Would Legalized Pot Threaten California's Economy?

Could pot profits go up in smoke? That's what some growers and distributors say will happen if a measure to legalize marijuana is approved by voters in November. One of the hottest crops in California has long remained taboo as a business proposition: marijuana. But now, a state ballot measure attempting to legalize the drug could end up threatening the state's illicit pot business -- and shaking up the Golden State's broader economy -- growers say.

It's not a frivolous concern. While accurate market-size numbers are, understandably, hard to come by, legalization advocacy group California NORML in 2006 estimated sales of medical marijuana at between $870 million and $2 billion annually in California alone. And that's just revenue from legal pot.

Is Pot Recession Proof?

There's some evidence that the overall U.S. business has also remained, well, high during the recession. A dispensary in Denver, for example, is selling so-called cannabis caviar for a breathtaking $1,400 per ounce, according to alternative weekly Denver Westword. That might indicate that prices for the most potent pot, at least, haven't hit a low. In 2007, a government report noted that some hydroponically grown pot was selling for as much as $1,200 per ounce in New York.

Jeffrey Miron, an economics professor at Harvard University and author of the paper "The Budgetary Implications of Marijuana Prohibition", confirms that those prices aren't outrageous. "[Fourteen-hundred dollars] doesn't seem so crazy compared to prices I recently saw on a tour of a Los Angeles pharmacy where some of the list prices were $800 or $900 per ounce," he says. "This is probably the equivalent of a single malt scotch."

Of course, prices for high-end pot aren't necessarily reflective of the broader cannabis business. Unlike sales of luxury cars, mega-mansions and yachts, there isn't much data on marijuana sales or pricing, nor is there likely a similar sales volume considering that medical marijuana is still only legally purchasable in 14 states. But pot prices have historically remained relatively stable at anywhere from $200 to $800 an ounce, meaning that growers and distributors could count on a fairly regular income.

The Business Benefits of Illegality

Oddly enough, the measure to legalize pot could undermine that stability. Illegality, the argument goes, plays a big role in keeping competition low and prices high. The high cost and risk of growing, distributing and selling the drug amount to barriers of entry that keep many potential competitors out of the business. So if these activities become legal, prices could plummet as aspiring marijuana moguls flood the market.

The prospect of legalization has some Humboldt County growers so worried that an estimated 100 industry insiders met with community leaders last week to discuss the possibility of a "post-pot" economy. "The legalization of marijuana will be the single most devastating event in the work force on the North Coast," organizer Anna Hamilton reportedly said at the meeting. She estimates that the price of outdoor marijuana could drop to as little as $500 a pound and result in the loss of 15,000 to 30,000 jobs.

But if prices really do plunge, that could also, in turn, help grow a broader customer base. A paper that the Bureau of Economic Research published back in 2000 found that prices played a significant role in preventing youth marijuana use. It's not a stretch to assume other would-be customers are likely also being dissuaded by the expense, as well as the illegality, of pot.

That means the overall market size could grow, even as profit margins shrink, and many companies might get smoked out if they can't remain price-competitive -- or differentiate themselves with a premium product. Still, many of the potential impacts remain hidden because of the pot business' current semi-illegality. If marijuana becomes legal and the now-hazy business becomes more visible, it's clear that the shakeout will likely have myriad as-yet-unexpected impacts on the broader economy.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum