The giant cannabis problem no one saw coming

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States like Oregon and Washington have too much cannabis and not enough demand.

When states started legalizing cannabis, lawmakers worried about setting fees and rules for licensing and legislating where cannabis dispensaries could set up shop. The last thing they thought they needed to worry about was an oversupply of cannabis.

But that’s exactly what’s happening in Oregon and Washington. The two Pacific Northwest states hope to correct their cannabis markets by tweaking local laws, but it appears that the only panacea for their woes could be the full legalization of cannabis at the federal level.

To say that Oregon has something of an oversupply issue is a vast understatement. The state’s authorities estimate that demand in the adult use cannabis space is running at just 50% of the supply from legal producers between July 2017 and June 2018. It has left Oregon, which became the third state in the country to legalize adult use cannabis in 2014, sitting on approximately 1.3 million pounds of cannabis that it can’t shift, mainly because of both local and federal laws that prevent sales outside state lines.

That is a staggering amount of cannabis —  enough to last until mid-2025 without the state having to grow one more plant. That’s not a possibility, as few dispensaries sell cannabis that has sat for up to a year.

Oregon’s cannabis policies are partially to blame here. Post-legalization, Oregon aimed to bring its hordes of illegal growers, including medical growers who were suspected of cultivating for the black market, into the legal market. Salem’s lawmakers set about lowering the barriers to entry with rock-bottom license fees and taxes, and removed caps on the number of licenses.

Salem also made another bold decision: it lifted restrictions that prevented out-of-state investors from owning a controlling stake in the state’s legal cannabusinesses. The laissez-faire approach resulted in an explosion in the number of licenses being issued by the state. To make oversupply matters worse, 2017 was a bumper harvest for cannabis, producing twice the amount grown in 2016.

But demand in the state hasn’t come close to keeping up with supply. There are just over 4 million people in Oregon, but they would each have to buy 5.2 ounces of cannabis today to clear the 1.3 million pound surplus. (For some perspective, an average dose of cannabis is .25g  to 1g of dried cannabis.)

One obvious free market solution would be to allow Oregon suppliers to sell cannabis to neighboring legalized states, but cannabis is still considered a Schedule 1 drug, on the same tier as heroin, by the federal government. The Department of Justice reiterated in 2013 that interstate shipments of cannabis are illegal.

Neighbouring Washington, the first state to legalize adult use of cannabis in 2012, is in a similar position. It’s hard to definitively declare that the state is oversupplied, because Olympia tracks cannabis production and sales, but not consumption. However, the rock-bottom price of cannabis in Washington is a sign that something is wrong. The average price of a gram of high-quality cannabis costs around $10 from a dispensary in Seattle, according to Budzu, which lets consumers post the price of their purchases. That compares to around $13 per gram in California.

Washington has issued around 1,500 licenses for producers and processors, and their combined ‘canopy’, or grow area, is yielding far more flower than retailers can sell. To cut their losses, the state’s growers have simply stopped growing. They are now using half or less of their licensed canopy. Their struggles are compounded by Washington’s restrictions on out-of-state capital.

This might seem confusing, given that Oregon's decision to allow out-of-state capital hasn’t worked either. But there is no perfect recipe for capital controls while the ban on interstate exports remains. Free capital flows exacerbate oversupply in Oregon, while restrictions on capital flows hurt Washington’s cash-strapped producers.

Both states are making efforts to correct the problem. Oregon’s growers have not given up hope on the possibility of interstate exports, and are working with the state’s lawmakers to achieve this by 2021. Their efforts will focus on the reintroduction of proposed laws in Senate Bill 1042, which would give the governor the ability to enter into agreements with other states to directly engage in cannabis businesses. The bill failed to pass when it first hit the floor in 2017.

Washington’s legal industry is seeking to tweak regulation around licenses, such as reducing the amount of square footage growers are allowed, and ending license transfers after a grower bankruptcy. Trade groups in the state are also lobbying for a lift on the ban on out-of-state investment.

But real change will only come when the federal government removes cannabis as a Schedule 1 drug and allows for interstate sales. Cannabis is an agricultural product which means it’s going to grow better in certain states, just as oranges, avocados and apples do. With a free-flowing market, growers in Oregon and Washington could benefit from demand as far away as Maine, greatly reducing the risk of oversupply.

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