The Commodity Price: 1¢/g ($4.50/pound)

Part 1: The Commodity Price

Here’s a vignette from Cambodia in 1998:

At a typical guesthouse you will almost always find community marijuana lying on the porch table. Scott, an English teacher living at a guesthouse, explains: “Marijuana is so cheap that it doesn’t make sense to be possessive. We just leave some on the table to save people the trouble of going to their rooms to get their stash.”

Scott waves the cigar-like joint he is smoking as a point of evidence. “There are two components to this spliff here, the rolling paper and the marijuana; the rolling paper is by far the more expensive ingredient.”

Craig, an English teacher living in the same guesthouse, brings me to his room to show me a huge sack containing at least 5 kilos of marijuana. “One of my students gave this to me,” he says casually. “His uncle has a field, and my student requested a bit as a present for me.”

What has happened to the price of marijuana since then?

The prices of globally-traded commodities tend to fall over the long haul. Therefore, it is no surprise that the global price of commodity rice (for example) is no higher than it was in 1998:  $0.22/kg ($10/cwt). It is, on the other hand, surprising that commodity tobacco is 13% more expensive than it was in 1998, and that the price of commodity hops — a plant used to make beer — is 3.5 times as expensive today as it was in in 1998. These figures are in nominal dollars (that is, not “inflation-adjusted” dollars), which would explain the price increases: it takes more dollars today, after inflation, to buy [whatever] than it did back then.

Another article, from 1995, put marijuana’s wholesale price, in Cambodia, at $4/kg, which is $0.004/gram (that is, 4/10ths of a cent per gram).

Using the history of the prices of rice, tobacco, and hops as a guide, we might expect that, today, commodity marijuana would cost $4/kg (same price as in 1995; same trend as rice), $4.52/kg (13% more than its 1998 price; same trend as tobacco), or perhaps $14/kg (3.5 times its 1998 price; same trend as hops). Alternatively put, it would cost 0.4¢/gram, 0.452¢/gram, or 1.4¢/gram, respectively.

Call it “one penny per gram,” more or less. There are 450 grams in a pound, so that translates to $4.50/pound.

Yet the USA’s wholesale price of marijuana today (May 15th, 2018) is around $2862/kg ($1,288/pound, $2.86/gram), which is ($2862/$4≈) 700 times the rice-trend price, ($2862/$4.52≈) 600 times the tobacco-trend price, and ($2862/$14≈) 200 times the hops-trend price.

Marijuana’s current high price is literally the Price of Prohibition. Back in the 1960’s, 70’s, and early 1980’s marijuana consumers in North America enjoyed top-quality marijuana imported from Thailand. Thereafter, however, the War on Drugs established a “non-tariff trade barrier” that blocked imports of Thailand’s marijuana. That trade barrier compelled marijuana-consuming nations to grow it themselves, often indoors. That’s like growing grapes in Scottish greenhouses to avoid a tax on the importation of French wine: you could do it, but it would be incredibly expensive (as Adam Smith pointed out 242 years ago).

When global marijuana Prohibition finally falls — enabling international trade, as with rice, tobacco, and hops — then the price of marijuana will fall, too, back to its natural price: One penny per gram, more or less. That’s a price decline of 99.7%, from today’s $2.86/gram back to yesterday’s 1¢/gram.

Economists have understood this for decades. In 1994, Dale Gieringer, Ph. D., wrote in Ed Rosenthal’s Hemp Today, that, under full legalization, “the price of legal marijuana would be cut by a factor of 100 or more.”

Part 2: The Boutique Price

“We’ll be fine,” many North American and European marijuana growers may think to themselves, as they whistle past this graveyard, “because the market always pays a premium for The Good Stuff, and we grow The Good Stuff.”

Which begs the question: how much more do people pay for The Good Stuff, really?

Let’s look at some examples: Chocolate, wine, and beer.

The specialty chocolate cited in this article sold, at the time the article was written, for an average price of $4.78/oz. In contrast, a 7oz bar of Hershey’s Milk Chocolate retails for $2, which is $0.29/oz. The premium for specialty chocolate is hence approximately (specialty price) / (commodity price) = ($4.78/oz) / ($0.29/oz) =  a “specialty price premium” of 17:1, give or take.

In wine, the specialty price premium is notoriously high. For example, the price of a bottle of Dom Perignon champagne costs £119.75, whereas a bottle of Yellowtail costs £5.55 — a specialty price premium of 21:1.

Craft beer is often cited as a model for North American marijuana. On Walmart.com, a 6-pack of Budweiser in 16oz cans (96oz) costs $7.34 ($0.076/oz). Craft beers tend to be proudly local and “limited run,” and therefore harder to find online. One award-winner is Breakside Brewery’s Wanderlust IPA, which retails online for $5.99 for a single 22oz bottle ($0.27/oz), a price premium of slightly under 4:1 — much less than the specialty premium of chocolate or wine.

Given this data, producers of “craft marijuana” could expect to earn, at retail, a specialty premium of somewhere between beer’s 4:1 and wine’s 21:1, all else being equal. Let’s generously assume that they get wine’s 21:1. That means that their craft marijuana would sell for 21¢/gram at retail (21 times commodity marijuana’s price of 1¢/gram).

To make a reasonable profit at this super-premium retail price, producers of craft cannabis would need to keep their total “cost of goods sold” below 5¢/gram ($22.5/pound).

Some might say that producing quality marijuana at this cost is impossible. It probably is impossible in North America, given its temperate climate and high costs. Yet PharmaCielo is growing medicinal-grade marijuana, in Colombia, at exactly this cost: 5¢/gram. We, here at the Thai Cannabis Corporation, have similarly low COGS, despite our product being independently certified to meet the highest international standards.

Part 3: Implications

Like the wine drinkers of Adam Smith’s Scotland, the marijuana consumers of North America and Europe could save 99 cents on the dollar by legally importing cannabis from regions better suited to growing it, just as they already import bananas, coffee beans, and vanilla, for exactly those reasons.

New legal cannabis production is coming from a raft of low-cost producers, from Colombia to Zimbabwe — not just Thailand. While much of current production is low-THC, the shift towards global high-THC legalization, spearheaded by Canada, is now unstoppable — and with global legalization comes global trade.

According to Beau Whitney, Founder of Whitney Economics and Senior Economist at New Frontier Data, “Cannabis commoditization is inevitable. Those who will benefit from commoditization, such as North America’s consumers and Thailand’s farmers, will love it. Those who think international competition will lower their margins, off-shore their jobs, and threaten their businesses, will revile it. The 64 billion dollar question is not ‘if’ there will be price commoditization, but: ‘when’?”

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