Disruption – The Weed Market in Oregon

Oregon allows recreational marijuana. Originally, there were laws limiting growers to local Oregon companies (when it was a medical marijuana industry) which were effectively eliminated when the transition was made to recreational usage (allowing out of state funding). There was also a relatively small local market for growing cannabis.

Dispensaries cropped up everywhere, even in seemingly small, out of the way tourist towns with only a few hundred souls. It seems that you can’t go far without seeing the “green cross” that symbolizes a marijuana dispensary. Unlike other states, Oregon apparently allowed anyone who met basic criteria to open a “weed store”.

While it surprised many of the locals who curated their wares and made custom strains of local cannabis, the free market reared its head and drove down prices on effectively undifferentiated product and storefronts. From the local WWeek newspaper:

A gram of weed was selling for less than the price of a glass of wine… we have standard grams on the shelf at $4… before we didn’t see a gram below $8… Wholesale sun-grown weed fell from $1500 a pound last summer to as low as $700 by mid-October.

As a result of this, there is significant consolidation in the market as smaller growers either bow out or are bought up and dispensaries are being purchased by large groups (often vertically integrated with growers) at fire-sale prices.

(the) Oregon cannabis industry is a bleak scene: small businesses laying off employees and shrinking operations. Farms shuttering.

One farm profiled in the article went into growing weed with the expectation of selling at $1500 a pound; when they finally had to liquidate most of their crop at a weed auction, they only received $100 a pound.

The entire Oregon recreational cannabis industry has played out exactly as you would expect in a market with few barriers to entry and a relatively undifferentiated commodity:

1. Suppliers rush in to take advantage of high prices for crops, turning what was originally a weed shortage (and resulting scarce supply) into a huge spike in supply which in turn drove down wholesale prices to almost nothing on the margin

2. Retailers who have little or no differentiation are being driven out of business by low profits or being forced to run at a loss

For me the interesting part of this is not the plain execution of basic market economics (in an industry with low barriers to entry, prices will drive down to near marginal cost of the most efficient operator), but in what that means to “adjacent” industries. For example, if a gram of (high quality) weed is the price of a single glass of wine (actually a lot less at $4… that is probably 1/3 of the price of a glass of decent wine at a standard restaurant), will customers switch from beer or wine to cannabis? From an economic perspective (cost / buzz) this would be a relatively clear-cut choice. Over time economists should chart the impact of low cannabis prices on both prices and consumption in adjacent alcohol industries.

Cross posted at LITGM

30 thoughts on “Disruption – The Weed Market in Oregon”

  1. One cannot reduce economic insights into equations which have exact precision, probably not even equations that have “fudge factors” obtained by trial and error. But the general observations of economic insight will nonetheless prove reliable in the process of time.

    Lots of people who either scorned Adam Smith or never heard of him will end up with costly experience teaching them basic economic ideas. I, for one, chuckle at the thought of a bunch of toked-up folks with a socialist utopia bent learning what happens in a free market.

    But I don’t chuckle at all about what will happen in the social/civil/law arena.

    Our legal system nearly across the board, no matter the specialty or focus, has rejected restitution grounded in responsibility, where people are required to make right what hurt they do. Thieves do not pay back, including costs for lost resources and time in finding and prosecuting them. Instead, they do time. At victim’s expense. The costs of crime transfer from meanies to victims. And, further, meanies may never gain the standing of having cleared their debt.Sad irony. Drunks do time. And inspire MADD to agitate for all sorts of restrictions on everyone which still leave the damage drunks cause unrepaired. The tax upon drinking does not even make a dent in its costs to society (read: not only deaths and injuries and damages from DWI, but families, children, time lost on jobs, work related injuries). Meanwhile the tax simultaneously transfers the cost of the drunk to those who are responsible drinkers.

    Hemp legalization economics will have the same features. Folks may debate the physiological effects, short term and long term, everything from increasing the probability of actions which harm others’ lives to the very real chemical influences of hemp on genetics. They may debate the cost vs benefit question, where medical uses of hemp very likely provide far better alternatives. But none of the laws will demand responsible use. Instead, they will transfer costs to others than those producing hemp, marketing it, using it.

  2. Weed will never replace liquor at any price anytime soon. What differentiates different beers, wines, and spirits are craftsmanship, marketing, packaging, and, possibly most important of all, the culture that develops around certain products. Marijuana producers, first of all, are too dopey to compete on those levels. Maybe they can compete with cheap beer, but they would need to step up their advertising and lobbying efforts.

    The problem on the high end is the fundamental disadvantage getting stoned has compared to drinking. You drink single malt scotch or fine wine and experience and recognize the nuances of tastes and flavors and textures. This isn’t only a great sensory experience, but it also encourages and develops discernment and perspicacity.

    As Roger Scruton wrote in his book, I Drink Therefore I am, “Wine is not just an object of pleasure, but an object of knowledge; and the pleasure depends on the knowledge… it paints the world before us as the true one, and reminds us that if we have failed previously to know it then this is because we have failed in truth to belong to it, a defect that it is the singular virtue of wine to overcome”

    High end weed is smoked for potency. The users judge quality by how well it makes them stupefied, so the product’s connoisseurs get dumber and dumber with each encounter. The experience is extra-sensory and puts the user out of touch with reality. It leads to either a false sense of knowledge, or some silly insight that won’t apply to anything back on Planet Earth upon sobering up. I know the stoners like to point to Carl Sagan or JFK or somesuch historical figures, but there is very little to actually hang your hat on with those anecdotes. How productive or groundbreaking they were while actually impaired is up for debate, but we can be sure they were smoking something far less potent than what is available now.

    In conclusion, if used properly, spirits unite and educate and enhance life. They are truth.
    Marijuana closes a person up inside their diminished intellect, ultimately creating idle invalids. It is a hollow cavern.

  3. Marijuana legalization is going to have catastrophic social consequences. You know why so many people are busted for pot? Because roughly 100% of petty criminals have pot on them at all times. “Oh, well, I’m a bigshot lawyer and I like to smoke a blunt occasionally so obviously weed is totally harmless.” Great, good for you, similar logic led upper class twits to destroy marriage, and look what’s happened. Our society is too stupid to survive. Literally.

  4. I don’t get why smoking pot is cool and free and a personal choice, where tobacco smoking is terrible for you and must be totally eradicated from the face of the earth. At least you have a filter on (most) cigarettes.

    I was recently in LA and stopped by a pot shop because I had never been in one. Were my eyes opened. Sure, there were your typical stoners and hippi types looking over all of the different types of weed (they had the menu on ipads and samples you could smell). But also, the marketing was very good. It was like going into a modern coffee shop. The help was very knowledgeable and security was tight.

    The array of products was mind blowing. They had everything from chocolates to drinks and everything in between. The staff was knowledgeable and was willing to spend time with a novice like me even though I told them I wasn’t going to buy anything and that if they were commission based they should talk to someone else.

    I think the real cash cow will be these other products that they are teasing out of the chem labs, not just plain old weed.

    But what do I know – I plan on consuming zero of these products ever.

    I don’t think you will ever see a booze to pot products move except in the lowest tiers of society – those looking for the cheapest buzz as you noted.

  5. High end weed is smoked for potency.

    Don’t illegal-drug suppliers generally compete on potency? Isn’t that what alcohol bootleggers did? The reason is obvious. Perhaps now that the stuff is becoming legal market competition will be more along the lines of increasingly creative derivative products as Dan suggested.

  6. I believe the edibles are more potent than smoking. When you hear about overdoses, it’s usually from eating the stuff. It apparently goes to your head faster. We have had an ongoing debate in our town about posting drug-sniffing dogs at the high school because it’s claimed that kids are bringing these treats to school. Edibles being so easy to consume, the youth market is an obvious target.

  7. There is a definite attempt to “uplift” the Portland pot scene. There are articles on different strains and a big effort to differentiate product. This also happens in Denver and other places that have legalized for a while. They were trying to get after the spirits you reference above.

    In general all these failed when there was a supply glut and prices plummeted. Obviously the efforts to differentiate weren’t enough to keep those stores and growers intact. Good enough is apparently good enough.

    California must regulate weed differently. Maybe I will look into that. Oregon is almost pure free market now. If they let anyone grow in California and anyone open a shop likely prices would plummet too and it would be more of a commodity.

    If I was a younger kid dope or pills would be much more appealing than booze, especially edibles. It takes a lot of booze to get you drunk and you smell and it is easy to get a DUI. It is much easier to conceal being high on edibles or pills or if you vape because you can’t smell it and it likely is WAY more cost effective.

    The habits we exalt in as we are old are often developed when we are kids out of necessity. There will likely be a new generation with much, much different preferences.

    Hell Miller Genuine draft came out with an 18 pack that was cheap when I was in college (with 6 more beers for the same $$) and I drank that crap for years. This is why advertisers want to hook em young – habits are hard to break.

  8. It is interesting that so many people repeat the phrase, “legalize it then tax it”.

    High taxation replicates incentives to criminal behavior that legalization is intended to eliminate. Thus in states such as NY with high cigarette taxes there is rampant smuggling by organized criminals, with attendant police corruption and violence (eg, Eric Garner).

    CA may go down this road with weed, partly due to ignorance by legislators and partly due to their greed for tax revenue.

  9. I think legalization will be a safer alternative.

    The taxing thing is probably going to help crime and California is closer to Mexico than Oregon so that will be a factor. I’ve heard that the weed growing areas of northern CA are dangerous places to go hiking since the owners have low tolerance for strangers.

    Fortunately, I no longer have to concern myself with California except an occasional visit to family.

  10. “Weed will never replace liquor at any price anytime soon. What differentiates different beers, wines, and spirits are craftsmanship, marketing, packaging, and, possibly most important of all, the culture that develops around certain products.”

    Well in BC the dispensaries have gone full commercial. There are all kinds of products from various weeds, with their brands, becoming established and oils and extracts of many different types, cunningly packaged and displayed in the expansive displays they have. Its not up to the booze level of marketing but getting there fast.

    Its very funny. It will be legal here soon and the massive buy in by all kinds of people looking to make serious money producing weed, has resulted in massive oversupply. We actually had all the damn weed we wanted already, and the companies that have the government’s blessing are already pushing for export licensees, as this become apparent.

    So weed is about $1100 a lb here now, down from $1800 a couple of years ago. At that price legal, with its taxes and other costs, cannot compete. No way in hell, and its going to be just hilarious watching that whole thing come apart.

  11. “I don’t get why smoking pot is cool and free and a personal choice, where tobacco smoking is terrible for you and must be totally eradicated from the face of the earth.”

    I have watched 2 people die from COPD, from smoking cigarettes. I have not seen anyone with health problems from weed.

    Now I squeeze the resinous substance from my weed, with a little heat and pressure. Then I vaporize that on a rather expensive titanium electric nail.

    There are no products of combustion at all. That’s a huge difference for a human. Its the nitrites etc that hurt you and destroy your lungs.

  12. …will customers switch from beer or wine to cannabis?

    I certainly hope so. I have plenty of (decades old) experience ingesting both and know that I’d much rather share the road with a stoned driver vs. a drunk driver. Stoned drivers might be stupid, but drunk drivers are both stupid and aggressive.

    There are some indications in CO that younger people are substituting pot for hooch. That’s a good thing.

  13. I’ll take mild exception to Grurray, The reason that we see overdoses from edibles is because the slower absorption through the G.I. tract delays the sensation of the “high”, leading to higher consumption, but once begun, is inexorable. You’re going to experience every milligram on its own timetable with no way to shut it off. Toxic is part of intoxication for a reason.

    There is exactly zero reason to believe that drawing the combustion products from weed deep into the lungs will be in any way less devastating than from tobacco. I expect that a few years will see plenty of evidence.

  14. “You will. It is more toxic when inhaled than tobacco.”

    Well I and my friends have been using it for 50 years now. When will we start to see this?

  15. Really, it does. I have been growing my own for that long. I don’t actually buy the stuff, never have, but I have very nice stuff to vaporize. You know a bathtub is all you need. ;)

  16. Actually, i would expect some market differentiation into both “organic” and “gourmet” weed, especially on the snobby Left Coast, where “organic” farming should make for a strong, non-trivial niche market. Specific strains of weed from various places, and soils, woukd likely crop up, especially as various other states legalize it.

  17. Roy, I would question your claim that taxes on alcohol are insufficient to pay for the damage alcohol does. I haven’t…ahhh… “Ginned Up” any numbers, but I’d bet that IF THEY WERENT FED INTO THE GENERAL SLUSH PILE, but instead were first required to be used for restitution, incarceration, and liability, they could readily be up to the task….

    But don’t ever expect that approach to taxes before a new Revolution…

  18. OBloody, your “ginned up” pun puts it well. Thanks for the chuckle. But *insert appropriate caveats here* google is our friend. One can quickly find not only the cost to a driver for a DUI (the diversity from locale to locale instructive), but a host of sites that make an attempt at that ginning. Quickly one realizes: 1) Nobody knows; there exists a range of ways to think about the calculation of costs and thus a huge range in results, and no clear way for precision. But, 2) Taxes on alcohol amount to at least one, probably two orders of magnitude less than the social costs alcohol creates.

    As to 1): Consider some of the painful questions (painful because OBH notwithstanding, you actually care about other people). How much responsibility do you have for the kids of drunk parents not even in your same neighborhood much less known personally? Is it fair that you receive less pay because the company you work for has significantly less productivity on account of drinking? You don’t think drinking inherently wrong, enjoy various adult beverages yourself, have enough awareness even to discern between various options, but never allow drinking to put others at risk, never allow drinking to diminish your performance at work. Why should you suffer for Fred showing up late? For Susy being slow and making mistakes? Etc.

    Put another way: what constitutes a legitimate social cost (= a load we should corporately carry vs something which is an individual’s responsibility). Combine that with questions about how we might best do that carrying. FWIW, I’d argue that no perfect system exists, that people are finite, limited, and not always nice, but nonetheless #socialismisevil, the socialism paradigm always brings more hurt than the help it provides, that voluntary charity best serves as it directly involves people caring for people.

    Your “fed into the general slush pile” observation also puts it well. It angers me that taxes on fuel don’t support highways, but get diverted to other purposes. It saddens me that people tolerate (read vote for) politicians who do the diverting (= concealing their vote buying activity, using government to steal from one group to give to another group). Taxes on alcohol (including on its manufacture, its sale, its purchase at bars and restaurants) do get diverted. Granted, part of the problem is a matter of accounting. But not the majority of the problem.

    But even if there were no diversion, direct taxes still are not high enough to cover the costs.

  19. Yes, Roy, there are so-called “social costs” of alcohol and alcohol taxes don’t cover all of that. So what? And what is your alternative? Prohibition, again?

    ALL activities have “social costs”. Are we supposed to tax EVERYTHING to cover for their “social costs”? The very premise of your argument assumes that is an appropriate use of government power. I disagree strongly.

    In this thread, I also detect a rather significant lack of knowledge of the marijuana subculture that has long existed in the United States. I have to side (somewhat) with PenGun on this issue. If your experience of marijuana is limited to Cheech and Chong or Jeff Piccoli (Fast Times at Ridgemont High), then you have no idea how marijuana is actually consumed now and by whom. Gruray, would it be fair to conclude that since you are a drinker, you behave like Foster Brooks?

    Now that marijuana is coming out of the closet, the number of products, vendors and research into marijuana edibles is exploding. Go into any Bay Area dispensary and you’ll find detailed breakdowns of THC-A, THC-B, CBD and CBN content for all of their products and clerks who will help you find the effect you desire. The interaction of the cannabinoids in different percentages produces radically different psychoactive effects. Some combinations are calming, others produce euphoria, some are good for pain management, etc. Indicas are different from Sativas, and since marijuana hybridizes easily, there are new hybrids produced every day. We’ve only just begun to explore all the dimensions of its effects. And, of course, the number of edible products is simply exploding.

    It is ignorant in the extreme to claim that marijuana consumers are simply brain-scrambled addicts only interested in maximum “buzz”. Is 190-proof EverClear the #1 seller in most liquor stores? I find the average marijuana consumer to be far, far more selective (now that they can be) than the average wine consumer. They have far more reason to be, since the effects can be much more variable (i.e., it is not just the taste that varies). And it won’t be long before the marijuana industry has it’s own share of pretentious posers like the wine, whiskey, scotch and (more recently) vodka industries.

    Personally, I have had issues with alcohol. But I gave up both alcohol and marijuana years ago. Physically, mentally and emotionally, alcohol was far, far more devastating than marijuana. I NEVER woke up after a marijuana bender and regretted what I had done. Can’t say that about alcohol. My worst marijuana episode was not as debilitating as even one of my mild drinking episodes. Although I drank and used MJ extensively, I never felt MJ was negatively affecting my life. Not so with alcohol. I quit MJ mostly because it was too closely associated with drinking and I absolutely had to stop that.

  20. Carl, great post!

    California marijuana market will be very different. It is much, much more regulated, controlled and it is taxed at a much, much higher rate. California requires a much more extensive approval process, requiring specific enabling and taxing legislation in each locality and then a lengthy permitting process. Being California, most localities impose highly restrictive regulations, sharply limit the number of dispensaries and rake in high taxes
    (averaging around 35% in the Bay Area).

    Many of the large illegal growers in California have said they will NOT try to become legal. The regulatory costs and taxes (and the ongoing Federal insanity) make it profitable to do so. California will continue to be fertile ground for a marijuana black market. The California system is only a few months old, but it has already put pressure on black market prices, although not nearly as much as in Oregon.

    It will be an interesting real-world economics experiment to see how these two very different approaches work.

  21. Scott, it appears that I relied too much on readers understanding what I did not expand upon. That may explain why it seems you have misunderstood my concern.

    I do not champion prohibition. History regarding alcohol helps see how that approach fails, and for multiple reasons. Here are two: 1) It did not work to accomplish the stated objective of eliminating usage. Both your post two above this and your post immediately above this one provide stunningly clear evidence that prohibition won’t work with MJ either. 2) The stated objective was not actually defensible. Not for medical reasons, not for social reasons, not for moral reasons. (I’ll not expand on these three except a possibly too cryptic observation on the third: the argument that the Bible condemns per se drinking alcohol has no truth as is immediately evident by noting Jesus’ providing 80 plus gallons of wine for the wedding feast recorded in John 2. Whatever is going on, whatever the position his action commends, it ain’t prohibition. Further expansion available in response to specific questions.)

    But I do champion responsibility. Personal responsibility. You cause hurt, you fix it; you make a mess, you clean it up; you open a drawer, you close it. The exact paradigm we (should) teach to children. Of course that cannot always work. The paradigm faces limits hinging on factors ranging from the trivial of children having a learning process thru more serious of others needing to help fix something all the way to the catastrophic of “Your DWI killed somebody”. In the case of alcohol (and MJ, too, the point of both my first and second post), society to the extent possible (hint: that “extent possible” warns of complexity) must insist that users themselves bear the cost for their actions, not taxes others. Drive while drunk rather than take steps to have someone else get you home? No sweat: you get caught, that car is gone. Doesn’t matter if your friend loaned it to you. Hurt someone? You are responsible for their bills. Don’t have resources? You have just sold yourself into servitude.

    The taxing response shifts the burden to others. Don’t like the idea of servitude? Go learn about what actually goes on in your local jail or in your state’s prisons, which effectively do at minimum three things I hope you join me in despising. First, the victim pays for it. Second, any gain from it goes to the government. Third, the victimizer is effectively kept from being able to do anything to restore the victim, so that both suffer further, the victim by not receiving recompense, the victimizer by remaining in debt.

  22. Roy, I was just kind of poking you to get you to clarify :). We mostly agree.

    As I disagree (strongly) with Christianity’s entire metaphysical, epistemological and ethical system, I’ll leave the discussion of biblical injunctions to others. However,…

    “But I do champion responsibility. Personal responsibility…” Fantastic paragraph. Agree 100%. Much of the Left’s attack on our system has consisted precisely of dissolving the connection between personal actions and their consequences. Whether it is “you didn’t build that” (said of the productive) or “he couldn’t help it” (said of most criminals), the connection between individual action and consequences MUST be destroyed. The Left’s project to re-make America can NOT succeed as long as individuals are free to move and act on their own. ALL elements of individualism must be wiped out, especially the most fundamental of all–that actions have consequences. ALL must be made to feel guilt. ALL must be incorporated into the anonymous, undifferentiated mass with “…one neck ready for one leash.”

  23. Yes, I’m familiar with CBD and have seen its use. It’s my conclusion that it may have some beneficial anti-nausea and sedative effects depending on the quality of the products, but quality seems to be very inconsistent. Otherwise, I would say it’s a waste of time and money. People who are really sick won’t get much use out of it. Others using it who have mild afflictions of some sort or the other are feeling placebo effects, and they would be much better off improving their diet and exercising more.

  24. “I do not champion prohibition.”

    I would favor drug legalization with the exception of cocaine, which makes people hyperactive and paranoid.

    The “designer drugs” are also very dangerous and it will be impossible to prevent them.

    Heroin has been the bogeyman for over a century but it is pretty harmless as a drug when pure.

    When the Harrison Narcotic Act took effect on doctors in 1917, Johns Hopkins the most prestigious hospital for OB, was allowed to use existing stocks of heroin for labor pain and these lasted into the 1930s. It is obsolete now because of epidurals but it was the best drug for labor pain and was still banned. I know of no evidence that any woman became addicts as a result of its use.

    I am not in favor of taking such drugs and have never used marijuana once but I don’t think making them illegal does much good. Cocaine was successfully suppressed in the early 1920s by social disapproval and that kept the use low for 50 years. I remember patients asking me if it was dangerous in the 1980s. It was largely considered harmless by many middle class people.

    Social disapproval no longer works.

  25. Scott:glad to read not only of your agreement with part of what I wrote. I also appreciate and agree with your remarks in your concluding paragraph in which you expand upon a paradigm which denies personal responsibility.

    Mike: two of your comments well summarize my generalized take on puzzles of the originating post. “I don’t think making them (such drugs and MJ) illegal does much good.” And, “Social disapproval no longer works.”

    Of course I confess to a bit of astonishment when I think of the latter vis a vis cigarettes! As many have noted, whodu thunk of MJ being legal and cigarettes not?

    I’ve seen/accomplished the destructive distillation of a cigarette; I’ve both witnessed and encouraged others to witness what happens when a smoker exhales thru a clean t-shirt. Tho I admit to never having a desire to smoke, these evidences added reasons for me to not start. That so even tho I agreed with the evidence leading to the claim that one regularly running 3 miles in under 18 minutes (I once could) could keep one’s lungs clean from personally smoking. (Of course the converse would follow. I urge smoking friends who cannot run that fast for that long to stop smoking.)

    This line of thinking about smoking found very interesting your comment, Mike, that smoking MJ was more toxic than tobacco. I read PenGun’s response, and thought right away of my personally knowing both some few octogenarian smokers and also having personally known many more who died from smoking decades before that 80th birthday. Not precise statistics, mind you, but neither am I totally unable to sense a pattern.

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