Pricing and Retail Implications of Washington’s Marijuana Glut

When the first recreational marijuana stores opened in Washington in July 2014, there was a consistent problem with supply—there simply was not enough. Close to eight months later the tables have turned in a drastic way. As of February 2015, one Washington farmer, Tom Lauerman, estimated that there is about 45,000 pounds of surplus marijuana.

As the surplus grew the prices offered to growers fell quickly. Lauerman saw a drastic change, from a starting place of $1,700 to $2,200 a pound, now down to as low as $700 per pound.

On the customer side, the ripples of the glut were obvious but not immediately as dramatic. According to Neal Cronic, who works at Cascade Herb Company in Bellingham, Washington, the glut was apparent but its effect was delayed. Cascade Herb’s prices did not reflect the surplus in supply until early February. Since then, he has seen the prices slowly creep down week by week. Prices for consumers are expected to soon come close to reaching black market prices, as they have recently settled around $50 to $60 for an eighth.

However, there is a cap to how low marijuana prices can go. Washington laws are written in a way that make it illegal, and not just poor business practice, for retailers to sell marijuana below the prices that they paid for it. Additionally, the tax structure of recreational marijuana sales makes the industry cost prohibitive, creating a pricing paradox. It allows prices to infinitely fall on the supply side, while preventing the glut from having too drastic of an impact on actual consumer prices.

The way that Washington’s tax system for marijuana is structured, growers, processors and retailers are all taxed individually and then an excise tax is applied afterwards. Because the laws prevent marijuana from being sold below the taxed price, this effectively eliminates the possibility of it being sold at or below untaxed black market prices (one of the reasons for the legalization of marijuana in the first place.)

One storeowner in Auburn, Washington, has actually blamed the glut on the tax structure. His reasoning is that in keeping legal recreational prices high, black market sources are still the cheapest place to buy marijuana, reducing legal recreational sales and keeping many potential sales with black market dealers.

Bellingham’s Neal Cronic fears that if this trend continues, it may create additional discord among growers, processors and retailers, potentially leading to the rise of special interest groups that may then lead to lobbying. This dissonance in the supply chain might eventually trickle down to a negative impact on the consumer. Cronic is of the opinion that so long as the industry holds its course, the glut will soon level out and reach a natural equilibrium.

The glut itself is due largely to two factors: First, the summer conditions in 2014 were more than ideal for growing and Washington quickly amassed an ambitious bumper crop—something Colorado was unable to do. Second, retailer, processor and grower licenses were awarded in a way that led to unbalanced numbers, where the state only licensed 334 retail stores but there was no limit on growers and processors. Certain counties such as Pierce County, north of Seattle, have actually banned recreational marijuana sales in unincorporated land, further limiting the number of retail shops.

As laws evolve and adapt to the newly legalized industry it will be interesting to see how the market and the supply chain adapt, especially as more and more states move towards legalization. Hopefully, the glut will even out sooner than later, and struggling growers can regain their footing before the start of the new growing season.

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