Humanosity says….Marijuana seems to be moving from the shadows and is on the verge of becoming a billion-dollar industry. Individual states in the US are leading the charge and now that politicians and corporations are seeing the billions to be made how long before the US model becomes the global model?
Bronzeville, a suburb on the south side of Chicago, is a picture of urban decay. It has long suffered the ills of disinvestment, middle-class flight and redlining that afflict many poor, often black, neighbourhoods.
However, a couple of young entrepreneurs are hoping that a law legalizing the recreational use of cannabis signed by Illinois Governor JB Pritzker will be the start of a new economic future for the neighbourhood. They see a future of cannabis stores and growers who will not only pay workers but will fuel a whole supply chain economy. Think contractors doing up the shops, security system installers, restaurants.
“It’s a snowball effect, and this is a once-in-a-generation opportunity for people who come from communities that look exactly like this community that we’re in now to really use that spark to jumpstart economic development in those areas”
The Economic Boom
Currently, 33 states have legalised the medical use of marijuana and 11 states and Washington DC have legalised the recreational use of cannabis. Analysis shows that nationwide, the industry is worth some $8bn. With many other states looking at amending their laws, the industry is projected to be worth $23bn by 2022.
The potential for raising taxes on the industry is what has attracted the interest of state legislators. Take Wisconsin for instance, should it legalise the recreational use of marijuana, it would get a $30m windfall in reduced criminal justice costs. The annual tax revenue is projected to be around $138m.
As cannabis is still banned at the federal level, each cannabis market is tied to the policies adopted by that state. In Florida, the legislature issued 5 licences that allowed the winning bidder to operate a vertically integrated business, from growing to selling. However, the fierce competition favoured well-financed large companies at the expense of local startups.
Big or Small Business?
The barriers to entry for many medical marijuana firms are often very high. In Illinois, participants need $400,000 in liquid assets and need to deposit $50,000 in an escrow account to run a dispensary.
Illinois’ recreational industry has much lower barriers to entry and is being closely watched by lawmakers in Wisconsin. Considering that many in the past were criminalised through marijuana possession or use, the state has set up a $30m fund to provide start-up capital to those who suffered under previous legislation. That lowers the costs of entry to around $5,000 and encourages small operations.
As in Florida, restricting the number of licences favours large companies. One licence was sold for $48m to a private equity firm. Whereas awarding too many can create its own problems. Oregon was liberal in awarding licences and so many entered the market that it leads to a huge oversupply and subsequent crash in prices.
The real key to unlocking the full economic potential lies at the Federal level. The continued federal prohibition means that the market cannot develop in normal ways. Traditional sources of investment like banks aren’t available throttling it’s growth.