Active Legal Production Analysis in Washington State Part IV: Shortages in social context

Since the publication of this post, we have been alerted that our assumption that most active Tier 3 producers are not indoor may be way off.  Blaine Stum, a researcher with the Spokane Marijuana Policy Working Group, reports that according to his research so far 7 out of the 8 Tier 3’s approved before May 1 may be indoor.  We will adjust our analysis going forward, but keep this in mind for now — Dr. Corva, 7/19/2014

by Dominic Corva, Executive Director

Part III of our analysis of Washington State’s active legal production landscape ended with the following conclusion and question:

Our extremely provisional calculations thus work out to a maximum of 86,800 square feet of active legal canopy that could have been harvested by now.  That’s a far cry from the approximately 800,000 square feet of canopy figure being cited as approved in the news, and explains a bit better (a) why supply is so limited and (b) the rate at which it can be expected to increase.

How do these number translate into pounds, and can we refine our assumptions to learn more?

Let’s pick up where we left off, on the verge of calculating available supply in terms of wholesale pounds, which is a more useful unit for understanding wholesale supply than retail grams, on the one hand, and metric tons on the other.

The WSLCB’s original calculations anticipated that 2 million sq ft of canopy = 40 metric tons of useable flower and 40 mt of raw material for concentrate.  Simple math leads us to the conclusion that they expected 25 square feet of canopy (5 ft by 5 ft, or a really abstract average plant size to yield 1 lb of flowers and 1 lb of useable byproduct (trim, shake, and kief).

If we have approximately 86,800 square feet of active canopy that could have produced by as of July 8, that means our maximum estimated available supply right now could be in the range of 3,472 lbs of useable flower and 3,472 lbs of raw material for concentrates and edibles.  Let’s throw out the latter figure for now, since only one processor has been produced and as of today as far as I know their product is not available in any retail stores yet.

So the question is, where are those lbs of product?  By our calculations, that’s the maximum possible production we could have right now if all producer/processors had to deal with was getting approved.  There are several useful responses to this question.

1.  CASP estimates are based on partial and extremely fallible information and assumptions.  This is definitely true, but even if our conservative estimates are off significantly, we don’t seem to have even 100 lbs to market at this time.

2.  Producer/processors are building/hoarding inventory for any number of reasons, including taking advantage of retail shortages to extract windfall prices even higher than reported so far by CASP.  This is definitely true:  I gave Cannabis City’s James Lathrop two phone numbers the day before he opened.  Kouchlock was able to provide a pound at $4500, but my other source refused to sell James any at this time.  I spoke with that source’s close associate not long after, and there may be more to it than the conversation indicated, including the possibility that their inventory may not have passed quality inspection.  In addition, I am aware of at least one producer/processor whose inventory-clearing price at the moment is $10,000/lb.  Finally, there is at least one active processor whose business plan is predicated on buying up all available inventory and monopolizing market supply.  While this makes sense as a short-term money-maker, I doubt the viability of such an effort since (a) that’s a business plan that builds an extra 25% excise tax into the price structure and (b) I don’t know why anyone would want to do business with them for long.

3.  Sourcing networks simply haven’t been developed yet.  This is definitely true.  Yours truly had more active producer sources for Cannabis City than James had, the day before he opened.  Another approved retailer just outside King County that is just getting their business logistics together not only didn’t have a list of active producers and their phone numbers, but wasn’t yet sure what wholesale prices they were looking at, as of Sunday evening.  I have also recently become aware of a private sector market clearing web site in development, so stay tuned.

4.  Critics of the supply “shortage” in real life exclusively blame the problem on I-502 itself, Washington State policymakers, and the Liquor Control Board.  They cite onerous regulations, slowness in the process and poor timing to worry about (a) a very real shortage of product in open retail stores right now and (b) whether this means the black market wins and by extension I-502 fails.

The CASP Reality Check: There’s far more to the “success” or “failure” of active production than simply getting LCB approval, and the development of a sustainable legal cannabis market depends on a wide array of variables (see Part I in this series).  The retail shortage is not just the result of the supply shortage, because the supply shortage is not just the result of formal I 502 implementation.

We can identify many shortages beyond the control of government officials, but I will single out two: real estate and competence.

(a) There is a legal cannabis real estate shortage because despite zero government interference, most landlords will not rent space for production because they fear federal intervention, property seizure, or other a host of other things.  Even properties that meet I-502’s stringent zoning requirements have to have a willing landlord to become part of the landscape, and the fact is that most landlords will not touch legal cannabis.

Those that do have inflated their prices substantially, for the most part.  In addition to opportunistic rentierism, however, competition from shady (and clean) financial interests bids up prices on 502-compliant properties.  These added — and often unexpected when property gets bought out from under them by real estate and financial speculators.  This is a rampant problem and may be a more significant contributor to higher costs of business and the “I-502 shortage” than any other factor.

(b) There is a competence shortage amongst existing approved I-502 producers.  I (mostly) don’t mean to imply that producers are not capable.  I mean producers are making decisions in a knowledge vacuum because this has never been done before on the one hand and with a huge degree of uncertainty from week to week what can be happening and when.  Just like the WSLCB, their “incompetence” is a side effect of creating something from nothing that has ever been done before (Colorado, with different rules and conditions, isn’t a precedent from which anyone could derive much in the way of lessons).

The upshot of this is that even when approved, active producers aren’t getting up to full-capacity production very fast.

Conclusion to Parts I-IV

While the numbers presented here are probably closer to wild guesses than educated ones, the general thrust of the story about active legal supply is this:  There is a huge difference between “approved production” and actual production, and this difference can be explained by a number of reasons beyond “government failure.”   Market creation is not a top-down administrative procedure: it’s a social process that implicates complex, locally discernible relations of power and knowledge.

Part V of this series will turn our attention to the notion that I-502 is meant to eliminate the black market right away, and that it is sensible to judge the existing state of legal market capture by whether it is in fact making a dent in illegal cannabis markets.

These notions are wrong, is the preview.  Stay tuned!