Economics of State-Regulated Weed

By Maddalena Rubini

MarijuanaHB 3460, enacted this past March, sets guidelines and regulations for medical marijuana dispensaries in the State of Oregon. Proponents of the bill claim that it has an upside of crime reduction as it will go a long way toward eradicating the marijuana black market. But are the business models allowed by HB 3460 sustainable? Are medical dispensaries able to compete with the streets? Startup businesses always have roadblocks and speed bumps, but this industry has obstacles that range from federal oversight to competition with cartels across the border. We checked in with some of Corvallis’ newly opened dispensaries to find out more about the economics of weed.

Market Before HB 3460
The Oregon Medical Marijuana Act, enacted in 1998, modified state law to allow cultivation, possession, and use of marijuana by patients with documented qualifying medical conditions. Patients and/or caregivers apply for medical marijuana cards and register as a grower with the Oregon Medical Marijuana Program (OMMP). As long as patients, caregivers, and growers did not exceed the regulated amount of mature plants (six), seedlings (18), and final product (four ounces per person), they couldn’t be criminally prosecuted by the State of Oregon. They were, however, left entirely to their own devices to sow, harvest, and process whatever they needed for their medical supply, which can come at a considerable start-up cost.

Overhead also increased with new administrative fees. Total cost was no longer a simple issue of supplies, labor, and distribution. Growers, if not the same person as the patient, became required to pay a $50 grow site registration fee. When compared to the cost of being arrested for producing and trafficking under old laws, it was a small price to pay on the supply end.

Folks on the demand side are squeezed a little harder. The current fee structure—in place since 2011—requires patients and caregivers to pay $200 to apply for a medical marijuana card. Renewal, required annually, costs the same. Replacement registry cards, issued every time a patient changes caregivers, growers, or grow sites, cost $100. Health insurance does not cover any of these costs. However, discounted rates are available for Supplemental Nutrition Assistance Plan (SNAP) and Oregon Health Plan (OHP) cardholders ($100), as well as people who receive SSI benefits ($20).

This doesn’t seem like too much of a financial burden on either side if considered as a long-term plan. However, the Oregon Medical Marijuana Act forbade growers from charging for labor, which certainly decreased return on investment and profit, as well as destabilizing the market. Chronic illness has a way of taxing household finances with ongoing medical expenses and damage to earning power, often leaving patients with tight budgets. If the market fluctuates while growers try to recoup losses, someone may go without treatment for the month or turn to illegal sources that offer lower prices.

localdispensaryoptionsPrices So Low, They Must Be CRAZY!
HB 3460 did not change the administrative fee structure for medical marijuana patients and growers. Instead, it introduced a middle-man in the form of the dispensaries. Retail expenses are usually passed down to the consumer via higher prices or lower quality. However, a rough cost comparison between dispensaries and the black market reveals competitive pricing, at least within the microcosm of Corvallis.

An anonymous source revealed that the current street rate starts at $40 for an eighth of an ounce, or an “eighth,” of average quality marijuana, which breaks down to $11.43 per gram. One-quarter of an ounce, called a “quarter,” averages $70. A discount of approximately 12% applies as the quantity increases.

Dispensary rates are cheaper, as would be expected when removing the overhead cost of dodging the law. An eighth costs between $24.50 and $32; between $8 and $10 per gram. Quarters sell for between $49 and $70. While dispensaries offer less of a discount per gram at the small scale, the bulk discount—a generous 16%—is actually better than that offered on the street.

On a national scale, Oregon is outpacing Washington and Colorado; black market rates remain consistently cheaper in both states. Colorado weighs in at $156 per street ounce verses $200 per dispensary ounce. Dispensary rates in Washington are reportedly two times higher than street rates. However, quality and potency comparisons in either state remain difficult to quantify.

As far as Oregon is concerned, the quality and potency of regulated cannabis exceeds the black market. Even average quality black market marijuana is frequently contaminated with mold, mildew, and pesticides, as dealers have no incentive to do microbial testing. Potency also varies since street pot is frequently cut with other herbs such as oregano, mint, and catnip. On the other hand, testing for microbes, chemical residue, and THC potency is mandatory under HB 3460. Essentially, dispensary customers are getting superior quality marijuana at astonishingly low prices.

Seasonal, Local, Sustainable
Registered cannabis growers do not receive government subsidies like other farmers. Instead, Oregon’s unique combination of low cost and high quality is driven by factors such as ideal growing conditions and sustainable sourcing.

Brock Binder, owner of High Quality Compassion, notes that Oregon’s terroir historically produces a high yield of excellent quality cannabis. The Missoula Floods, which occurred at the end of the last ice age, brought rich soil across eastern Washington and down into the Willamette River Valley. Oregon’s mild climate and plentiful rain also contribute to prime growing conditions.

“We are blessed to have such great prices and quality,” said Binder.

The outdoor growing season is short, though. Its harvest comes to fruition in September and October, according to Kayla Dunham, co-owner of the Agrestic Green Collective.

“The outdoor season is very short here due to rain,” she noted.

Indoor growers can reap mature buds every four to seven months, which keeps prices consistent throughout the year, but July and August are typically lean times.

In order to keep quality consistent, dispensary owners rigorously source their products with an unofficial, but commonly held set of organic standards no different from those established by the United States Department of Agriculture.

“We have vendors who we know are organic from seed to sale,” said Binder. “We try to ask that of all of them.” Owners also source for specific cannabis strains with desired medicinal effects to keep potency consistent.

EB 3460 also allows growers to charge for labor. Since growers and dispensaries alike are still trying to determine the actual cost of labor, wholesale prices fluctuate. However, cannabis farmers are working with dispensaries to keep the market even. “We have to invent it as we go,” said Dunham, “but the farmers also know what the market will support.”

Dunham believes that labor reimbursement might eventually stabilize off-season prices by giving people incentive to grow indoors, a pursuit that requires a great deal of start-up capital and maintenance cost. “I think that now that it’s more economically feasible to be reimbursed for labor, people will be willing to invest more,” she said.

EB 3460 generally supports a sustainable marketplace for dispensaries. However, owners have federal laws working against them. IRS Tax Code prohibits dispensaries from deducting payroll, operating costs, or any other expenses beyond cost of goods sold. However, dispensaries are required to pay Oregon business taxes. Essentially, dispensary owners shoulder all of the burden and receive none of the benefits that other small businesses do. “They’re working on changing federal tax codes, but it’s a huge part of determining our rates,” Dunham said.

Although dispensary owners admit to not turning much of a profit yet, they remain optimistic. “What small business does [turn a profit] in the first year?” asked Binder, continuing, “In my mind, I feel that if we can have good staff, good prices, and good selection, it will work out in the end. We need to create strong relationships with patients to the extent that enough of them will want to return.”

Dollars to Donuts
One such patient, Marc Fieldstone, started experiencing insomnia, systematic pain, and nausea shortly after graduating from the University of Oregon in 2010. After a bewildering year of medical appointments and declining health, Fieldstone was diagnosed with fibromyalgia, a condition that falls under the severe pain category of the Medical Marijuana Act. He sought treatment through alternative therapies such as acupuncture until a doctor at the Frida Center for Fibromyalgia in Portland suggested cannabis.

Fieldstone has held a medical marijuana card since 2012. However, he occasionally treated his severe pain and insomnia with cannabis before receiving it in the mail. In addition to worrying about legal repercussions, Fieldstone was also concerned about the product he was getting. “I had this naïve trust in the seller,” he said.

Since dispensaries have opened in Oregon, Fieldstone’s quality of life has improved. “You get so much control over the dosage,” he said. Because dispensary owners research and responsibly source medical cannabis, “You don’t have to accept the word of somebody you may or may not know that well,” said Fieldstone. He continued, “I can buy smaller amounts to try things and get something more zoned in to [relieving] my symptoms.”

The bottom line, however, is whether or not people are inclined to keep their options open and shop the black market. When asked, Fieldstone simply responded, “God, no. Why would I?”

Fieldstone is only one of many medical cannabis consumers in Oregon. Some patients still prefer a direct “farm to table” approach, working directly with a farmer instead of going to a dispensary. Others are generally wary of regulation because it’s just another way for the government to tax citizens. However, HB 3460 seems to be the step Oregon needed to take toward creating a sustainable and safe legal marijuana market.