The Cannabis Law and Policy Project, based in the University of Washington School of Law, was formed by professor Sean O’Connor in fall 2014 to be a center for researching regulatory issues around the state’s new legal cannabis industry. The group recently published its first report for the Washington state Liquor and Cannabis Board (LCB), which found that the amount of marijuana currently allowed to be grown by state-licensed producers in Washington is enough to satisfy both the medical and recreational marijuana markets.
Sam Méndez
Q: Your study estimates that between 1.7 and 2 million square feet of marijuana plant production will be needed to meet Washington’s medical marijuana market. How did you reach that estimate?
SM: We had our phone survey of dispensaries, which produced a couple of figures we relied on, the two big ones being the estimated number of dispensaries in the state, 273, and the estimated average monthly sales of marijuana flower. From those monthly sales, we then estimated annual sales for the whole state. With those figures, we utilized other research to estimate the canopy, or square footage, of marijuana plants needed to satisfy patient demand.
Smoking marijuana is not the only way people use it. It can be consumed in a variety of ways, and we made three broad categorizations of these uses: flower, which is generally smoked, edibles and concentrates. We realized early on that not accounting for these other forms of use would create a big hole in our estimates. I think as time goes on, you’re going to see those being consumed more.
A lot of people, particularly new entrants to the cannabis market, are concerned about the health effects of smoking, so I expect market share of edibles and concentrates to grow over time.
Q: What challenges were there in conducting this research?
SM: We had to learn as we went along. Something that the students and I learned as we were producing the report was the difficulty in generalizing edibles and concentrates.
First of all, there’s a huge variety of products out there of varying size and prices, though most servings now contain 10 milligrams of THC. Second, these products are generally not made from buds — flower — they’re extracted from “shake,” or basically leftovers of the marijuana plant. This was just one of many complications in the calculations that we had to account for. There were other complications that, given the time and resources we had, we simply couldn’t account for.
Also, there was the challenge of finding solid data on what has long been a black market and a stigmatized market. How many dispensaries are in the state? That’s actually a pretty hard number to come up with. Other states have medical marijuana systems where product and stores are regulated and tracked, but for a variety of reasons that never really happened in Washington. So the state didn’t really know how many dispensaries were out there. Just about anybody could set up shop, put a green cross out front and start selling product.
The other challenge was what we could do with our limited time and resources. We had about three months to do it. It wasn’t just 273 dispensaries that the students called. We came up with 467 potential dispensaries. Some of those were wrong numbers; some had gone out of business. But we had to call every single one. Of the ones that we got no response from, we had to call back. It was 600 to 700 phone calls that the students had to make in those couple of months.
Q: Under state law, all dispensaries must convert to retail stores or close by July 1 of this year. What does that mean for dispensaries and their customers?
SM: Under the new laws, registered patients will be able to grow up to six plants on their own, and they can set up collective gardens. Aside from that — or buying illegally, which is still a significant issue — they will have to go to a licensed retail marijuana store.
These new laws effectively end the medical marijuana system as we’ve known it by bringing it under the umbrella of the recreational marijuana system. Stores will have to get an endorsement by the state to sell medical marijuana. To date, about 80 percent of stores will have this. The LCB has capped retail licenses at 556 for the state. To date, 359 licenses have been issued, and 276 of those have reported sales.
One thing I’ve heard that has people in the medical marijuana community frustrated is that patients have to get onto a patient registry that the state government is setting up. Patients can possess a larger amount of marijuana and don’t have to pay sales tax on it. But some patients, at least, don’t want to be on some government list. There are also claims out there that the LCB is underestimating patient demand. I’m sure there are other complaints as well, and the LCB is doing the best they can to accommodate patients and the market as a whole.
Q: What does the change mean for the industry overall in the state?
SM: It’s transforming the entire market, so it’s going to change a lot. A lot of dispensaries have shut down, some have left the state, and many have converted to retail stores. That’s been going on for the last year or so. There’s a limited number of stores that can operate in each locality. For example, Seattle was recently allotted an additional 21 retail licenses by the LCB, far lower than the number of applicants out there. So not everyone, even if they were good actors, could get a license to operate.
The market right now is pretty volatile. But in the grand scheme of things, it’s going to settle down.
You’re going to see a system that is now tracked and taxed, and the state will know in a way it didn’t before how many stores are operating, how much product is being sold and moved around, and how many patients are using product, at least in the legitimized system. Again, combating the black market will continue to be an issue.
Q: How much is the recreational market worth?
SM: According to the LCB’s dashboard webpage, total retail recreational marijuana sales for 2016 to date in Washington are nearing $850 million, compared with about $260 million in 2015. Certainly a lot of growth for one year. Give it five years. It’s going to be a lot bigger.
A report from ArcView in California estimates that the national market will grow from $7.1 billion this year to $22.8 billion in 2020 – three times as big in the course of four years. A number of people I’ve spoken to, policymakers as well, believe the horse is out of the barn — that this is not going to be shut down by the federal government.
You already have 58 percent of the American public that is in favor of legalization. The federal government would be picking a big fight at this point if they shut down state-legal marijuana.
Q: Where is Washington’s marijuana grown?
SM: Most outdoor marijuana is grown in Eastern Washington, where there’s more sunlight and more cheap space. Indoor operations are all over the state, but it becomes a simple question of profitability. Where is real estate cheap? Indoor grows are not restricted by weather like outdoor grows are, but it’s a lot more expensive to grow indoors.
The advantage with indoor is you can do multiple harvests a year. You’re not restricted by the seasons and lack of sunlight in winter. But indoor operations take a lot more capital to set up. It takes a lot of money to set up a greenhouse and all the systems and equipment.
The price of marijuana is going down, and long term there’s no reason to think it’s going to go up again. One producer has told me the future of marijuana production is outdoors, simply because it’ll be so much cheaper to operate. He’s probably right.
Q: How do you see the market evolving over the next five years?
SM: I think the biggest change you’re going to see is the market divided into different price points.
Some have compared it to the wine industry — on the bottom you have your cheap wine that is produced and consumed in massive quantities, and on the top you have the high-quality and expensive stuff. Different customers will be attracted to different parts of this spectrum.
The Washington market is also going to be affected by what’s happening nationwide. The big one that everyone’s talking about is California possibly going legal. That will transform the entire industry.
California is the seventh largest economy in the world and is responsible for 80 percent of all marijuana grown in the United States. It’s easily bigger than all the other four legal marijuana states combined, and just about everyone in the industry thinks California will legalize it this year.
So that will affect the market in Washington, because as more states go legal you’re going to see less marijuana tourism. It’s going to be less of a novelty. It will affect the economy in a number of other ways too.
Q: So that’s not necessarily going to be good for the market here?
SM: Well, it depends on your perspective. Good for consumers? Probably. Cheap goods are generally good for consumers. A lot of people are not happy about this becoming a corporatized industry, and I think that’s something you can expect in the next five years. There are public health concerns too.
I think you’re going to see a lot more investing in the market, and you’re going to see the system increasingly corporatized, which is to say you’re going to see some very big players, and that’s going to squeeze small businesses.
Anybody who had some notion that this would just be a bunch of local mom-and-pop shops is going to be disappointed. For better or for worse, we live in a country with some very large corporations that dominate our economy. For small businesses, being bought by those corporations is often the path to success. Is that a good or bad thing? It depends who you ask.
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