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The business of selling legal weed is getting bigger. North America spent $6.7 billion on legal weed last year, and some analysts believe the market could expand to more than $20.2 billion by 2021 with California set to open recreational dispensaries on Jan. 1 and Massachusetts and Canada following suit. So it's not surprising that you're seeing eager business people across the country lining up to invest millions of dollars in this green boom.

But here's a word of caution for those looking to dive head first into these brand new legal weed markets: the sales figures behind the first four years of legal pot, with retail prices dropping and adding to the growth of well-funded cannabis businesses, show a market that is increasingly favorable to big businesses with deep pockets. As legal weed continues to expand, marijuana prices are likely to continue to fall, making the odds of running a profitable small marijuana farm even greater.

Washington offers a cautionary tale for potential marijuana producers. The state's marijuana market, for which detailed information is available to the public, faces a steady decline in prices, consolidation of production on large farms and a competitive market that is forcing cannabis processors to spend money on cutting-edge technology to create entirely new ways to get high.

"A lot of people [in Washington] are surprised and a lot of people are in denial that prices are falling," said Steven Davenport, a researcher at the RAND Corporation. "The average price per gram in Washington is about $8, and it's unclear where the floor will be."

Davenport has been concerned about the legal weed market from the beginning, starting when he served as a consultant to Washington state regulators in 2013, when they were writing rules governing the country's second legal weed market,1 allowing for the cultivation of marijuana and licensing businesses to sell the product the following year.

There is not much data on how the marijuana market worked in 2013, and regulators in Colorado and Washington are trying to develop rules for products that have never been sold on any regulated market. Questions about the market dynamics behind the sale of marijuana are in some ways unanswerable, and that information is hidden in the ledgers of black-market dealers.

Now, four years later, the situation has shifted as entrepreneurs launch recreational marijuana businesses in California and Massachusetts. Since legal marijuana sales take place in five states on a daily basis, there is a wealth of data on how the market works. In fact, thanks to a public database2 containing every legal weed transaction that occurs in Washington State, there is probably more public data on how the market works than any other market in the world. The massive 45 GB database tracks each plant as it is harvested, processed and sold.3

The data shows that legalization has been extremely disruptive to the way cannabis was previously grown and processed, when small underground weed businesses could make a living in basements filled with plant lights.

Jonathan Caulkins, a professor at Carnegie Mellon University and former co-director of the RAND Center for Drug Policy Research, said, "Prices are dropping, the industry is consolidating, and the variety of products is exploding - none of this is surprising." A book titled "Legalizing Marijuana: What Everyone Needs to Know" was published in 2012. "These are things we predicted well in advance because they are the natural result of legalization along the for-profit business model."

Falling marijuana prices

When the first recreational store opened in Washington in July 2014, cannabis shoppers didn't have much of a financial incentive to buy legal marijuana. With only a handful of farms and stores licensed to sell legal marijuana, market supply was limited and the average retail price was $32.48 per legal gram in the first month of sales, $4 more than the price on the black market or medical market.

According to data from TopShelfData.com for the state, the average retail price rose to $35.67 the following month, but marijuana prices have steadily declined since then: within six months, the average retail price dropped to $21.07 per gram; a year later, after a change in state taxes, the average price for five pots was only $12.32 per gram; and by September of this year, the average retail price for a gram was The average wholesale price for producers in September was $2.53 per gram of cannabis.

According to Susan Gress, a legal pot farmer on Vashon Island outside Seattle, those prices are much lower than what pot farmers who first applied for licenses in late 2013 thought would be the wholesale price. .

"That's just a blue sky estimate, anywhere from $5 to $25 - no one knows. We were hoping for about $7 or $8 (per gram), and in those days we were able to get $8 per gram," Grace said. "But things changed."

Grace, who used her retirement savings to start Vashon Velvet Pot Farm in an old horse barn on her property, said she thought her brand had a better chance of survival because it was considered premium and she was able to charge close to $5. wholesale grams. But with prices dropping, not everyone is sticking around.

Caulkins points out that it's fairly obvious why growing has become cheaper: on the one hand, pot farmers no longer need to spend time and energy dodging the police; on the other, industrial farming techniques and engineers are now involved in the industry, designing state-of-the-art growing facilities to increase efficiency and reduce production costs. These changes - with their associated price reductions - are likely to continue.

California and Massachusetts will launch their own legal markets in 2018, and if the federal government ends the ban, prices will fall even further, according to Coggins.

"Once it's legal nationwide and farmers can grow it like tomatoes and asparagus, it will be very cheap to grow compared to the past and either very cheap to process or very cheap depending on which product you're making," Caulkins said.

Consolidating marijuana cultivation

When regulators in Washington created the legal marijuana market, they created three tiers of marijuana producers based on the size of each farm. The idea was to license farms of different sizes, and the market would support a range of small, medium and large producers.

Fast forward three years and it appears that this idea was flawed. Large recreational producers have gobbled up much of the market, sidelining small-scale growers in the black market and medical market. From January through September of this year, Washington's 10 largest farms harvested 16.79 percent of all dry weight weed grown in the state,6 more than the 500 smallest farms combined (13.12 percent).

This consolidation of Washington cannabis cultivation is just a harbinger of things to come, Davenport said. "I think what's becoming clear is the inevitability of mass production, which will really start to lower the cost of production," Davenport said.

Current regulations prevent pot farms from expanding indefinitely, but as legalization moves forward, larger farms will likely be allowed. This summer, regulators in Washington expanded the maximum size of a farm from 30,000 square feet to 90,000 square feet. California plans to limit farms to 1 acre or 43,560 square feet when the market first launches. But current state regulations do not prevent farmers from using multiple permits, which opens the door to larger farms.

What would happen if pot farms could be as big as wheat or corn fields? According to Caulkins, it's conceivable that 10 reasonably sized farms could produce a national supply of tetrahydrocannabinol, marijuana's best-known active chemical (often abbreviated as THC).

"You could grow all the THC consumed by the entire country on less than 10,000 acres," Caulkins said. "The common size for Midwest farms is 1,000 acres."

The economic pressure on small pot farmers is only likely to increase if a national market for hemp opens up with the nation's largest, multi-billion dollar agribusinesses able to invest in production - which is where they are from doing blockage7 until the federal government changes its laws.

"The specialization of the industry is an ongoing thing," Caulkins said. "There's been tremendous change, but there's at least as much change coming."

It's not your parents' pot

Walk into a legitimate weed store and you'll see shelves of products that barely resemble Cheech & Chong pots. From weed mineral water to pot topical rubs to cannabis sodas, producers use complex and expensive equipment to creatively deliver cannabis to customers. Washington's weed data shows that consumers have clearly developed an interest in these processed products.

When legal weed stores first opened in Washington in July 2014, flower - unprocessed chunks of cannabis that can be put into pipes or joints - accounted for 94.80 percent of the market, but a year later, flower accounted for just 72.62 percent of sales. By September of this year, the date of the latest available data from TopShelfData.com, that share had dropped further to 54.50 percent.

Other forms of cannabis - such as concentrates, e-cigarettes and food products - make up the rest of the market. Concentrates, a highly effective product that can be consumed in multiple ways, accounted for just 5.2 percent of all sales in July 2014, but 17.96 percent in September of this year. Vape bongs, which allow for the consumption of cannabis through e-cigarettes, accounted for 7.67 percent of sales in September, while food accounted for 8.46 percent of sales.

Caulkins said this diversification is natural in an industry where the basic product - loose-leaf flower - is relatively inexpensive to produce. "If you put the same amount of cannabis into an edible food, then your food may taste different than the competition's and therefore will be different because of the other ingredients," Caulkins said. "They're doing everything they can to differentiate their product so they can get a premium price."

While growing and selling unprocessed pot is relatively inexpensive, it requires significant investment in equipment to produce increasingly popular foods and concentrates. Products like unflavored canned mineral water or concentrates, which form crystals, are made by combining pharmaceutical and food science techniques with production equipment that can cost hundreds of thousands of dollars. It may be difficult or impossible for small business owners to purchase the equipment needed to produce modern pot foods themselves.

This business environment seems to limit the number of companies willing to produce food products. According to TopShelfData.com, only 74 of the more than 1,000 Washington companies with valid licenses sold a food product in the 12 months leading up to September 2017. And, just like flowers, a few large companies dominated the edible market. The five largest food producers accounted for 51.15 percent of the $38.7 million in food products sold during the 12-month period. The top 20 edible producers accounted for 90.48% of edible products during this period.

With legal weed spreading across the continent, the drive to find a way to charge a premium price for cannabis won't end anytime soon. Combining lower cannabis prices and consolidating production, it's not easy for small business owners to find a profitable way to sell legal weed.

Lester Black is an independent journalist and cannabis columnist for Seattle newspaper The Stranger. He supports the legalization of marijuana.

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