Economy

Why Is Marijuana In Colorado Getting So Cheap?

CREDIT: AP

Almost 18 months into Colorado’s experiment with legal recreational marijuana, the counter price of an eighth of an ounce is down as much as 40 percent, researchers from New York brokerage firm Convergex reported Monday.

After selling for anywhere between $50 and $75 last spring, eighths are selling for between $30 and $45 in the first half of 2015, according to the firm’s survey of retailers in the Colorado. But the drop is not necessarily bad news for legalization advocates.

“Nowhere in the report do we call it a collapse,” Convergex’s Nick Colas told ThinkProgress. “I’d characterize it as a notable decline,” he said, but no one should think that the market is in free-fall. “Price volatility is a natural effect of a new industry and a new marketplace that are in their growth phase. Prices get set, prices go down, something happens and prices go back up again.”

Indeed, the survey of shop owners indicates that overall sales revenue is still booming even as the unit price of recreational marijuana in its raw flower form has dipped dramatically. Sales revenues were up by 153 percent in January for recreational pot compared to the same month a year before. Revenue jumped 164 percent for February, 126 percent for March, and 98 percent for April, meaning that the state’s dispensaries have consistently brought in between twice and three times as much cash from recreational sales in the first third of 2015 as in the same period a year before.

The monthly trend indicates that recreational sales alone could grow by a full 50 percent for 2015, Convergex predicted Monday. That kind of sales growth in the face of a shrinking price tag means that the volume of business these shops are doing is immense and growing.

There are structural reasons that sales and price competition have hit this inflection point in the past few months, National Cannabis Industry Association associate director Taylor West told ThinkProgress. “We’ve only been in a fully open market in Colorado for about six months,” West said, “because prior to the end of last year, there was a limit on who was going to get the initial licenses for dispensaries and cultivators. When the market first started, the only people eligible to apply for licenses were already existing medical marijuana businesses, and they had to cultivate 70 percent or more of what they sold.”

Price volatility since those restrictions lapsed is evidence that the strict early rules interfered with the market’s function to keep prices artificially high. The rules traded a bit of market inefficiency for a lot of political stability. In designing the first legalized recreational marijuana trade in U.S. history, Colorado had significant incentive to make that trade.

“The state’s primary job was to roll out a regulatory framework that was sustainable. So the market and concerns about prices and so forth took a backseat to ensuring we could satisfy Department of Justice guidelines,” said Art Way, Colorado state director for the Drug Policy Alliance, who also pointed out that customers were turning up in droves even at the ostensibly high prices Convergex found in the early months of the business. “Issues around the market and the industry are sexy for people to talk about, but primarily this is a criminal justice issue, and legalization is a way for states to prove to the federal government that they can reduce some of the harms of prohibition.”

With numerous other jurisdictions watching what happens in Colorado, though, there’s pressure to deliver on the economic promises of legalization as well as its potential to reshape the criminal justice system. Tax revenues from recreational marijuana sales in calendar year 2014 came in significantly under what was predicted, but the state still netted upwards of $70 million from recreational, medical, and business license taxes in that first year. And the same market evolutions that are dragging prices down for recreational consumers and pushing overall sales revenue up will in turn prove beneficial to state coffers.

Rebounding tax revenues, falling prices, and a bevy of new businesses with names like “CannaCamp” are great news for Colorado. But it’s not all sunshine and ponies in the state’s weed business. Dispensaries and growers are still unable to put their money in banks, and must grapple with federal tax rules that treat them like criminals instead of licensed businesspeople. An attempt to create a pot-specific credit union in the state has stalled as federal officials decline to authorize the bank to take deposits.

And a quirk of federal tax law threatens to drive retailers out of business at exactly the time they should be re-investing early profits into future growth. “There is a section in the IRS tax code that was added in the 1980s that explicitly prohibits any business engaged in trafficking a controlled substance from taking any normal business tax deductions,” West said. “We’ve had members whose tax liability for the year has been literally more than their entire profit for the year, because they can’t subtract out their expenses for payroll, rent, mortgage, utilities.”

It’s those regulatory obstacles, more than the market’s lurch toward a realistic, lasting price point for an eighth of weed, that out-of-state observers must heed, Convergex’s Covas said. “If you’re considering this, you really want to have a financial services industry that these businesses can use,” he said. “It would probably be a much more beneficial industry for local commerce if they were allowed to use the local banking system, because the money could circulate back into the local economy more easily.”