03/31/2014 01:35 EDT | Updated 05/30/2014 05:59 EDT

Marijuana Prices Are Going To Crash

Some say that the proliferation of home cultivation licenses has also helped to drop prices, but I don't think this has had a major impact. The amount of cannabis being produced by all licensed patients is not that significant when compared to the total level of underground production in Canada. It's shrinking U.S. demand that is driving prices down here.

Chris Hondros via Getty Images
BOULDER, CO - APRIL 20: Young men smoke a marijuana cigarette during a 'smoke out' with thousands of others April 20, 2010 at the University of Colorado in Boulder, Colorado. April 20th has become a de facto holiday for marijuana advocates, with large gatherings and 'smoke outs' in many parts of the United States. Colorado, one of 14 states to allow use of medical marijuana, has experienced an explosion in marijuana dispensaries, trade shows and related businesses in the last year as marijuana use becomes more mainstream here. (Photo by Chris Hondros/Getty Images)

Marijuana prices are going to drop substantially over the next year, and then drop even more once full legalization happens.

Shrinking exports drive down prices

Marijuana prices in B.C. have dropped about 30 per cent over the past decade, and I predict this decline will only accelerate over the coming years.

Home cultivation in Canada really got going with the introduction of high-intensity indoor lighting in the mid 1980's. Before that time, virtually all marijuana and hash in North America was imported from Mexico or South America.

The profitability of Canadian marijuana exports into the U.S. peaked during the mid 1990s. At this time, the U.S. dollar was worth up to $1.60 Canadian, and American prohibition was in full swing, which kept prices high. It was a very profitable time to bring B.C. Bud across the border.

Since that time, the demand for Canadian cannabis in the U.S.A. has been on a slow and steady decline. California legalized medical cultivation and sale in 1996, and other states have steadily followed their lead. Now there are 20 states with some form of legalized medical marijuana, and two states with full legalization. Combine this with a U.S. dollar basically at par with Canada's, and we see why the demand for imported B.C. Bud has declined dramatically in the U.S.

It's difficult to get an accurate estimate of an underground industry, but from what I have seen, far more B.C. Bud is now going out east to Ontario. The mark-up is less than what it used to be when exporting to the U.S., but the risk involved in shipping within Canada is also much reduced.

In B.C., retail prices for cannabis have dropped around 30 per cent over the past 10 years, with about half that drop happening since 2011. Dispensaries that sold for $10/gram a few years ago are now selling for $8/gram. This is reflected in street prices as well.

Some say that the proliferation of home cultivation licenses has also helped to drop prices, but I don't think this has had a major impact. The amount of cannabis being produced by all licensed patients is not that significant when compared to the total level of underground production in Canada. It's shrinking U.S. demand that is driving prices down here.

A glut of legal marijuana?

As more American states move towards legalization, the Canadian export market will continue to evaporate. This will push our domestic prices down further, as underground growers compete for a share of the much smaller Canadian market.

At the same time, we are now seeing what could be hundreds of new players entering the market as licensed producers for the medical marijuana user. These new companies will be competing with the underground market, and with each other. This is only going to push prices down further.

These new licensed producers are all trying to grow as much marijuana as possible, but without a lot of new patients entering the system, this could easily lead to a glut of legal marijuana.

Many doctors are reluctant to sign prescriptions for marijuana, and without doctors doing the paperwork, these new companies can't sell their product. Now that patients can keep growing their own, many will choose to do so, further narrowing the legal client base.

Plus there are still dispensaries across Canada, which supply an incredible array of strains, as well as cannabis capsules, tinctures, creams and medibles which the licensed producers cannot provide.

Given that many of these dispensaries also do nationwide mail-order, the legal producers could have a hard time competing. Their only option may be to cut prices so that they can move their backlogged marijuana medicines.

I predict that a year from now, there are going to be a lot of these companies with a backlog of marijuana, and there's going to be price wars as they struggle to survive.

Cheap imports

However, marijuana prices could easily drop much, much more in the long run.

If we expect legalization of marijuana is a trend which is going to spread around the world, then the long-term price of cannabis could easily drop even more. Agriculture is a labour-intensive activity, and thus becomes much cheaper when done where labour is cheap.

High-quality, medical grade cannabis buds and extracts could be grown and produced much more cheaply in Mexico or Jamaica for instance, then imported into the U.S. and Canada for much less then we could grow our own.

Perhaps one day we will see the Canadian government promoting a "Buy Local" campaign for B.C. Bud, to protect our home-grown marijuana industry and the jobs that come along with it.

Ultimately, the price for legal cannabis products will largely be determined by taxes and regulations. If cannabis was as free to grow as tomatoes, then the natural retail price would drop to tomato levels as well.

Governments will be eager to tax as highly as possible, to generate the most revenue. But heavy taxation will perpetuate the underground market, because street dealers don't pay tax.

Wholesale marijuana for 10 cents a gram

I believe that a retail price of about $1 a gram would be low enough to eliminate most of the black market while still leaving plenty of room for tax revenue. This could mean a wholesale rate of about 10 cents a gram, with 40 cents in taxes and a 50 cent retail markup.

That of course would just be a base retail price. Just like a glass of wine in a fancy restaurant costs much more than the same amount of wine bought in a liquor store, so too would an after-dinner vaporizer session cost more than the same buds or hash bought at the cannabis store.

In the short term, marijuana prices will be kept artificially high by ongoing prohibition, and then by heavy taxation. But once cannabis prohibition is fully repealed in many nations around the world, the price will end up dropping very low.

While this means that the long-term future of cannabis may not be as profitable as some might hope, this will still free up billions of retail dollars currently being spent on overpriced marijuana, and redirect it towards other parts of the economy.

A lower price for cannabis could also get people drinking less alcohol, as they begin choosing cannabis as both a safer, and more affordable option.

What do you think about the future price of legal marijuana? Leave your comments below.


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