Supply and Demand for Marijuana in California

California Republic of Cannabis Flag
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The passage of the Adult Use of Cannabis Act in 2016 emboldened public interest in the massive marijuana industry in California. Now, as residents wait for recreational marijuana sales to begin, businesses, governmental organizations, and curious consumers alike are taking a look at the potential supply and demand of marijuana in California.

After all, the potential of the legal marijuana industry is a curiously easy thing to be drawn to.

Quantifying the California Cannabis Market

Quantifying supply and demand is difficult due to the long history marijuana has had on the wrong side of federal law. As an illegal drug, data on activities related to marijuana use, its transportation, and growth is historically absent or scarce, often being collected after the fact.

Although the medical marijuana laws have been in place in California since 1996, the scale of California’s population, when combined with their huge economic value, puts the state in a precarious position. Allow me to explain:

  • Issue too few growers a license, the legal market will have supply constraints. Supply constraints when there are high demands and a consumer accustomed to getting marijuana illegally would likely encourage continued black market sales.
  • Charge dispensary licensing fees that are too high for growers to pay and growers will likely continue to operate in the black market or stop growing altogether, doing nothing to help the supply in the legal market or deter illegal marijuana grows.
  • Have the taxes too high, growers and consumers will likely look to the illegal market again. Data on supply and demand for marijuana in California is necessary to ensure the supply of marijuana will meet the demand, while also giving lawmakers additional tools to eradicate the illegal marijuana market.

The Problem? Oversupply by Local Growers

Marijuana in California
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California marijuana growers have been supplying more than the industry in the state will demand, months before recreational licensing is expected to begin – highlighting the state’s massive unregulated market and illegal cannabis exports.

The California Department of Finance (DOF) conducted an economic report on cannabis cultivation, publishing the results in January 2017. The report estimates as much as 13.5 million lbs. of marijuana is grown in California, up 4.9 million lbs since 2006.

The estimate is based on knowledge of licensed cannabis farms, eradicated growing sites, and grows which are known and mapped but are not registered. Using the size of the grow site, the report assumes each plant yields two (2) lbs of cannabis.

The supply of marijuana in California meets the expected industry demand more than five times. Demand for cannabis by weight in California is estimated to be between 2.2 and 2.6 million pounds per year. This would imply, as a whole, California currently produces between 10.9 and 11.3 million lbs of marijuana which will not be used by residents of the state.

Of course, this estimate does not include potential from tourism and users who use more than 21 grams per month. In total, the Department of Finance estimates 14.2% of Californians have used marijuana in the last year, or 5.6 million residents.

Even With Tourism, California Exceeds Demand by the Millions

In a separate analysis, provided by ICF, reviewing the supply and demand for marijuana in California, it was estimated as many as 19% residents have used marijuana in the last year, increasing the number of users of marijuana in California to 7.7 million. Annual demand estimates range from 2.9 million lbs to 3.69 million lbs, an increase of at 700,000 lbs when compared to the California Department of Finance analysis.

Tourism would add between 212,000 and 241,000 lbs of marijuana demanded by cannabis consumers each year, the report suggests. This is based on information from Colorado, suggesting 7.3% of marijuana sales came from visitors to the state.

Potential Problems with Oversupply

grown marijuana in California
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As California pushes forward with their recreational marijuana program, the disparity between the volume of marijuana in California being produced, the number of licensed growers and the amount being sent through the legal marijuana system will have to be dealt with. The supply surplus, a whopping 5,000 tons, has a huge value in markets where marijuana is still illegal. Eroding the illegal market via regulation and taxation, after all, would seem as paramount to the marijuana industry as voters passing the law.

The marijuana industry is here to stay. Surplus supply and less demand for marijuana in California could have the potential to generate billions in direct sales revenues, as well as billions in secondary industries (such as security, transportation, growing, and farming equipment, etc.) and in the black market. At an average market rate of $1,500 per pound, as defined in the California Department of Finance report, California can expect between $3.3 billion and $5.55 billion in sales from residents each year and as much as $361.5 million from visitors.

Taxes collected on retail marijuana sales will include a 15% excise tax, on top of sales and local taxes. The excise tax collected in California at this rate could potentially generate between $549.2 and $886.7 million each year in additional taxes.

Article By: Joey Wells