Prepare For Big Weed

Engineers like checking things in as many ways as possible, ball-parking estimates are a favorite.  I have done enough marketing and engineering plans that projected prices for that meme to come readily to mind.

I was thinking about cannabis* in a couple of posts, one I am working on projects the price of cannabis at $1000 / kilogram in the near future, and then it crashes to lower values, a dollar a pack, farm commodity prices for outdoor-grown and sophisticated grape prices for indoor.  This is my analysis of future cannabis prices.  I will check with some of the cannabis publication’s projections when done.**

First, everyone sees the gravy train and wants aboard.  Indian tribes, Ohio, farmers in 3 states that have legalized it.  All 3 have climates that will do well for outdoor corn-equivalent commercial operations.   I have some judgment in this.  I was a farmer in my youth, friends (not me, never touched the stuff) raised 100s of pounds of cannabis at the ends of farmer’s corn fields, down by the crick.  Just scatter the seeds in the spring and fill leaf bags with bud in the fall. It is a weed, you know?  They would fill their van with leaf bags full from one spot, they planted many.  They gave it away by the leaf bag, told their friends where to harvest what they didn’t want. Potent stuff, I was told.

As a plant, cannabis is somewhere between hay and corn in general characteristics, assume hay as a comparison.  There are many 5-ton per acre, 4 crops a year hay fields in the US.  That is dried, in the barn.  Assume cannabis is 5% bud, the rest waste (it isn’t).  5% of 20 tons is 1 ton, say 1000 kilograms, 1 metric ton, for ease of math.  For comparison, corn is >5 metric tons per acre for the season in top quality land, and that is shelled corn kernels, not the entire plant.  I would anticipate cannabis yields climbing for years.

Farmers are very happy to gross $1000/acre for corn, but profit at less than half that.  At $500 / acre, land owners get about $225 per acre renting, so the farmer is grossing $275 with corn at $2.50 / bushel, 56 pounds in a bushel.  Current price is about $3.75.  John Deere already has the harvester for cannabis working, just waiting for the market.***

So my projections are $1000 / kilo retail for outdoor grown, top grade cannabis in the near future, then $500 / kilo and that could fall by half again.  That probably means indoor (don’t smoke, people say it is smoother and it gets a premium) is not much more than 2X that.  According to Youtube, indoor grow operations are labor intensive.  Space is the limiting factor, so they exchange human labor for best use of space.  Legalizing cannabis widely can produce more indoor grown for sale, but there will be pricing pressure from outdoor.  The best comparison for a legal environment would be flowers and greenhouse tomato industries.  Same kind of labor and facilities.   USDA’s info on tomatos :

On average, the shipping-point price for fresh field-grown tomatoes averages about one-fourth of the retail value. This share has declined during the past three decades, averaging 37 percent in the 1980s, 31 percent in the 1990s, and 28 percent the first decade of the 2000s. Shipping-point prices for field-grown tomatoes have frequently been under pressure since the mid-1990s, largely because of increased imports and competition with hothouse products.

Worst retail prices for hothouse tomatoes I have found is $3/pound in early winter.  Cannabis is inherently more costly because bud is metabolically more expensive as the psychoactive chemicals are more complex than carbohydrates, so there is relatively more weight in tomatoes vs the rest of the plant.   Assume 10X as expensive as tomatoes ==> minimum of $30 / pound at some future time, a reliable projection as cannabis is just another plant, same problems growing it as tomatoes, same kind of labor.  OK, happier labor due to much better bennies — working in a cannabis greenhouse will make you much more popular than working in a tomato greenhouse.

For reference, a pound of cannabis is about 450 joints.  3000 / 450 = 7 cents a joint.  20 per pack, $1.40 per pack.  Plus markup for a retail chain***, but the point is that cannabis is a plant, grows like a plant, base cost is the same as all other plants.  As a check: say 56 pounds of corn for $5 = 10 cents per pound.  10X that base value for metabolic costs above carbohydrates is $1/pound.  That is outdoor, not greenhouse, but clearly the range is $1 – $30, quite low compared to the $15 – $30 / gram in cannabis shops now.

The market will grow, wildly. Assume 25% of the adult-enough country, 40M people will do cannabis, say 2 joints a weekend, 25 joints a quarter for light recreational use, half use 2x that, 150 grams a year average.  Easy to believe:

  • Many states are legalizing it in various ways, barriers to use fall.
  • It is being widely acknowledge to have genuine medicinal effects, is a much better pain killer than ibuprofin, very good for nausea, and won’t cause bleeding.  Excuses make it easy for people to try it, and medicinal effects are good excuses.
  • People using cannabis habituate to it, heavy daily users use 10 – 100 times weekend recreational users.

150 grams a year * 40 million adults (60% of the 330M population is adult enough) is 6M kilos a year worth $6B. This, checking afterwards, says minimum 25.8M people in the last year, 15.2M in the last month have used cannabis in the US.  Correcting for underestimates, they say about 10 metric tons, my prediction is 60% of that.  Ball park estimate is OK, tho from the number of $B hauls various federal agencies have confiscated over the years, I would have expected the market to be much larger. Americans spent $39B for pizza last year, $137B for beer.  Cannabis is not a large market.  However, the beer market is falling, wine has peaked, cannabis is still growing.

If one field-raised, no-till, machine-planted from seed outdoor plant produces a 250 grams of bud (conservative according to on-line and a friend’s experienced estimate — Jorge Cervantes has a Youtube video that says his sativas get 10 pounds per plant outdoors, but those are the result of tender-loving-car in gardens, not fields), that is 4 plants per kilo * 6M kilos = 24M plants. Big sativa cannabis fit >1000 plants per acre on 6 foot centers. 250 kilos per acre and retail $250,000 per acre, wholesale 250X the minimum $500 that a farmer can get for corn raised on the same acre.  For comparison, that is 1/20th the weight of the corn kernels.  That is 2x the metabolic cost of cannabis herbivore repellents THC and the terpenes vs tomatos carbohydrates assumed above, so this is likely to be conservative, thus higher yields and so lower prices, long-run.

6M kilos / 250 per acre is 24,000 acres.  The US planted 95M acres of corn in 2012.  Iowa planted more than 14M acres.  24,000 acres is 40 600 acre farms, the minimum profitable machine agriculture size.  It is a small corner of a county, a specialty crop. Astonishing ROI, the price of cannabis can fall a long way.

Because large supplies of cannabis are about to arrive, Ohio’s attempt to control cannabis in their state is doomed, they can’t grow and distribute it as cheap as some farmer can raise it + a distributor can truck it in by the ton in hay bales + the markups of local distribution.  Ditto all other states : they profit to the exact extent that they open up the system, treat it like any other vegetable product.  Our area has plenty of cannabis stores and I nevertheless have been offered several different strains and qualities (claimed, I don’t smoke so didn’t check quality or prices) by neighbors.

With hundreds of different strains and different growing conditions developing different aspects of cannabis, and a richer society developing new sophistications, it is easy to assume a market for appreciation of cannabis in branded products, advertising, etc.  There are cigar clubs and hookah clubs all over the US, why not a cannabis club?  Cannabis doesn’t seem to affect peoples’ lungs, so waitresses should be OK in cannabis clubs, EPA will lose that case.  Would you not like the cannabis concession at a big club?  Much more profitable than the cigar concession, I think.  In fact, according to friends who work in them (I haven’t been in one for years, not at all interesting for me) most big clubs already have people doing this, just ask your waitress to send one by.

The large food and beverage companies with distribution will have an advantage in developing these markets.  Cigarette companies, maybe. Tobacco has a much larger barrier between grower and consumer than cannabis does, so the markup can be a lot more.  Smoking a tobacco straight from the curing shed (I was around those at different times when I lived in the south, also, have never smoked tobacco) must be very different than a cigarette, because the markup is huge and tobacco is nevertheless hugely profitable, quotas on farms and imports.

Cannabis is much easier to grow, it is a weed (Although youtube says indoor grows have problems with fungi.).  Anyone anywhere can have a backyard full of it.  Tinctures don’t much care about the quality, I think.  The potential markup above home-grown therefore is the increment in ease and satisfaction of consumption and cannot be so large, no matter how wonderful the store-bought concoction.

That also defines the amount of restrictions people will put up with.  Ohio cannot keep the price high via restricting the amount they raise, because Ohio’s neighbors will be happy to take advantage of the gap to make some spending money, or save their own money.

Ohio’s medical, etc. laws will immediately produce MDs who write prescriptions.  I read that the first of the cannabis prescribers in California included young Harvard-trained MDs.  They had student loans, were willing to work all their spare time writing cannabis prescriptions, anyone who has ever needed a pain pill or sleeping pill or felt nausea will get a prescription.  Cost of prescriptions is about $50 / year in our area.  Enabling those uses are exactly what the laws are meant to do, and many people do use cannabis for those reasons, just not a very high proportion of medical prescriptions.

Tinctures and elixirs will come back, as a major way of consuming home-grown. They were very popular up through the 1920s. My imagination (I haven’t looked for evidence) says that foreign pharmacies are about to start delivering those again.  As far as I know, no drug I have gotten from overseas (all less expensive pharmacy, nothing illegal) has been intercepted or opened, and Silk Road did OK.  So I bet you can buy those now.  In fact, alcohol tinctures are something that can’t be produced in the US because of combined cannabis and alcohol laws.  That is one of the places that value could be added, a marketing campaign might make that profitable.  Liquors and wines with cannabis flavor and content could be big, but the young people we see using cannabis do not even drink beer, and look down on people who do as less controlled, harder to be around and have fun.

Immediately after medical cannabis is available, cops will stop arresting anyone for marijuana offenses. Many of those they could arrest will have licenses, and the rest will be too much trouble, excuses related to licenses will be many and expensive of everyone’s time, penalties will drop a lot.  So medical means only prosecuting major jerks or a major dealer when police and prosecutors need some help at budget time.

Many laws are about to go away or be ignored.  Social evolution is kicking into gear.  Hard economic times always accelerate social, political and economic change.  Cannabis would be prominent in those changes, legalization or no, but at least won’t be enhancing our police state’s powers in this next cycle.

*As an honestly honest member of the Honest Party, I assure you I do not have any financial interest in cannabis or any other businesses mentioned in this, but wish I did.  Watched videos on raising the stuff, peer-to-peer bragging, so proud of their work and learning.  Distributed beats centralized in an evolutionary arms race, again.

**As an honestly etc, no of course I would not change my estimates, rather will inform both of us about the errors and think about the kind of errors my mind makes and possibly why.  How do you get better at things?

**There are a number of conjectures in this post posing as fact.  Hope you can tell the difference.  I can’t.  There are machines for trimming bud, if John Deere isn’t making a version scaled for 100-acre fields, someone else will.

——-

Added later.  I can’t even mislead people, my conscience won’t allow it.  The above is all correct, except for projections of the future, just not honest in the impression left in your minds.  I don’t smoke, but do vape and/or eat a lot of cannabis days that I hurt.  Days I don’t hurt, don’t touch it.  Except when I want to have fun, of course.

Vaporizing using low temperatures and the best extracts avoids the smoke particulates and burn chemistry.  It is also cheap : $45 / gram of extract, lasting 3+ months for normal recreational use.

***I notice that includes retail, the 4X in the USDA’s numbers, so the grower is only getting 75 cents a pound.  The $1.40 is retail with plenty of margin for manufacturing and distribution.  Most people wouldn’t mind $2 / pack, I think.

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