An Overabundance Of Cannabis Production In The United States. Things You Didn't Know.

Written by Tia Moskalenko at AskGrowers

 

Not so long ago, there was no legal cannabis in the United States at all. Now, by many estimations, there is an overabundance of weed production. No, not from an ethical perspective. A logistical one. States have more cannabis than they can sell, with production sometimes double or even triple that of demand.

From an economic standpoint, this is disastrous. It's no better environmentally or, for that matter, fiscally. In this article, we examine cannabis issues. Read on to learn more about this unique problem currently impacting the weed market.

The black market dilemma

Is legal cannabis winding up on the black market? Undoubtedly, some of it is, though evidence that it is getting there at the hands of legal vendors is spotty at best. There are a few reasons that legal vendors are directly discouraged from selling beyond the perimeters of their license.

For one thing, guidelines are very strict. A vendor who has been caught selling on the black market will not only face the potential for fines and imprisonment, but they will also lose their license, something that often costs hundreds of thousands of dollars to get.

There is also a cost-to-risk problem. Legal cannabis still commands a relatively handsome sum—depending on the state as much as two to three times what it costs on the street. Shoppers are paying both for the high state fees and taxes that go into the legal cannabis industry and for the dispensaries' overhead.

Buying on the street is, at best, an intensely uncertain proposition. Buyers can only guess what they are getting, how potent it is, how it will affect them, and so on. By contrast, shopping at a modern dispensary is like stepping into a Teavana.

Most establishments are clean and professional, outfitted with a well-trained, professional staff who can connect the customer with a product perfectly suited to their unique needs. All of that gets built into the cost of cannabis.

How many dispensary owners are willing to risk their livelihoods to sell their product for a third of its value? Some inevitably will, but the vast majority won't. So what is done with it?

Getting rid of excess cannabis

At a legislative level, some states are trying to reduce overproduction by limiting the number of licenses they issue. That's what happened in Oregon after they went legal in 2014. The state congress passed a bill allowing the discretionary power to stop issuing new licenses in situations where the supply of cannabis was seen to exceed the demand.

Lawmakers also began to examine the possibility of allowing vendors to sell out of state—an interesting proposition given the legal status of cannabis at the federal level. Technically, cannabis remains illegal in the eyes of the federal government.

This means that cannabis vendors in a legal state are technically committing a crime in the eyes of the federal government—so far, a strictly logistical problem that has made it difficult for simple business tasks like securing a bank that will cooperate with dispensaries.

But what does the federal ban on cannabis suggest for interstate commerce? It's a complicated question because it involves a lot of moving parts.

Say an Oregon dispensary wants to sell to California—ignoring for a moment that California residents have no trouble at all getting cannabis on their own. Legally speaking, this should be no problem, right? Two recreationally legal states are going about their business in compliance with their own local laws and ordinances.

Unfortunately, it's not quite so simple. Oregon and California might be on the same page, but what if the package detours in Idaho—one of the few western states not to have some form of legal cannabis?

There are also just the logistical demands of getting the package there. The transportation company. The potential insurance involved in shipping the goods. Businesses may not wish to participate in cannabis distribution for the simple reason that it remains federally illegal.

For the record, Oregon has voted to allow sellers to ship their goods out of state, but the broader context of this decision remains to be seen.

The more typical results

So, that's what Oregon is doing. And it has the potential to reduce overabundance in the long run. Oregon has been averaging something to the tune of 4.5 million pounds produced annually. For context, California, a significantly larger state, consumes an estimated 2.5 million pounds of cannabis annually. That's a significantly larger supply than there is a demand, and the ramifications can be quite severe.

·   Prices dip. A simple law of economics. When the supply of an item radically outweighs the demand, prices dip considerably.

·   Farms close. Cannabis cultivation sites find out that their product becomes significantly less valuable. Instead of continuing on, they decide to pivot into a new crop. Something without the logistical oversite headaches of cannabis. Something they can actually make money from.

·   Product destruction. Finally, products that can't be sold will inevitably get destroyed—burned and not in a fun way—to make room for fresher products. The actual estimates of how much legal cannabis is destroyed annually are imprecise. Most legal states keep their records sealed. In Cannada, however, it was shown that vendors had to destroy 425 million grams of legal product last year.

Obviously, none of this is good for producers, nor is it good for the environment. Legal cannabis production—particularly indoor grow operations—is a major contributor to emissions, often outweighing those seen by local transportation. Having all of those emissions is bad in its own right. Having them for the sake of a product that will only be destroyed is even worse.

A potential solution?

Obviously, burning excessive cannabis is not a sustainable long-term solution. But what's to be done? Context is important here. Legal cannabis is still relatively young. Local producers will naturally correct supply on their own in the coming years to avoid waste.

This can be better accomplished using analytics—data that will allow producers to make very precise estimates for how much they can expect to sell. This will reduce their costs and the risk of overproduction.

Some states may also consider market caps. Rather than limiting licenses, they can limit production levels. Not only will this reduce the risk of overabundance, but it will also stabilize prices, making cannabis more profitable as a whole.

As things stand now, small vendors are disadvantaged. Large-scale producers can afford the risk of loss and overproduction. Local mom-and-pop shops, businesses that only barely scraped together enough to afford their license, risk closure when prices plummet, and the stock goes unsold.

Through a concerted effort, growers and states can work together to stave off overproduction and make the cannabis industry more sustainable.