How Does California's Cannabis Market Compare? 

Comparing states is a dicey proposition, but some broad observations are possible

click to enlarge Where cannabis is legal (dark green) and medical (kelly green).

Source: ProCon.org

Where cannabis is legal (dark green) and medical (kelly green).

Any reference to the "U.S. cannabis market" is specious. When you note that pot prices in the United States are twice those in Canada, it doesn't really tell you much. The average price of a gram of flower in Canada at the end of last year was more than $7. In Washington State, it was less than $5. In California, it was $16.

Markets by definition allow trading across them, but cannabis, being still illegal at the federal level (unlike in Canada) is not allowed to cross state lines, even from one legal state to another. Interstate business can still be done, in a way, as when MedMen opens stores in different states, or an edibles maker such as Wana Brands outsources manufacturing to producers outside of its home state of Colorado. But in terms of markets, cannabis in the United States is really a "patchwork of small economies," as Leafly's Ben Adlin wrote last year.

That explains the wide disparity not only in prices, but in the levels of industry success from market to market. There are so many variables at play — taxes and regulations, population differences, supply levels, acceptance of the industry by local governments, etc. — that it's impossible to really compare one state to another. Add to that the fact that legal weed is a completely new business in some states (Illinois, for example, just began legal sales on Jan. 1) but only a somewhat-new one in others (California's been at it for two years, Colorado and Washington for seven) and it becomes clear that state-to-state comparisons can tell you only so much. Brand new markets can't be assessed by the same criteria as more mature ones.

Still, observations can be made, and the experiences of the states with the longest histories offer clues about which approaches work best.

One thing that stands out is that, while tax rates surely have a huge impact on the performance of a given state's industry, other factors are even more important. For instance, does a given state allow vertical integration? That is, are growers, for example, allowed to sell directly to the public, as they are in California? Or are growers allowed to sell to retailers only, as is the case in Washington? What is a given state's cap on the number of licenses it issues to growers, manufacturers, and retailers? How much do those licenses cost? How strict and expensive are regulations on things such as testing for pesticides? All of these variables, and many more, vary tremendously from state to state, though in very general terms, California is among the strictest and most expensive.

It's important to note from the outset that, although there are big problems in the nascent legal-pot business, both nationally and particularly in California, the outlook remains bright: More states are legalizing all the time, and business is growing in every legal state. Even in California, where the cannabis business is operating under a haze of gloom at the moment, legal-pot sales are expected to keep soaring. According to various estimates, adult-use cannabis sales in the state are expected to at least double by 2022 from their 2018 levels, perhaps approaching or even surpassing the $8 billion mark — which one recent study pegged as the size of the overall market here.

Still, it could be much better. Legal retail sales in 2019 were just over $3 billion, leaving about $5 billion to the illicit market. Lowering taxes would help, but while our tax burden is high, that doesn't account for all the industry's woes. Accounting for excise, sales, and cultivation taxes, the total tax burden in California is about 39 percent on average. But it's not the highest: that honor belongs to Washington, where the state tax is the only one applied, and it's a whopping 45.87 percent. Oregon's total is 20 percent; Colorado's is 28.15 percent, Nevada's is 25.1 percent.

So why are prices so low in Washington? It seems to be a function of industry structure. Vertical integration does lead to "efficiencies," but it also leads to large, corporate-minded firms dominating the market, and it tends to lead to less choice and higher prices. It's not allowed in Washington, where there is a proliferation of licensed growers, but a relatively limited number of licensed retailers. That gives retailers a lot of bargaining power over the wholesale prices they pay, and the notably lower prices paid by consumers. And low prices, of course, do more to discourage the illicit market than any amount of law enforcement might ever accomplish.

There are restrictions contained in the bewildering rules governing licenses in California, capping how big a given part of a cannabis business can be (you can't be a big grower and a retailer, for example), but those rules are nothing like they are in Washington. The difference might become even more stark in the coming years if the moratorium on vertical integration is lifted, as the law now holds.

Arguments over industry structure were vociferous leading up to legalization. The complicated compromises that made it into California's law pleased neither the activists who wanted to prevent industry consolidation nor the businesses that wanted to pursue unrestricted growth. We should expect those fights to flare up again in the coming months and years.

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