Legal Marijuana Prices Are Plunging in Colorado, but Not for the Reason You'd Expect

Cannabis' competitive landscape is going up in smoke.

Sean Williams (TMFUltraLong) Sep 11, 2016 at 9:07AM

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Marijuana prices are plunging, but for a surprising reason

More recently, though, a report from marijuana distribution platform Tradiv highlights an even more encouraging trend for consumers in Colorado. Namely, legal marijuana prices are getting much more competitive with black market prices. Remember: Black market marijuana has minimal overhead costs, as there are none of the costs associated with taxes, regulation, and storefront maintenance, which typically gives it a big pricing advantage over the legal marijuana market.

However, according to Tradiv, wholesale marijuana costs in Colorado have fallen from between $2,400 and $2,600 per pound in October 2015 to just $1,400 to $1,600 per wholesale pound in August 2016. Prices are substantially more competitive for the consumer, and it could result in more revenue than expected for Colorado's government as more consumers presumably purchase the product through legal channels.

Yet what's really interesting is the reason behind the falling prices. The typical assumption would be that growing competition is driving down prices as small marijuana dispensaries fight for customers. The U.S. Drug Enforcement Agency recently chose to keep cannabis categorized as a schedule 1 (and therefore illicit) substance, which should, in theory, keep big business out. You see, businesses involved in the sale of marijuana often face very high tax rates, as they're unable to take normal business deductions, and most have little or no access to basic financial services such as checking accounts or lines of credit. The industry doesn't seem very conducive to big business.

Yet that's the exact opposite of what's happening in Colorado. In May, the state extended a moratorium on the issuance of new cannabis licenses, allowing big cannabis players in the state to purchase the majority of licenses available. Furthermore, there are no limits on the number of plants a facility can grow in Colorado, which has allowed these bigger businesses to boost production and essentially flood the market with marijuana, even if demand for the product isn't there.

In other words, we're not seeing demand driving competition in Colorado. Instead, an oligopoly-driven oversupply is pushing prices down. ...

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