Investing in the weed industry is a trend among investors now, especially in those countries where cannabis laws move towards the regularization of both the production and use of the plant. This is exactly what happens in the USA, where government administrations seem to be making great strides in that direction. However, contrary to what some data indicate, the legalization of marijuana doesn’t bring about the immediate uprooting of the entire black market.
Evidence shows that the United States has set out on a long yet non-stop journey aimed at expanding the boundaries of cannabis use. Thirty-three states have already legalized medical weed while just 10 have done so with recreational pot. Plus the Farm Bill signed by President Trump at the end of 2018 has given the industrial hemp industry a nudge, completely changing the course of action pursued since the mid-twentieth century.
With all this happening, one thing is clear: the cannabis market is hotter than ever. According to the most optimistic forecasts, the legal cannabis market is expected to reach $23,400 million by 2022, twice as much as in 2018.
The black market is also at full swing, still generating lots of money, which means the new laws haven't had much of an effect on it. In fact, out of the $52,500 million generated by the cannabis market in 2016, $46,400 million came from illegal means.
This proves that, whether you legalize pot or not, it's necessary to conduct follow-up action to put an end to or hamper the impact of the black market. Below is some information in this regard that may be of interest.
The black market resists (because of the taxes)
One of the reasons why the illegal market stays strong is that legal weed is heavily taxed, making retail prices too high for most cannabis users. Washington's current excise tax on pot, for example, is 37% while Massachusetts levies a 10.75% rate. Most analysts agree: these numbers are too high. The example of Colorado proves it. The 30% excise tax imposed after the legalization failed to stop people from turning to the black market. Most states are now planning to set a tax of around 10%-25%.
Bureaucratic obstacles fuel the black market
The numerous bureaucratic hurdles growers applying for production licenses have to jump through are also responsible for the black market's continuing unabated. Both Nevada and the city of Denver (Colorado) are great examples of this. Adult-use cannabis is legal here, but never outside of a private home. This scenario isn't really appealing for cannabis consumers for they don't see any reason why they shouldn't look for cheaper black market alternatives.
Legalization strides on, detentions intensify
Here's a curious fact that seems almost surreal: cannabis-related arrests increased sharply between 2016 and 2017. The funny thing here is that all this happened in a time when increasingly more states had legalized medical and recreational marijuana. Arrests for possessing marijuana account for 91% of the cases, while fewer people are being prosecuted for the cultivation and use of pot.
More people busted, less weed seized
In keeping with the paradox, the total value of DEA seizures plunged dramatically. Between 2016 and 2017, cannabis seizures fell from $12.8 million to $8.3 million. This is down to the fact that the DEA focuses on the largest drug rings, devoting approx. 15% of their resources to marijuana trafficking. Organized crime cells then move to states where cannabis's been legalized and sell it to those that still criminalize it, obtaining huge profit margins.
Reduction of the cross-border illicit market
Figures say so: the smuggling of weed on the U.S.-Mexico border is in decline. Data on seizures in states bordering Mexico reveal a 44% decrease since 2015. What it's still quite unclear, though, is whether this reduction results from an actual drop of these illicit smuggling activities or from the police looking the other way. It is, nevertheless, clear that illegal cannabis growers in Colorado and California, for example, no longer have to bear the costs of transporting weed through the border, meaning they can lower their prices and compete with those of the Mexican cartels, who seem to have decided to concentrate on the production of poppy seeds given the rise in the consumption of heroin and opiates in the USA.
Limiting home cultivation brakes the black market
According to some data taken from a few surveys on the situation of pot in Colorado, restricting home cannabis cultivation curbs the black market's production. Unlike some years ago, when up to 99 plants could be grown at home, a maximum of 16 cannabis plants is currently permitted. The problem was that the overproduction ended up in the illegal market. Coincidence or not… this restriction seems to have brought about a reduction in the black market production.
Not all states follow the same pattern
However similar they may seem, they sometimes differ greatly. This appears to be what the cannabis price trends of the states that have legalized weed are leading us to believe. The state of California, for example, raised the price of legal weed making it more likely for users to turn to the black market. Oregon thought otherwise and decided to keep the prices down by facilitating the procedures and reducing administrative fees. The direct consequence was an increase in supply and an almost 50% reduction in the price of legal pot.
Illicit pot results in higher profit margins
Profit margins within the black market are generally better than in the legal industry. This is definitely one of the reasons, if not the main reason, why the black market is so difficult to uproot. Not having to undergo any inspections, use any costly products or worry about any health and safety requirements represents a large saving for cannabis producers and suppliers who see how their profit margins grow and grow.
Photo Credit: Vapor Vanity
At one time, it was legal
Although these last decades U.S. legislation could be described as widely restrictive, the truth is that it hasn't always been like that. In fact, during the first half of the 20th century, the hemp industry did nothing but thrive. After some devastating blows, however, in 1970 it had to face the enactment of the Controlled Substances Act, a federal U.S. drug policy that tightened up legislation and restrictively banned cannabis and hemp alike.
The FDA switches gears
With the enactment of the Agriculture Improvement Act of 2018, the FDA (the U.S. Food and Drug Administration) has announced a possible more permissive regulation on the production and trade of cannabis derivatives, so the legal market is expected to grow further in the next few months. The right decisions could lead to the uprooting or at least to the decline of the illegal market. Poor choices, instead, could result in negative consequences for the legal industry. That's why this association is seeking the opinion of all parties involved, with no exception.
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