Cannabis: A Commodity

how to get into the cannabis industry

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 – the price a business or consumer is willing to pay for a commodity or the 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 by a cannabis entrepreneur.

Legalizing cannabis and creating commercially regulated businesses for harvesting, production, and sales treats cannabis as a commodity by state governments and the private sector have spawned cannabis start-ups. 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 into the cannabis industry and onto 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 new jobs.

Cannabis: Industry and Market Analysis

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

Analysts are poring 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 start-ups, products, prices, and investment opportunities, and insights on how to get into the cannabis industry.

As I drink from the fire hose of cannabis podcast and 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 a cannabis consumer? Is he or she a patient purchasing cannabis for medical purposes? Or a consumer purchasing cannabis for recreational purposes?

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

Cannabis entrepreneur ideas and market dynamics

Can the above ground market realistically compete with 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 above ground 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 above ground market.

Respecting the strength of the underground market enables better market predictions. The underground market won’t disappear with a commercial above ground 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.