This piece originally appeared in Forbes. The reason that the modern cannabis boom isn’t going to last is that people have cost bases vastly above anything that’s realistic once we get into international competition. The base material, that cannabis, is just too cheap.
Global Capitalism Would Make A Pack Of Fully Legal Cannabis Joints Cost 50 Cents, Not $50
There’s an interesting piece over at Fast Company ruminating on what the cost of a pack of legal cannabis joints would be. The answer they come up with is around $50, with perhaps the top end premium products at the $120 of the current marketplace. There’s a problem with this calculation though for in a properly and fully legal market the cost of a pack of joints will end up somewhere around 50 cents, not that $50 figure. The reason is that while consumption is newly legal in a couple of States production is not legal under Federal law anywhere. And we most certainly don’t yet have anyone (legally of course, the illegal stuff flows over the borders all the time) able to tap into the global market to source production. When it’s possible for that to happen then prices will very swiftly fall to that much lower level of only a few cents per spliff.
The Fast Company piece is here and they’re reliant upon this piece of information for the basic costs of the dope itself, before manufacturing, retail margins and tax and the like:
In June of 2013, a company named BOTEC speculated that the production cost of marijuana ranges from $2 to $3 per gram, which “implies a price to retailers of $6.25, which is broadly consistent with current access points paying about $5 per gram.” The average Marlboro cigarette has just under one gram of tobacco in each of the 20 cigarettes contained in a pack. So at the low end of things, you’re looking at a production cost of nearly $40 per pack of Mary Janes.
In the Washington State context, if one thought, for example, that producers would sell for $2 per gram (i.e., $2,000 per kilogram) and markups would be 100% for both processors and retailers, then taxes would account for a little over one-‐third (36.7%) of the $16.99 per gram retail price, as shown in Exhibit 1. Note for this model, the $2 per gram producer price implies a price to retailers of $6.25, which is broadly
consistent with current access points paying about $5 per gram.
Note what they’re doing here. They’re trying to model the tax take and likely retail prices given the current producers’ prices. They’re not, in any manner, trying to model or calculate producers’ prices themselves: they’re simply an assumption going into their model. Fast Company did ask Altria (Philip Morris, the makers of Marlboro) what their attitude to the production of cannabis joints would be and got the not surprising answer that given that Federal law makes this still illegal it’s not something the company is going to look at any time soon. However, let us change that assumption about Federal law. Let us instead assume that joints do become fully legal. Further, that the large companies like Altria do indeed enter the market. What is then going to happen to the price of doobies? It will collapse, down to that 50 cents or so level that I’ve already mentioned.
Well, the first thing I would expect Philip Morris to do is go talk to some people in Malawi. They already get a good portion of their tobacco from that country:
Tobacco production in Malawi is one of the nation’s largest sources of income. As of 2005, Malawi was the 12th largest producer of tobacco leaves and the 7th largest global supporter of tobacco leaves. As of 2010, Malawi was the world’s leading producer of burley leaf tobacco. With the decline of tobacco farms in the West, interest in Malawi’s low-grade, high-nicotine tobacco has increased. Today, Malawian tobacco is found in blends of nearly every cigarette smoked in industrialized nations including the popular and ubiquitous Camel and Marlboro brands. It is the world’s most tobacco dependent economy.
I think we can say that Philip Morris knows that country and economy reasonably well. Which is interesting, for here is a listing of retail and wholesale cannabis prices around the world from the UN Office of Drug Control. In which the Malawi price is listed as $3. That seems reasonable enough, cannabis likes good temperatures (25 oC to 30 oC is best) long daylight hours and thus places within 30 to 35 degrees of the Equator work well. Rather like tobacco itself actually. But do note that that Malawi price is not $3 per gramme, like the assumption made about Washington State. That is $3 per kilogramme, or one thousandth of the Washington State price.
Yes, that’s an extreme number I’ve selected from that listing. But that same listing is giving the US wholesale price in the $600 to $4,000 per kg price that encompasses the $2 to $3 per gramme assumption made in the Washington State paper. We really are talking about orders of magnitude differences in price as a result of international trade. And as I say, that price in Malawi is the price in a country where the tobacco giants already get a lot of their tobacco.
Certainly, there are more costs to these things than just the raw cannabis. Packaging, manufacture of the actual joints, transport and so on, but the marijuana content of a pack of 20, assuming one gramme per joint, is going to be around 6 cents. Very doubtful that the other processes will add much more than 15 cents to that, meaning that the production costs of the pack will be more like 20 cents. Which sounds about right: it’s a number of years since a friend of mine worked in cheap wholesale cigarettes but no brand horrible quality tobacco cigarettes used to be available to 30 cents a pack or so. Some report that fake Marlboro can be produced for 20 cents a pack, including the tobacco price itself (on the assumption that there’s any real tobacco in them of course). Add the usual margins and the taxes based on a percentage of the value of the original cannabis and we get to somewhere like my initial 50 cents a pack of joints.
So, yes, I feel confident in predicting that a pack of fully legal cannabis joints, one that is able to benefit from the full effects of global capitalism, would cost something like 50 cents instead of the predicted $50.
I would also go on to make two further predictions. Currently the proposed and enacted taxes on cannabis are ad valorem. That is, they’re based upon the value of the cannabis itself. As the price crashes as a result of trade I am certain that those ad valorem taxes will be replaced by unit taxation. So many dollars per pack of joints, rather than x or y percentage of the value of them. The second is that full liberalisation of the cannabis market will be followed milliseconds later by calls for trade barriers to be imposed. For, obviously, if Malawi were to be allowed to compete then all and every US based producer will go bust. Which, given the interplay between the localisation movement and the legalise cannabis movement isn’t something that will be welcomed. Legalisation would therefore be followed by the “Smoke Local” campaign.