Outrun Change

We need to learn quickly to keep up with the massive change around us so we don't get run over. We need to outrun change.

Some data points on pricing in newly legal recreational marijuana. We can already see distortions created by regulation.

Comments by a reader of my blog informed me that wholesale prices of state-legal-federally-illegal recreational marijuana have dropped dramatically. That got me to wondering what has happened to the pricing.

I’m am otherwise totally clueless of the pricing in this market. What I know I learn by reading the ‘net.

Just so everyone knows, I am following this story because it is a natural experiment to see the impact of crushing regulation imposed on a newly emerging industry.

The commenter shared a recent report on CNBC quoting a producer saying the wholesale prices had dropped from $1,700 to $2,200 per ounce down to $700 per ounce.

The range in price is due to different qualities. That would give wholesale prices in the range of $60 to $77 per gram in the recent past to around $25/gram currently.

That gives these data points:

  • Wholesale
  • $1,700 to $2,200 per ounce sometime prior to the CNBC article
  • $700 per ounce at the time of the CNBC article (date unknown)

So using the ‘net, which is the most incredible educational tool ever invented, I search for about 10 minutes and found a lot of great info. Spent another 10 minutes reading promising articles and found the following:

7/8/14  – International Business Times- Marijuana Costs In The US: How Black Market, Retail And Medical Pot Prices Compare  – Citing the web site PriceOfWeed.com (same source I’ll mention in a moment), the article gives a variety of data points.

Article has a great infographic providing the following data points for 1/8th ounce:

  •                          CO        WA
  • Retail               70.90   60.25
  • Medical            35.40   40.75
  • Street              30.00   29.00

That provides reference points for recreational, so-called medical, and state-illegal-federally-illegal.

Adjusting those prices to an ounce (assuming no discount for full ounce) gives the following data points:

  • July 2014
  • Retail
  • $567 per ounce, Colorado; not sure if this includes tax but looks like it
  • $482 per ounce, Washington

9/30/14 – Yahoo – Colorado’s pot market getting new competition – Apparently until September ’14 only previously licensed medical marijuana providers were allowed to sell recreational marijuana. After 9/30 newly licensed shops can get into the market. Expectation in the article is for prices to drop.

Article says:

Colorado is issuing licenses for 46 more pot shops, in addition to about 200 already in place. Colorado is also licensing 37 more growing facilities and 13 new product manufacturers who make marijuana-infused products.

Here we see one intentional distortion knowingly created by the regulators. By artificially holding down the number of retail sellers, the prices were artificially held high (Can’t pass up the pun. Sorry.)

In addition, according to the article until 9/30 there was a “70/30” rule, meaning sellers had to produce 70% of what they sold. This means that new growers were locked out of the market.

That is another intentional distortion created by the regulators. The flood of new suppliers were frozen out until 10/1.

That makes for two artificially created restrictions on supply.  If you are a consumer and feel you were overpaying until September, you are right. And you can thank the state regulators.

Article provides the following data points:

  • September 2014
  • Wholesale
  • $1,800 to $2,500 per ounce depending on quality
  • $1,000 per ounce, guess of what wholesale prices might soon be
  • Retail
  • Up to $400 an ounce, plus tax

11/20/14 – Colorado Pot Guide – Marijuana prices in Denver and Colorado: Fall 2014 Update – Article says the supply of recreational marijuana is expected to double or triple in the next year, meaning by fall 2015. Article cites the always-present someone as speculating retail prices could be at $50 an ounce by fall 2015.

Average retail prices, exclusive of sales tax:

  • Denver Metro Area Recreational Marijuana Prices:
  •                         1/8 oz  1/4 oz  1/2 oz  1 oz
  • Average Price  $47      $95      $181    $323
  • I-70 Mountain Corridor Recreational Marijuana Prices:
  •                         1/8 oz  1/4 oz  1/2 oz  1 oz
  • Average Price  $59      $107    $194    $367

The data points here are:

  • November 2014
  • Retail
  • $323+tax – Denver
  • $367+tax – I-70 corridor

2/?/15 – Price of Weed – Data for the price of weed in: Colorado – Retail prices per ounce:

  • February 2015:
  • Retail
  • $243 – high quality
  • $192 – medium quality

My previous post here mentions a grower who is quoted at saying he sold his previous harvest at $21 per gram, which would be $596 per ounce. He expects his next harvest to be at $4 per gram, which would be $114 per ounce.

That gives the following data points:

  • Wholesale
  • January 2015
  • $596 – price realized for one grower in previous harvest
  • $114 – expectation for next harvest

Data points

Pulling those data points together gives the following rough picture.

Wholesale

unknown time:

  • $1,700 to $2,200 unspecified time prior to the CNBC article
  • $700 per ounce at the time of the CNBC article

September 2014

  • $1,800 to $2,500 per ounce depending on quality
  • $1,000 per ounce, guess of what wholesale prices might soon be

January 2015

  • $596 – price realized for one grower in previous harvest
  • $114 – expectation for next harvest

Retail

July 2014:

  • $567 per ounce, Colorado; not sure if this includes tax but looks like it
  • $482 per ounce, Washington

September 2014:

  • Up to $400 an ounce, plus tax (presumably the highest quality)

November 2014:

  • $323+tax – Denver
  • $367+tax – I-70 corridor

February 2015:

  • $243 – high quality
  • $192 – medium quality

That is far too few data points to draw any graphs. There is insufficient comparability to reach anything other than general conclusions. On the other hand, if I wanted make like a recently popular economist, I could smooth the numbers and give you an exact regression calculation.

What is clear from the articles and data is the regulators had intentionally distorting rules in place which inflated the price above the equilibrium of natural supply and demand.

Another idea hinted at in the data:  Capitalism (or something that at least has more resemblance to free enterprise than less) drives down prices for consumers. Hmm. Would the inverse be that regulation drives up prices???

I will be watching for further indications of how much the huge regulatory burden is affecting the industry. This is such a great natural experiment.

If you are, um, familiar with the industry pricing, feel free to laugh at me for wrong numbers and wrong units of measure and finally realizing what you’ve known for a long time. (Yes, I’m generally slow to catch on. On the other hand, getting me caught up to what everyone else already knows is why I blog.)

For everyone else who is as clueless as me of this market, I hope you find this exercise as educational as I did.

Please follow along as I use a telescope to gaze into worlds far away I’ll never visit.

Your thoughts?

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4 thoughts on “Some data points on pricing in newly legal recreational marijuana. We can already see distortions created by regulation.

  1. Jim,
    Here is some interesting tax info for the industry in Washington state.

    “As of Dec. 4, Cannabis City owed $631,171, one quarter of the shop’s $2,524,685 in total sales, to the state in the form of excise tax, according to state Liquor Control Board figures. Because of the 280E provision this excise tax expense cannot be written off. The Internal Revenue Service would view the $631,171 as income and tax it accordingly.

    “I’m being taxed on the tax I’m paying the state of Washington,” Lathrop said.”

    Here is a link to the article. It describes how the current tax liabilities are strangling the business.

    http://crosscut.com/2014/12/pot-marijuana-excise-taxes-washington-state-280e/

    • Hi Mark:

      Thanks for the link. Phrased differently: By classifying the tax amount as excise instead of sales tax, the amount collected by a business is included in income. Usually that wouldn’t be a problem, because the business can claim a deduction. Enter 280E which means the tax remitted can’t be claimed as an expense. Thus the $631K sent to state by this business is taxed as if it was profit.

      I’ll count this as another place the state regulations are strangling what the state has defined as a legal business.

      Jim

  2. From what I have been reading, in Washington state the black market stuff is cheaper than the non-medical legal stuff because of the heavy taxes on the pot that is not sold for medical use. Governments will never fully realize the tax potential if illegal pot is cheaper than legal pot.
    I have also been reading that there is a bill to stop the federal ban on pot, so maybe that will help create a better marketplace if the bill passes.

    • Hi Mark:

      You hit a critical issue that will muddy the water for everyone on every side of the issue. The severe taxes and the massive regulatory load will do nothing other than make recreational marijuana far more expensive than the illegal stuff on the street. The major advantage of buying from a licensed outfit is the radically reduced risk of getting busted, ripped off, or shot. Also won’t have to find a street source or go to a possibly dicey area to get product. The regulatory load on medical marijuana will make it more expensive than the street marijuana and cheaper than recreational.

      There are major complications from this approach. Those issues are the reason I’m blogging on this topic.

      Jim

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