Pricing Marijuana

I’m not in Colorado or Washington or Uruguay or any other place where marijuana is legal, but I expect to be in not too long a time, because the legalization movement will be spreading. With that in mind, I looked at process in Colorado, and I was shocked. The prices look like they still have a premium of risk in there, even though most of the risk has been removed by legalization. It’s not easy to estimate how large the risk premium is, but we should be able to make a reasonable estimate by comparing marijuana with other crops that require similar inputs, similar soils, etc. After getting a general idea from a direct comparison, we can make adjustments to reflect differences.

Hemp, whether for fiber or smoking requires good quality soil and some additional nutrients. The soil requirements are similar to corn or tobacco, but hemp does not require the special soils that some tobacco requires. Per acre labor costs are said to be comparable with specialty grains and oilseeds.

Processing costs would be similar to industrial hemp. Although different parts of the plants are taken for industrial hemp; the kind of handling would be similar. There probably be additional handling costs that would cover drying and packing in small quantities, but that is a simple kind of adjustment to make, especially since we know the time and equipment that would be necessary.
To start off.
Corn (ave.) 495.00
Canola (SK) 375.00
Canola (AB) 390.00
Flaxseed (SK) 450.00
Flaxseed (AB) 400.00

These are recent spot prices stated in cents per pound in different markets. Considering that this is a small and speculative market it would be reasonable to start with the high price ($4.95) that is for corn. This is only a starting point, because the harvesting and handling of smoking hemp is more labor intensive than is the case of crops that are loaded in huge quantities. The exact cost of the handling can’t be determined in detail until the actual market will exist. A reasonable estimate is that it will take less than a quarter of a person hour and the handler probably will make about $20 per hour. Handling facilities will eventually be rather specialized, but that will be mostly for drying and controlling dust.

It is difficult to estimate costs beforehand, so it is better to estimate on the high side, but thinking of a grading and drying facility for tobacco and assuming that a plant for hemp would be similar in type, size, etc. The handling time would also be similar to tobacco, so let’s look at the costs of that commodity also. Dried tobacco leaf sells for $5 to $20 per pound depending on type and quantity. Considering that smoking hemp would be a smaller crop, it would be reasonable to say that wholesale smoking hemp prices should be about $20 per pound. Tobacco is somewhat easier to work with, because the leaves are thick and less likely to crumble (which also suggests that a moisture controlled facility would be a good idea). The retail price of cigarettes without the taxes is about $2.50 per pack of twenty cigarettes, which has a weight of about one ounce.

Putting all this together a reasonable price for an ounce of marijuana, smoking hemp, is about $2.50 plus a reasonable tax. The federal excise on cigarettes is just over a dollar a pack, and the average state taxes are $1.91 per pack. This level of taxation is silly, but it doesn’t look like it will rationalized soon, so let’s live with it and make the taxes on marijuana equal to tobacco taxes. If the feds and the states decided that taxation based on the THC content would be preferable, then the total price probably would end up in the same range, from $4.50 to $10.10, but the way to get there would be different.

Pricing marijuana like this would allow the participants in the industry to make good money, and government could make an obscene amount of money, and consumers could get a good product at a reasonable price without paying the criminal risk premium. The reason why I wrote this was that I looked at pricing in Colorado and found prices per ounces ranging from $90 per ounce to more than $300 per ounce. That level of pricing is theft. Perhaps prices will come down when the markets learn the economics, or when the owners of markets become so rich that they won’t need any more money, but it is possible the economies of scale are not coming into play, yet. Until that happens I think that most people should scream, unless they grow their own, in which case they should smile.