Oregon Cannabis: Black and White Markets

Last month, the Oregon State Police Drug Enforcement Section published a report titled “A Baseline Evaluation of Cannabis Enforcement Priorities in Oregon.” It’s a great read. The big takeaway, as reported by The Oregonian, is that Oregon remains a top source for black market pot— despite our legal cannabis programs. Those familiar with the industry have long known this fact, of course, and the problem has been exacerbated as of late for various reasons. These include: state and local regulatory hurdles, high start-up costs, and increased federal uncertainty.

We have been been writing about the unsanctioned Oregon market for quite some time. To be clear: there has always been a black market in Oregon, and will be for a while. There is also a dark gray market, an off-white market, and many shades between. As a general concept, the further that weed gets from the grower, the darker the market. This is especially true in poorly regulated systems like the Oregon Medical Marijuana Program.

Right now, Oregon probably grows four or five times the amount of cannabis that is consumed in-state. (It’s not that consumers aren’t trying; there’s just too much pot.) The Oregon State Police study estimates that just 30 percent of all pot transactions are state-approved. Much of the surplus weed goes from sea to shining sea, but especially to hubs like Illinois, Minnesota, New York, and Florida.

Because Oregon weed is an excellent brand, demand is high nationwide. The lion’s share of Oregon’s exported weed is grown in two southern counties: Jackson and Josephine. And much of that weed is straight-to-black market—e.g., a pound of local weed may sell for $1,000 here, and re-sell somewhere like Texas for $7,000. Other transactions may be grayer and comparatively benign—e.g., a pound of weed grown under the medical program may be sold to the cardholder’s friend, at friendly prices.

As with any commodity, the blacker the market gets, the higher the price for cannabis. This is because buyers compensate dealers for increased risk of arrest, the cost of turf, and so on. One day, when pot becomes legal nationwide, the black market will probably look similar to those for other controlled substances, like tobacco and booze. Today, a few people still buy loosies and moonshine, but most of us go to the store.

It will be a while before Idaho, Texas, and other miserable states change their laws, so Oregon attempts to moderate the black market in three primary ways: law enforcement, supply, and taxation. Oregon needs to improve its enforcement, and turkeys like Jeff Sessions point to this as evidence that the program must end altogether. This argument ignores the demand side, though, where federal prohibition has created an irrepressible national market for Oregon weed.

On supply, the state is doing better. The goal here is to have enough legal weed so that no Oregonian needs to go off-system. Oregon is close on that one, but issues with state-mandated testing and license approval have caused temporary shortages. Recently, we have seen a spike in client requests for requirements contracts that cover the sale of cannabis even before it is grown—at least in the OLCC system. This should even out by 2018.

As for taxation, the goal is to generate revenue but keep prices low. When prices drop and stay below the black market, the black market disappears. The last people to leave will be the heaviest cannabis users, who are generally most price-sensitive and accustomed to informality. When all of those folks are finally going to the store, the black market will be gone—at least for Oregon sales. When the national laws change, the black market will dissipate altogether.

Over the past few months, our clients who have weathered the storm and resisted the urge to retreat to black and grey markets–and thereby remained our clients–have reaped dividends. Demand for state-sanctioned weed is robust among Oregon consumers, and we expect prices to remain high throughout the supply chain for a while. The Oregon Sate Police report is a helpful snapshot of where the state of the market today. Where it goes next is the fun part.

Editor’s Note: A version of this story originally appeared in the Portland Mercury’s “Ask a Pot Lawyer” column, also by Vince Sliwoski.