.6 pounds of cannabis this year to keep up with current supply.
If you are unfamiliar with the consumption rates of cannabis users 1.6 lbs is a ambitious amount of cannabis for one person to consume in a one year period.
Part 2.0 Commodity Markets, Tax Revenue and Regulated Systems
The Oregon cannabis industry is a commodities market in its rawest form. There is a supply, a demand and a highly responsive price point that directly correlates to supply and demand. As discussed above in “Part 1.1 Production vs. Consumption” the demand or consumption side exists as a predictably static number. Meaning that draughts and/or gluts in production have a direct impact on price of goods sold, and the price of goods sold has a direct impact on tax revenue collected, business survival rate, and job numbers.
If we know that peek consumption rate of a product is fixed as long as the maintains a acceptable consumer price point between $1 and $10 dollars and tax rate on that product is a fixed percentage, then we know that more tax revenue is realized the closer the product can stay to the high end of the acceptable consumer price point.
Oregon currently has state regulated systems that produce tax revenue in the form of excise or ‘sin taxes’. Fuel, tobacco and alcohol immediately come to mind. Alcohol retail pricing and liquor store frequency is regulated by the state. I can think of two very obvious benefits from these regulations; (1) Neighborhoods are not filled with or surrounded by liquor stores, and (2) Liquor stores are not in a constant state of war with one another maintaining consistency with their businesses (this is good for business and community)
2.2 Retail for Everyone
Currently (03-20-2018) there are 539 OLCC licensed recreational cannabis retailers fueling a unsustainable fight for the same end user base of 693,000 That comes out to about 925 potential patrons per retail outlet. There are less than half that number of OLCC licensed liquor stores in Oregon with a much larger base of end users. A 2012 Gallup Poll estimates that 66% (and rising) of Americans (1,811,861 Oregonians) 21 and over consume alcohol. That’s 7,365 potential patrons per liquor store.
2.3 The Goldilocks Zone for Cannabis
Businesses also do better the closer they are to the highest acceptable consumer and wholesale price point calculated against peak consumption price. When a business is successful they typically add investment and value into their infrastructure and communities, provide more living wage jobs and are far less likely to seek out alternative sources of income. The Goldilocks Zone refers to the best possible wholesale price point vs. sell through rate for sustainable business and can most easily be achieved through a regulated supply chain.
We are now beginning to see perverse incentives as we see prices drop below what it takes to maintain these sorts of businesses.
3.0 The Problems with Surplus
If we can assume a massive surplus (871,450 lb or more) and price points are dropping well below or to the bottom end of the Goldilocks Zone we have to then ask ourselves, “where does it end up?”, “why does it end up there?” and “how do we fix the problem?”.
3.1 Where does it end up?
Over the past six months we have heard or read about several large busts of Oregon licensed cannabis Producers and Processors caught transporting product to out of state markets, and as a former “Black Marketeer” I would suggest that for every shipment that gets caught 100 make it through.
I feel as though it’s a safe bet to say that a fair amount of the Oregon surplus legally produced cannabis and its derivatives end up either; In out of state illicit markets, purchased for well under market value for legal in state extract processing, purchased for well under market value for legal in state extract processing and then moved to out of state illicit markets.
3.2 Why Does it End Up There?
Cannabis finds its way to the illicit market as a response to the rapid decline in spot pricing/ revaluation of our regulated legal market. Oregon cannabis farmers have already bought into the legal system. It’s purely a case of our farmers not being able to compete with or survive current in state commodity prices at present under regulated levels of production.
Processors take advantage of the low prices. The problem with this scenario is two fold; (a) reduced pricing for source material now fuels a new price war and race to the bottom with Processors (b) new illicit market emerge as more licensed companies find themselves in trouble under a bottomless commodities market.
4.0 The Banking Question
I ask this alot and never get a good answer; “Who does the OLCC bank with?”; “Who do the utilities bank with?; “What bank does the state use to put all its tax revenue from the direct sale of cannabis?”.
If the OLCC/ state, and the utility companies collect tax revenue, and service charges from the direct sale of cannabis, who’s their bank, I’d like to open an account. For the record, I am not a banking or financial expert, but I’ve managed to do a bit of research and it seems to me that the states with legal medical and/or recreational cannabis could use some of the tax revenue to form, underwrite, and run a state backed credit union. Just an idea.
4.1 How do we measure success and what does failure look like?
|Failed Cannabis Industry||Successful Cannabis Industry|
|Loss of tax revenue||Added tax revenue|
|Federal intervention||Infrastructure improvement|
|Higher unemployment||More jobs|
|Organized crime, sales to minors||Legal access to recreational cannabis for consenting adults|
|Opioid addiction, substandard treatment options||Legal access to medical cannabis for qualified patients|
|Higher rate of incarceration||Reduced prisoner populations|
|Not the intent or direction that the majority of constituents want||Community involvement|
5.0 Fixing the Problem
This section is likely to be unpopular with some, but rest assured I have no influence over the decisions of Governor Brown, the Oregon legislature, or the OLCC; the following is purely my opinion:
- Slow down issuing licenses immediately (5 year wait time on new licenses). The state can’t legally stop issuing to qualified licensees but they can slow it all down; doing this will add significant value to the license itself, and dissuade people from acting in manors that could jeopardize their license (like selling into illicit markets)
- Mandate a state pricing system for retail sales, much like alcohol. This would actually be somewhat tricky, but I believe it’s doable.
- Force all products to pass through Wholesalers on its way to retail or B2B sales as a price control point for the OLCC.
- Create two distinct types of wholesale license:
- Type 1- For non vertically integrated Wholesalers allowing them to wholesale to retail and facilitate/ transport B2B sales; Producer to Processor
- Type 2- For Producers, allowing them to transport large amounts of their harvest to Processors
- Stop issuing and renewing “Type 1” Wholesale licences to producers, processors and retailers
Free markets like this tend to self regulate (in terms of spot price and production levels) on their own naturally over time. For the “lucky” this looks like consolidation, and/or acquisition, for the less than lucky it looks like being pushed off a cliff with all your belongings.
5.0 Conclusion, and the Landscape Today
Since the OLCC has been issuing licences the Oregon recreational cannabis industry has experienced a steady and rapid decline in the price of cannabis at the wholesale and manufacturing level and to a slightly lesser extent the retail level.
This race to the bottom is counter productive to licensed canna-businesses, end users and the state regulated system.
- Producers and Processors suffer price fluctuation with a consistent and unsustainable downward trend, ultimately compelling them to make the decision between failure and/or extra legal activity
- Wholesalers are squeezed out, losing one of the state’s best untapped resource in real time on the ground data, and a potential price and product control point
- Quality of offerings to end user declines facilitating another reason for people to avoid the state regulated system in favor of alternative means of access, legal or other
- State realizes lower than potential recurring tax revenue
- Overflow of surplus products flow freely into out of state illicit markets attracting federal authorities
Lack of limits on the number of licenses issued is the number one contributing factor to the Oregon cannabis industries current market crash.
Over the past six months I have heard Oregon referred to as “the Afghanistan of weed”. While I personally feel as though cannabis should be legal nationally and it is an unfair burden to the states that have taken on the challenge of pushing this agenda against the tide of the federal authorities and the lobbies that pay them, these states are not inventing the wheel and there is not only a more sensibly and economically reasonable approach to this model, but a actual sensible and economical model in the OLCC that is not being utilized.