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April 20, 2013

"The Pot Business Suffers Growing Pains"

P1-BL197_POT_G_20130419170915The title of this post is the headline of this fascinating new Wall Street Journal article about justr some of the modern challenges facing the modern marijuana businessman.  Here are excerpts:

Across the country, the business of growing pot is fast becoming mainstream. Eighteen states and the District of Columbia have approved the use and production of marijuana for medicinal use, including two states, Colorado and Washington, that also allow recreational use.  That has spurred on a cottage industry of professional growers, with an estimated 2,000 to 4,000 businesses now producing the plant for legal purposes.  Total sales: $1.2 billion to $1.3 billion last year, according to the National Cannabis Industry Association.

But it turns out that trying to make a profit in this business is harder than expected. When grown and sold legally, marijuana can be an expensive proposition, with high startup costs, a host of operational headaches and state regulations that a beet farmer could never imagine. In Colorado, for example, managers must submit to background checks that include revealing tattoos. The state also requires cameras in every room that has plants....

Prices for pot, meanwhile, have plummeted, in large part because of growing competition. And bank financing is out of the question: Federal law doesn't allow these businesses, and agents sometimes raid growers even in states where it is legal.

Still, a hearty group of weed producers are coming out of the woodwork — or their basements, where they used to grow pot — to have a go at it. That includes outfits in Colorado, which hosts the first-ever High Times U.S. Cannabis Cup this weekend. The state passed a new law that next January will allow anyone 21 and older to buy marijuana from retailers, which is expected to dramatically open up a market currently limited to some 110,000 patients with prescriptions.  Indeed, the industry publication Medical Marijuana Business Daily forecasts a tripling in annual sales in the state in 2014 to at least $700 million....

A major drag on earnings for marijuana growers is the labor-intensive nature of the business.  Payroll can make up more than a third of production costs, says Jason Katz, chief operating officer of Local Product of Colorado. Managing workers is challenging too, he adds, in an industry where many learned their trade by growing clandestinely.  His company went through six growers in three years before one worked out.  "They aren't used to being part of regular society," he says.

Costs and management issues aside, the biggest shock to most marijuana growers has been pot prices.  As the industry becomes more competitive and there is more pot available, the price for a pound of high-quality weed in Denver has slid from $2,900 at the beginning of April in 2011 to $2,400 in the same period in 2012 to $2,000 this year, according to Roberto's MMJ List, a service that connects wholesale sellers and buyers.  At the height of summer demand in 2011, a pound sold for as much as $3,900.

To be sure, some experts say it is possible to do well.  Roberto Lopesino Seidita, who runs the price list and consults for the industry, says some growers are pulling in double-digit margins by focusing on price, not just quality.  They have developed ways to produce large amounts of pot cheaply, and offer it at unbeatable prices, driving hundreds of customers through the door every day. "It's run like Wal-Mart," he says.

Illegal growers, of course, have been producing and marketing large quantities of marijuana — often at a sizable profit — for decades.  Most of the pot consumed in the U.S. is grown outdoors in Mexico by low-wage laborers, with no need for lights or air conditioning, says Jonathan Caulkins, a professor at Carnegie Mellon University who studies marijuana legalization.  And street prices for pot in places where there is no legal outlet for it are generally higher than in regulated markets, Mr. Caulkins says....

As with many plants, spider mites and mildew can wipe out a marijuana crop. A single mistake in planting can also doom a harvest, or lower its quality and value....

Though rarely in Colorado, federal agents still raid growers regardless of state laws when the businesses are too close to schools or lax in other ways. Last December, President Barack Obama said his administration had "bigger fish to fry" than going after recreational users.  A spokeswoman for the U.S. Department of Justice said the agency is reviewing the new laws in Colorado and Washington state.

There are other legal headaches.  After a marijuana strain called Bio-Diesel won a quality competition in 2009, the name started appearing in dispensaries around Denver, says Ean Seeb, owner of Denver Relief, the outfit that produced the prized variety. Prices are below his, but Mr. Seeb has no way of legally challenging his competitors; the U.S. Patent and Trademark Office won't register cannabis-related products, he says.

A few recent and older related posts on the marijuana business: 

April 20, 2013 at 01:40 PM | Permalink

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