Amid ongoing cannabis price compression and fierce competition with the illicit market, University of California, Davis economists Daniel Sumner and Robin Goldstein have been analyzing these industry challenges to assist plant-touching and ancillary cannabis businesses, politicians and regulators.
In June 2022, the economists published the book, “Can Legal Weed Win? The Blunt Realities of Cannabis Economics,” in which they dive into legal cannabis’ competition with the legacy market, as well as the high taxes and regulatory burdens that allow illicit markets to provide consumers with low prices. However, industry challenges aren’t limited only to tight margins in the commercial supply chain, they write, but that consumers are dissuaded from giving the industry more business due to early dispensary closing times, restrictions on alcohol in cannabis consumption lounges, and more.
Cannabis Business Times caught up with the authors to discuss the state of affairs. Sumner is the Frank H. Buck, Jr. Distinguished Professor in the Department of Agricultural and Resource Economics at UC Davis and served as deputy assistant secretary at the USDA and was a senior economist at President Ronald Reagan’s Council of Economic Advisers. Robin Goldstein is director of the UC Davis Cannabis Economics Group and an economist in the Department of Agricultural and Resource Economics at the university.
Patrick Williams: You wrote in the book that taxes, supply chain markups, local bans on cannabis business activity and other factors have made cannabis more expensive and difficult to obtain for certain consumers, and that that’s incentivized some of those consumers to go to the traditional market for some or all of their product. Is the competition with the illicit market at all being miscalculated by state governments when they legalize and set up state programs? Additionally, are advocacy groups thinking about these realities?
Daniel Sumner: It’s fair to say they’re thinking about them. But particularly the first movers didn’t think thoroughly enough. Going back six, seven years in California and even before, we were saying, “Look, you’ve got an established market—that’s the illegal market—it’s been around forever. The cannabis users, particularly the heavy users, have been buying from a guy who knows a guy, and why would they shift?” And particularly, if you said, “Gee, we’re going to legalize this store out there in the mall, in the suburbs, which gives you the opportunity to pay twice as much.” Somebody looks at them and says, “Huh? Tell me again. As the buyer, what’s in it for me?” [Sellers ask,] “As a seller, what’s in it for me to go legal if I’ve been in the business for a while?” And you can understand that the typical regulator—even though in theory, they knew that was true, they had a hard time internalizing it. … [In] California, … in … Proposition , they basically packed … their whole wish list, whether it was social equity or high taxes or limiting access to legal cannabis by when it had to close or which county it could be in.
All of those things were packed into this legislation. So, you can picture this poor cannabis grower, processor and retailer dragging all this baggage with [him]. … Every one of these regulatory ideas in isolation may sound good …. “Ah, gee, we want the businesses to be small.” In California, you [couldn’t] have any large cultivators, only [medium] cultivators. (Editor’s note: California began permitting large cultivation in 2023.) Or “We’ll create something we call a microbusiness that’s 10,000 square feet.” It sounds great. “Let’s not have any cannabis in my county in … California,” or something. Well, great. In other words, [that translates to] is, “I want to make sure all the cannabis in my county is illegal.” If you say it that way, it doesn’t sound so smart.
One of Robin’s favorites, and I’ll mention it … [is], “Gee, we only want illegal cannabis to be sold after 10 p.m. because we want illegal people out at night.” … When Robin told me about this, I said, “Ah, well, if you’re going to have a party, you plan ahead. Who needs to go buy more cannabis at 10 p.m. because everybody will have this all planned out?” And the answer is no. People have been known to order a pizza at 10 o’clock at night for that matter or send somebody out to buy a six pack of beer. Everything you do to make cannabis less accessible, more expensive, more highly taxed, … every one of those favors your competitor. If your competitor already had a 50-year head start, … call it a headwind, call it trying to swim upstream.
PW: The book says prices will fall and that operators should be ready. Currently, some cannabis companies are not willing to budget much on price in the face of just ongoing price compression. Does everybody need to brace for more compression now, or do craft and niche businesses have some degree of insulation from that for the time being?
DS: The trend is for downward prices just because, frankly, cultivators are getting better at it, whether it’s better lighting indoors or automated handling or now, almost all the trimming is done in a separate factory process or setting. The first stages of processing are now mechanized. And [there’s now] better management …. We don’t try to predict week-to-week prices or anything else. I learned that a long time ago talking about wheat markets. And it’s not just cannabis. This is farming, after all. So, we want to be a little careful there. But we don’t see anything to stop these long-term, steady efficiency gains. That’s what it really is, is costs coming down.
What about the niche markets, or a craft grower or something? … If you have a reputation, and you have a group of people that are going to pay more because you’re local or because you’ve got some quality aspect or because you can make environmental or sustainability claims, social responsibility claims—for a few people, that’ll work. But whether it’s homegrown tomatoes or the farmers market for peaches, it tends to be one-tenth of 1% of the market. It’s great for the people that can do that, and of course, and there are [comparable] markets. Fancy wines are a place where you sell the story along with a product. The back label has a nice story, and you show people a picture of the hillside where your vineyard is. Robin and I both do a lot of wine economics. There’s a well-established niche market. There’s a growing market for craft beers [and] a similar storyline that goes with it.
Robin Goldstein: It is, as Dan mentioned, local. There seems to be some preference for local everything among some higher-end consumers. So, there are not very well-established patterns yet about recognition of local regions as being the best for legal weed. I think there might be more potential for some subregion of some area where there’s special growing conditions, and it’s outdoor grown. That I could see making more inroads in this kind of craft market than a brand that’s competing with a bunch of celebrities, with Mike Tyson and whoever, to try to advertise it more like a traditional mass-market-type brand. But the thing is, there’s going to be a lot of competition in those high-end [products]. … So, you have a huge number of existing players that are competing for that small piece of the pie, and I think that outdoor growers that are in certain areas could collaborate to build their brands together; that could be one winning strategy.
PW: Heavy regulation is a topic that comes throughout the book. You wrote that one outlier is Oklahoma in that they have laws and regulations governing the industry that are easy to follow and that many businesses are able to comply with as far as licensing and testing requirements. How can laws and regulations strike a healthy balance so that operators can financially succeed while providing safe, quality product through the proper channels?
DS: That has been a challenge. At the time of the book, Oklahoma and Vermont had legalized cannabis. Oklahoma was still, of course, medical only, but pretty much everybody could get a medical card if they wanted to consume cannabis. There was no serious restriction there. The way we like to say it is the Oklahoma politicians, or the administrators, initially opposed any legalization of cannabis, but once it was passed, they said, “Oh, you mean it’s a business? Well, we like business. This is Oklahoma, after all. We like business.” … Literally hours after they had passed legal cannabis, the first dispensaries opened.
In Vermont, four … years [after legalization], they were still thinking about getting it right. New York now has [three adult-use dispensaries] in New York City. And just about every street corner, or every block, has an illegal cannabis shop or two. So, these legal cannabis shops in New York City, when they finally arrive, who knows when, three years from now, five years from now, with any quantity, they will have had competition from illegal shops that even the cops say is just too hard to try to shut them down. It’s not worth doing. And nobody has the stomach for throwing a bunch of people in jail for retailing cannabis, which is now a legal substance.
So, our point about Oklahoma was not that they got everything right. But there seem to be a lot of ineffective regulations. It really has to do with putting everything into it that you wish would have been a good idea. Social equity is one of those. I think everybody we’ve ever talked to said, “Yeah, this social equity stuff—that’s a good idea.” Then you say, “Is it worth waiting four years to actually implement legalization in a thoroughgoing way because you’ve made the social equity rules so complicated and so tough, even for the people you’re trying to provide social equity to, that it takes approximately forever to get them approved?”