Wednesday, August 27

Legal Marijuana Farming's Phantom Profits and Why The Real Profits Are For Crooks

"The boom in medical pot farms has led to a decline in pot prices, which in turn has caused people to grow even more to make up for their income losses, further exacerbating the problem, state and federal law enforcement and environmental officials say. Both public and private lands are suffering as a result."
-- From Cleaning Up After Pot Growers Challenges North Coast; The Press Democrat (Santa Rosa, California); July 24, 2014

In response to every study and news report revealing more about the environmental damage done by commercial marijuana ("pot") cultivation, in answer to every report about criminal involvement in the industry, advocates of pot have one reply: Legalize it.
By this they mean legalize the cultivation of pot at the federal level of U.S. government.  This on the argument that once the federal government puts its weight behind regulating commercial pot growing it will result in better enforcement of regulations and knock criminals out of the pot growing business. That last on the assumption that under a legal regime the price of pot would decline to the point where legal growers could match or even beat the price charged by organized crime.

Yet the entire argument is wrong. This is first because it ignores retail business economics 101. The chaos that erupted in California, indicated in the quote I provided above, could have been predicted by any Walmart executive.

Second, the pot legalization argument can't seem to distinguish between agriculture for human consumption and the manufacture of chachkas. Pot agriculture intersects with no less than four heavily regulated retail areas in the USA.  This is because pot is used as a medication, added to processed foodstuffs, and cultivated commercially both indoors and outdoors. Those last two items also fall under every kind of American environmental regulation one can name.
Add to this the fact that while virtually all the regulations also apply to other types of agriculture for human consumption in the USA, there are features of pot agriculture that place a unique regulatory burden on it.      
All this means the regulatory regime covering just the agricultural aspects of marijuana is only slightly larger than the planet Saturn.

The cost of complying with this regime is in the stratosphere.  How, then, have any licensed commercial pot growers been able to make a profit up to this point?  Because the U.S. states that license the growers have never enforced any more than a fraction of the regulations and even then only in haphazard fashion.
And even with the will to enforce compliance, the cost of doing so is fabulously expensive. This is because commericial pot agriculture has two unique aspects:

1. The dual nature of commercial pot cultivation -- indoor and outdoor -- places it under two large and vastly different sets of regulations.

2.  Pot's cultivation sites are ubiquitous. If you want to inspect, say, commercial corn farms in your state, it's pretty hard to miss a corn field. But if you want to inspect commercial marijuana, first you have to find where it's grown. This can be anywhere -- inside a private home, a warehouse in a town's commercial district, in a forest or back yard, or interspersed with other crops in a field.
Piling those two factors on top of a regulatory regime larger than Saturn means that enforcement would gobble up all the revenue pot-licensing states realize from taxing pot sales, and then some. Yet by skimping on regulation the states have in effect been subsidizing commercial pot agriculture.  This has created the illusion that there are profits in the industry that don't actually exist.

It's this illusion that investment funds, venture capitalists, pot legalization advocates, and economists have been pitching when they laud the big profits in legal marijuana farming.

There are big profits all, right. The fine print is that the profits can only be made illegally -- by both the regulators and pot farmers cutting regulatory corners.
But if pot cultivation is legalized at the federal level, this would bring in a host of federal agencies that would set about enforcing codes, chiefly by handing out mountains of fines for noncompliance. 

This would force state governments to spend their revenue from taxing pot sales on code enforcement, a problem they'd try to solve by slapping all kinds of fees and taxes on pot farmers in their states.

There's only a handful of U.S. agricultural corporations with deep enough pockets to cover expenses from that big a double whammy.  However, Big Ag would have three good reasons not to grow pot: its cultivation can't be offshored, the product can't be exported, and the law suit regime that would gear up if pot is legalized at the federal level. The regime would be huge because it'll cover so many issues, including environmental and health ones.

That would leave the smaller fry to attempt to eke out pennies in profits from high volume production of pot.

To boil it down, under a federally enforced regulatory regime, commercial marijuana farming would be so costly the only entities that could legally make a decent profit from it would be law firms, accounting firms, auditing firms, and banks.

That would keep the door open for organized crime, which can make a good profit under a federally enforced legal pot regime in the same way it does now: by ignoring every U.S. law related to agriculture.
It would also continue to incentive lawbreaking by licensed pot growers. California's 18 year experience with licensed medical pot growing demonstrates that there is no surer way to turn law-abiding citizens into scofflaws than by setting up an industry that delivers good profits only by breaking the law.
So a bonus for forcing down the price of pot through high volume production while forcing up the cost of compliance is that it switches out Mexican organized crime's control of the illegal pot industry for American organized crime's control of the legal industry.  One consequence would be a level of corruption in U.S. state governments not seen since alcohol's prohibition days.
That's the Elmer Fudd method of crime fighting. We shot ourselves up but we sure showed those wascal Mexicans.


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