Cannabis: A Commodity

Wall Street, Cannabis, Commodity

Analyzing the Commoditization of Cannabis Requires Context

What is a Commodity

A commodity is anything that can be bought, sold, or traded on legal markets. Examples include; grains, metals, electricity, natural gas, foreign currencies, and financial instruments. Commodities can be bought and sold business-to-business and business-to-consumer. Additionally, the perceived value of the commodity – price a business or consumer is willing to pay for a commodity or value of a commodity producer or seller – can be traded on the stock exchange.

Cannabis: A Commodity

Cannabis by definition is a commodity. It’s a raw material (e.g. flower) that can be bought and sold, and processed into another product (e.g. concentrate, edible, etc.) that can be bought and sold.

Legalizing cannabis and creating commercially regulated businesses for harvesting, production, and sales treats cannabis as a commodity by state governments and the private sector. Cannabis has a legal market value (e.g. business-to-business and business-to-consumer sales), and there are secondary and tertiary markets to bet and trade the anticipated retail price of cannabis and cannabis companies.

Legalization has brought cannabis the commodity into the mainstream conversation and onto Wall Street trading floors. Our friends are talking about their pot stocks, and our family is asking us how to get in on this green rush. A new merger or acquisition of a cannabis company is announced monthly. New cannabis companies are listed on a stock exchange weekly. We see headlines with the promise of billions in additional tax revenue and hundreds of thousands of news jobs.

Cannabis: Industry and Market Analysis

To say there is a flurry of activity and attention on cannabis is an understatement.

Analysts are pouring over financial data and state regulations, and making predictions about the future retail value of cannabis and cannabis companies. Publications like Forbes, Business Insider, and Wall Street Journal have dedicated writers predicting the future of cannabis for every type of investor. There is article after article on cannabis companies, products, prices, and investment opportunities.

As I drink from the fire hose of cannabis industry news, I’m always left with three questions. As you consume cannabis news I encourage you to consider these questions too.

Cannabis: A Commodity in Context

Who is the cannabis consumer? Is it a patient purchasing cannabis for medical purposes? Is it a consumer purchasing cannabis for recreational purposes?

Cannabis patients have different product preferences, consumption habits, and price sensitivities than a recreational consumer. Furthermore, a recreational consumer could be sliced and diced a multitude of ways. For simplicity sake, let’s think of recreational consumers as falling into one of two categories; a regular, consistent consumer and new, irregular consumer. These recreational consumers also have different product preferences, consumption habits, and price sensitivities.

Knowing the consumer enables better market predictions, and lumping all consumers into one group is a mistake. At a minimum look for analysts who differentiate between medical patients and recreational consumers.

How is the plant harvested? What are the grow cycles? What are the expected yields? Are there any known or unknown events that could impact product yield?

Though not a complete one-to-one comparison, cannabis is like agricultural commodities in that seed source, harvesting cycles, and weather patterns can impact product yield and price. Let’s face it large-scale commercial cannabis cultivation is relatively new. When something is grown from seed to plant, there quite a bit of trial and error that goes into figuring out what products and processes to use. Additionally, there are many unknowns about the cannabis plant itself including the full spectrum of cannabinoids, medical applications, and products that can be created from plant material.

Understanding the complexity of the cannabis plant and acknowledging the unknowns enables better market predictions. At a minimum look for analysts who acknowledge the challenges with harvesting quality at scale and leave room for new scientific or medical research to impact the industry.

Can the aboveground market realistically compete the underground market? How do state criminal background check requirements impact who can own or work at a cannabis business? What are the retail options and prices for cannabis patients and consumers?

Cannabis unlike almost any other legal commodity has a strong, thriving underground market. Any legal market has stiff competition from day one. Not only does the underground market have loyal consumers but also deep historical knowledge of the cannabis plant itself. Most states have created commercially regulated markets that prevent underground market participants from transitioning into the aboveground market. The bridge between the two markets is almost nonexistent, concentrating knowledge and consumer loyalty in the underground market, and power and money in the aboveground market.

Respecting the strength of the underground market enables better market predictions. The underground market won’t disappear with a commercial aboveground market or targeted law enforcement. At a minimum look for analysts that understand how state regulations and cannabis businesses inclusion or rejection of the underground market impacts patient and consumer behavior.  

TL;DR Cannabis market and industry analysis often miss crucial context and nuance.

Vertical Integration: Why Should You Care?

cannabis vertical integration licenses

How Cannabis Supply Chains Vary by State

Let’s discuss vertical integration. It may sound boring but it’s helpful to understand as a voter, patient, and consumer.What Is Vertical Integration

What Is Vertical Integration?

Vertical integration is when one company owns two or more stages of production normally operated by separate companies. In the case of cannabis legalization, it means one company grows, processes, and sells cannabis.

State Regulations Determine Vertical Integration

States with regulated cannabis markets can require, prohibit, or allow vertical integration. 

  • Colorado REQUIRES medical growers to also sell cannabis
  • Washington PROHIBITS growers from processing or selling cannabis
  • Michigan ALLOWS medical growers to also process and sell cannabis

The Good: Vertical Integration

  • Limits number of businesses the government needs to oversee; reducing government resources and spend required to monitor the industry
  • Reduces price at point of sale as a result of supply chain efficiencies and reduced mark ups as cannabis moves business-to-business through the supply chain before being sold to the end patient or consumer
  • Growers have greater access to and knowledge of the end patient or consumer enabling the grower to be responsive to patient and consumer preferences

The Bad: Vertical Integration

  • Significant capital and facility square footage required to own two or more stages of production; catering more to people with deeper pockets therefore limiting the diversity of business owners and business sizes in the market
  • Growers are farmers, processors are chefs or scientist, and dispensaries are retailers often times people do not have all skills so depth is sacrificed for breadth impacting product quality and limiting job opportunities
  • Growers and processors have to work with dispensaries to better understand patient and consumer preferences

Vertical Integration & Big Cannabis Lobbying

Vertical integration is a lesser discussed aspect of cannabis legalization but it’s important to understand as it impacts opportunities to enter the market as a licensee, general employment opportunities, and cannabis product variety and quality. In my observation, it’s also an indicator of how closely big cannabis is working with state legislators to define cannabis regulations as vertical integration benefits big business.

Florida’s Vertical Integration Woes

Florida is a great case study in how vertical integration impacts the cannabis market “As of July 5, six vertically integrated MMJ businesses operated 120 of the state’s 142 dispensaries.”

TL;DR Vertical integration is good indicator of how closely involved big cannabis business is with the state rule-making process