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State Cannabis Regulations Lead to Imbalances in Supply and Demand

The laws of supply and demand are imbalanced in the cannabis industry across multiple states in the United States and Canadian provinces. As a result, many markets face cannabis oversupply or undersupply problems, and much of the problem can be attributed to each state’s regulatory framework for legal adult-use and/or medical marijuana.

The laws of supply and demand are simple. When consumer demand and commercial supply balance, all consumers get the products they want and businesses have an opportunity to maximize profit. If demand outweighs supply, consumers don’t get what they need and businesses don’t make as much money as they could if demand was met. If supply outweighs demand, businesses will be left with unsold goods that equate to lost revenue.

In a free market system, supply and demand should be self-balancing, but when you mix in regulations that restrict production and sales, supply and demand imbalances are more likely, which is what we’ve seen happening in both the U.S. and Canadian cannabis industries.

Regulation Leads to Cannabis Undersupply

The demand for medical and recreational cannabis continues to rise, but in some areas of the U.S. and Canada, the supply of cannabis can’t meet the growing demand. As a result, prices may increase, consumers may have to travel long distances to get the cannabis products they need, and many consumers may turn to the black market to buy.

For example, Canada opened its adult-use cannabis market on October 17, 2018, and within hours, some stores across the country were having supply problems. After the first few weeks of operation, it was clear that Canada’s cannabis market was facing a product shortage that would last a very long time. The province of Quebec opted to close its stores for three days per week, while Alberta stopped issuing retailer licenses, and Ontario limited the number of store licenses to just 25.

One of the biggest factors causing the cannabis shortage in Canada was regulation. The amount of time to obtain a license to grow marijuana in Canada’s legal market was excessive with some cultivators waiting months or even a year. Once a grower obtained a cultivation license, it needed to produce two full crops, have them tested, get its sales software audited, and apply for a sales license, which could take another year.

Some industry professionals believe the cannabis supply problems in Canada will take at least 12 months to correct while others believe it could extend to 24 months.

Michigan also faced a medical marijuana shortage in January 2019 when new regulations went into effect requiring that dispensaries only obtain cannabis from licensed commercial growers. However, the state doesn’t have enough growers and processors to meet patient demand.

The problem escalated quickly when patients couldn’t access the medicine they needed. As a result, the governor and director of Michigan’s Department of Licensing and Regulatory Affairs asked the state’s medical marijuana board to allow dispensaries that had been operating under temporary licenses to reopen with supply obtained from caregivers (as they had been doing in the past).

This is just a temporary solution to solve the undersupply problem in Michigan. The state still needs to change regulations to ensure demand for medical marijuana is met in the future.

Undersupply is also a problem in Pennsylvania. When the number and types of qualifying medical conditions increased there was a jump in physician-certified patients in the state from 70,128 to 161,273 between January 1 and September 1, 2019. Despite the growth in patients, the amount of cannabis produced during the same time period didn’t change.

Pennsylvania did license additional growers in 2018, but until they’re operational (possibly during the fourth quarter of 2019), there will be a cannabis shortage.

Production isn’t the only thing that can cause supply problems. In California, a different type of shortage happened in 2018 when new testing regulations passed and there weren’t enough licensed testing facilities to handle the required testing. As a result, retailers weren’t able to meet the demand of the state’s growing recreational cannabis market.

Regulation Leads to Cannabis Oversupply

The problem of cannabis oversupply in Oregon begin in 2017, and by the end of 2018, an abundance of cannabis drove prices down and profits with them in the legal cannabis market. As a result, many licensed businesses had to close. Most of these businesses were small without the capital needed to withstand significant losses in sales for an extended period of time.

One of the primary factors causing Oregon’s oversupply problem is regulations. Many people believe the state’s regulations allowed for the approval of too many cultivator licenses without canopy size limits. In January 2019, the Oregon Liquor Control Commission reported that the state had enough cannabis in dispensaries, processing plants, and warehouses to meet demand for six years.

Both Washington and Colorado experienced similar oversupply problems in recent years. To stop the problem from getting bigger, both states stopped issuing cultivator licenses.

According to the Cannabiz Media License Database, the number of cultivator licenses issued in Oregon during 2018 increased by 26% over the number issued in 2017 compared to a 1% increase in Washington and 1% decrease in Colorado.

To help solve the oversupply problem, Oregon enacted legislation in 2019 that allows regulators to stop issuing new production licenses when supply exceeds demand.

Colorado uses a different approach to avoid oversupply of cannabis by issuing five tiers of production licenses based on the number of plants the cultivator is allowed to grow (1,800 plants to 13,000 plants). Every cultivator starts with a tier one license and can only move up to the next tier if they can prove that they sold 85% of the crop they grew in the previous six months. Those that can’t prove they sold 85% may be dropped to a lower license tier.

Balancing Supply and Demand in the Cannabis Industry

Clearly, it will take some time for regulators in the U.S. and Canada to solve their cannabis supply and demand problems, but states and provinces can learn from each other. Consider Oklahoma where a very large number of licenses are being approved. How will this affect supply and demand? Is an imbalance the likely result? Only time will tell.

It’s quite possible that states with cannabis shortages might need to learn a lesson from Nevada where supply problems after the launch of its adult-use market led the governor to declare a state of emergency, which allowed more applicants to apply for licenses to open the supply chain.

Oversupply problems are a different matter entirely. This year, Oregon’s Senate Bill 582 allows the governor to enter into agreements with other states to export cannabis. While interstate transportation and commerce in the cannabis industry is still illegal at the federal level, many people believe that removing this barrier could open the market and allow efficiencies, competition, and pricing to evolve freely and supply and demand to self-balance.

Key Takeaways about Cannabis Supply and Demand

The lesson to take away is this – states might be making their own rules, but they don’t have to operate in regulatory silos. In other words, states developing marijuana programs shouldn’t repeat the mistakes made by other states.

Eventually, marijuana programs will run smoothly across the U.S. and Canada, but until then, the problem of supply and demand imbalance is still very real.

Originally published 1/30/19. Updated 10/10/19.

Susan Gunelius, Director of Email Marketing Strategy for Cannabiz Media , is also President & CEO of KeySplash Creative, Inc. , a marketing communications company offering, copywriting, content marketing, email marketing, social media marketing, and strategic branding services. She spent the first half of her nearly 30-year career directing marketing programs for AT&T and HSBC. Today, her clients include household brands like Citigroup, Cox Communications, Intuit, and more as well as small businesses around the world. She has been working with clients in the cannabis industry since 2015. Susan has written 11 marketing-related books, including the highly popular Ultimate Guide to Email Marketing for Business, Content Marketing for Dummies , 30-Minute Social Media Marketing , Kick-ass Copywriting in 10 Easy Steps , and she is a popular marketing and branding keynote speaker. She is also a Certified Career Coach and Founder and Editor in Chief of Women on Business , an award-winning blog for business women. Susan holds a B.S. in marketing and an M.B.A in management and strategy.

Why Is Legal Weed So Expensive? Low Supply, High Demand And Big Tax Driving Chicago’s Pricey Pot

Officials say prices will come down when supply catches up to demand. But for now, some buyers are treating legal weed like a special bottle of whiskey.

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CHICAGO — On Saturday, Ivano Ipsaro Passione braved the snow to wait in a long line at NuMed dispensary in Bucktown, picking up a peanut butter edible bar and a vape cartridge for $78.

But there’s something else Passione picked up he wasn’t planning for: a hefty $26.37 tax on his bill. Like other dispensaries, NuMed doesn’t itemize the various taxes consumers pay, making them confusing to compute.

Illinois’ steep weed taxes, combined with already high cannabis prices tied to a dwindling initial supply, has some people keeping their street dealer on speed dial.

But dispensary owners, market analysts and legislators who crafted the state’s weed bill all are urging patience, saying the prices will come down.

Dispensaries have asked customers to check social media to learn whether their favorite shop has enough legal weed to sell before stopping in. Outsized demand, limited supply, high taxes and Illinois’ quick on-ramp from a small medical market to full legalization are contributing to the high price.

Illinois’ legal weed prices are higher than any other state across all products, said Andy Seeger, cannabis research manager at the Brightfield Group. The sticker shock of Illinois’ legal weed will allow street dealers to stay in business, he said.

“This should drive some people back to their weed man. There will always be a black market and we’ve seen this in other places with governments that need to fine tune their tax structures,” he said.

Part of the issue is that Illinois wasn’t fully developed as a medical marijuana market before recreational cannabis was rolled out, Seeger said. Where patients in other states could get a medical card for anxiety or insomnia, the list of conditions to qualify for a medical marijuana in Illinois was much shorter — leading to less available supply in the state. Expansions have been made to the state’s medical marijuana program since then.

“We’re kind of stuck in this situation where there is a product shortage. We’re caught in the middle of December in Illinois, trying to grow enough product for a very large amount of demand,” he said.

Kris Krane, president of dispensary Mission South Shore, 8554 S. Commercial Ave., said cultivators in the state were hesitant to invest in and expand their facilities because there was uncertainty that legal pot would pass.

“These cultivators that built out their cultivation infrastructure to meet the demands of the medical market … very few started expanding their cultivation facilities before the law passed,” he said.

Currently there are fewer than two dozen cultivators in the state. Expanding their facilities to meet the legal demand could take many months and millions of dollars. In the meantime, cultivators have all of the bargaining power to set wholesale prices.

“You’re just not going to see a huge change in those retail prices until those wholesale prices start coming down,” Krane said. “Right now wholesale prices here are as high as anywhere I’ve seen in the country.”

But Seeger predicts the high prices won’t stick around.

“Hopefully in the coming months, we’ll see a little bit of a reduction in shortage as well as a reduction in price,” he said. “By the end of the year, we should absolutely see a reduction in price.”

Customers have bought up more than $19 million in weed products since weed went legal, according state sales figures released Jan. 13.

Kris Krane, president of Mission South Shore. Justin Laurence/ Block Club Chicago

‘Growing Pains’

Budzu, a website popular with weed consumers, allows people to anonymously enter the price they pay for pot, legal or off the street. The crowdsourced site puts the street price of an eighth in Chicago at $40 for “medium” quality weed and $70 for a similar quality at a dispensary, although there has been less time to collect data on dispensary sales. Popular flower products are $60 before tax, according to a few dispensary websites in Chicago.

In Washington and Colorado, which began selling recreationally in 2014, an eighth of weed costs considerably less — $28 at the dispensary and $21 on the street in Washington. In Colorado, it’s $31 at a dispensary and $26 on the street, according to the website.

Seeger said those prices track with what he’s seen.

“Right now we’re more than double other states that I’ve seen and, you know, some states are incredibly cheap, but the average of what I’ve seen we’re roughly double that,” he said.

At NuMed, one customer named Kyle said he’ll shop at dispensaries for edibles and other products, but he’s hesitant to buy flower there.

“It’s kind of dope that you can choose the feeling that you want, and for that I think I’d pay an extra price. I don’t know what the price is for flower right now, but I’ve heard some outrageous prices and if it’s gonna be as outrageous as $75 for an eighth [including taxes], I don’t know if I’d shell out that much,” he said. “…If you’re to get it on the street out here, it’s usually like $50-$60 bucks.”

Flower sales account for 50-60 percent of all legal weed sales, said Seeger and Krane. Krane said flower is what initially brings a lot of customers in the door because it’s what customers are most familiar with.

Once the price of legal weed — a price that includes taxes — is comparable to the street market, “that’s when I think we’ll see a real massive movement of consumers from the illicit market to the legal,” Krane said.

“I think when it gets to about $50ish [for an 1/8th ounce of flower] all in that will probably have a significant impact,” he said.

State Rep. Kelly Cassidy (D-Chicago) said high prices were expected.

“We know that it takes about five years to get to market maturity,” she said. “When we talk about the market maturing, that’s people habituating into the legal market as opposed to the street market, but that’s also supply issues leveling out, that’s producers and retailers …getting into a groove. That’s what we’re watching play out now, is those growing pains.”

Inside Mission South Shore. Justin Laurence/ Block Club Chicago

A Complex Tax System

When Chicagoans buy legal pot, they are hit with hefty taxes that can be difficult to understand.

Legal weed is taxed based on its level of potency, measured by THC in the product. Products with THC level at or below 35 percent are subject to a 10 percent tax. Products with a THC level above 35 percent are taxed at 25 percent. All cannabis infused products, like edibles, are taxed at 20 percent.

Those rates are in addition to local and state sales taxes, which is a combined 10.25 percent in Chicago. And in July, an additional cannabis tax of 3 percent will take effect in Chicago. Cook County could also tack on another 3 percent tax, as the proposed county tax is currently being considered by the Board of Commissioners.

So, customers who buy a high THC product from a Chicago dispensary right now are hit with a 35.25 percent tax. In July, that tax could soar to 41.25 percent.

When a weed grower sells to a dispensary, that transaction is also taxed at 7 percent, meaning the increased cost could also be passed through to dispensary customers.

Lucy Dadayan, senior research associate at the Urban Institute, said Illinois taxes weed in a unique way. Most states with legal weed tax products based on price or weight, while Illinois taxes based on level of THC.

State Sen. Heather Steans (D-Chicago) said whether high taxes are motivating people to buy from their street dealer instead of a license dispensary will be studied.

“This is going to be a program that’s continuing to be evaluated as to what tweaks and changes we need to make to it,” she said.

Cassidy also said the tax structure will be monitored.

“Whether we have to go back and reduce [taxes] or if this levels off as prices go down,” will be looked at, Cassidy said.

Tax structures and rates vary in the eleven states that have a recreational cannabis program. Dadayan’s October 2019 study notes that taxes often change after a state’s marijuana market first opens.

When Washington first began taxing sales in 2014, the state had a complex, tiered structure similar to Illinois. A year into the program, Washington scrapped that for a simpler, 37 percent retail excise tax at dispensaries.

Oregon voters also approved a complex tax system, but before sales began, lawmakers replaced the structure with a 17 percent retail excise tax. Local municipalities may also impose up to a 3 percent tax on purchases, according to the study.

Dadayan said many people point to Colorado as a model for taxation, but she stressed there’s no perfect example. Colorado’s legal weed is exempt from its general sales tax and is subject to a 15 percent retail sales tax.

In Michigan, taxes are also low by comparison — a 10 percent excise tax and 6 percent state sales tax.

Krane, who’s Mission South Shore location could compete with Michigan for northern Indiana customers, said Michigan is having issues with their legal roll out as well.

“Michigan is having its own problems. Michigan has a flower crisis right now,” said Krane, whose 4Front owns a stake in an Ann Arbor dispensary. “…Sales numbers in Michigan are way lower than you would expect because flower drives sales.”

The line at Mission South Shore dispensary on New Year’s Day. Justin Laurence/ Block Club Chicago

Where do the taxes go?

Chicago does not have a dedicated fund for its tax revenue. Paul Stewart, Mayor Lori Lightfoot’s cannabis advisor, told City Council the city’s take could range from $3.5-10 million in Year One.

The state will divide cannabis tax revenue into a number of different pots:

  • 35 percent goes to the General Revenue Fund
  • 25 percent to the Restoring Our Communities Fund for community reinvestment departments
  • 20 percent to a fund that will support mental health and substance abuse services
  • 10 percent to the Budget Stabilization Fund to pay a backlog of unpaid bills
  • 8 percent to the Illinois Law Enforcement Training and Standards Board to create a law enforcement grant program
  • 2 percent to the Drug Treatment Fund to fund public education and awareness

The Illinois Department of Revenue projects the state will raise more than $57 million in revenue and licensing fees in the first year of sales. As the market matures, it projects the state could collect $375 million in 2024. A fully mature market could produce between $440 million and $657 million in tax revenue for the state annually, according to a study commissioned by the sponsor of the state’s legal weed bill.

But revenue projections don’t always materialize, Dadayan said. As more states legalize weed, states like Illinois will lose out on potential tax dollars from weed tourism.

“You have to consider that more states are going to enter into the market, so things are going to change. I think the revenue projections are always quite optimistic,” she said.

A line outside NuMed. Justin Laurence/ Block Club Chicago

‘A Big Tax, Man’

As buyers wait for supply to catch up to demand, the market to mature, or for taxes to be reduced, some have come up with a compromise.

Edward Burns has been to Dispensary 33 twice since recreational sales began. He said he and his girlfriend spent about $350 on products on New Year’s Day. He didn’t know exactly what he paid in taxes that day, but said “yeah, that was a big tax, man.”

Despite the high price, he went back again on Wednesday.

“I just got an eighth of ‘superglue’ which costs $80 with taxes. I spent $80 on an eighth when I usually spend $40 on a quarter, but the stuff is a lot better. It is much, much better, like world’s better,” he said.

Going forward, he said he’d treat dispensaries as a luxury item.

“It just depends if you have the money, if you want to celebrate. It will be, it’s more of like when you get an expensive bottle of whiskey for the holidays versus when you get a bottle of Jack, or whatever,” he said.

Saturday at NuMed, Joey Moreno, a barista living in Lakeview, said the Bucktown dispensary was the second one he’s been to since recreational weed sales began. He said he likes the dispensary experience because he “likes a trustworthy product,” but he said at the moment legal weed comes with a luxurious price, so he’ll treat it as a luxury item.

“To me it’s gonna be like one of those little gluttonous things that, you know, if I have a little extra money in my pocket that week I’ll stop in the store and pick up some stuff,” he said.
Moreno doesn’t know if he’ll fully transition to buying on the legal market.

Buying from his weed dealer is cheaper and more convenient, after all.

“You know, most people have been buying from their third floor walk-up neighbor … and they’ve been hooking them up for years,” he said. “So of course those people, probably myself included (aren’t) going to give up on that.”

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Why Is Legal Weed So Expensive? Low Supply, High Demand And Big Tax Driving Chicago’s Pricey Pot Officials say prices will come down when supply catches up to demand. But for now, some buyers are