Wish-I’d-Said-That Dep’t

John McDuling in Quartz: “Investing in marijuana stocks is a lot more dangerous than smoking marijuana.”

There is a ton of money to be made in the cannabis business: by fleecing investors.

There’s also a ton of money to be lost: by being one of those investors.

Legal cannabis will be a commodity, and a cheap one at that. Maybe somebody has a clever branding strategy to make money anyway, but what are the odds you’re going to pick that lucky company to invest in as opposed to the 99 others that are going to go broke when pre-tax retail prices hit $3/gm. for sinse, with concentrates trading at a discount on a per-milligram-THC basis?

This is one case where the old rule applies in spades. The sure-fire way to double your money is to fold it over and put it back in your pocket.

Comments

  1. Supertroy says

    I wonder if that counts against the old saw that says the guy who really makes money during a gold rush, is the one selling the shovels?

    Because on the one hand I can see investing in a company that focuses on being a brand name in marijuana pariphelania (novelty pipes, grinders, etc.) as being a decent investment opportunity.

    But a high end vending machine that’s never going to be used? Forget that noise.

    • Freeman says

      Because on the one hand I can see investing in a company that focuses on being a brand name in marijuana pariphelania (novelty pipes, grinders, etc.) as being a decent investment opportunity.

      Just don’t use the word “bong” and sell on the internet (at least not while someone like Ashcroft is AG). “Chong Bongs” was an excellent brand name, given Tommy’s celebrated reputation among connoisseurs (word on the street is that genuine CB’s are going for $700+ on the used market), but instead of fabulous wealth, it got him a federal prison sentence.

  2. Warren Terra says

    Regarding money and marijuana, isn’t the more pressing issue the federal laws regarding money and marijuana? Selling weed is a legal regulated activity in Colorado now – but you can’t deposit the money in a bank, because the banks don’t wan’t to be subject to seizure laws. You can’t even write checks. The CBC’s As It Happens had an interview on Monday’s show with one of these legal retailers, and he’s spending a lot of time carrying cash around town and hoping he doesn’t get mugged, and buying money orders at the supermarket. He’s got to do all his transaction in cash or in overpriced money orders – even when he remits the sales taxes he’s collected!

  3. Dead Or In Jail says

    Maybe I’m not following the trajectory of this discussion close enough but I thought that the drug-policy-cum-tax-policy wonks seem to be coalescing around a taxation consensus.

    Shouldn’t THC content, rather than cannabis per se, be the element that’s taxed? After all, it’s the “bad” cannabinoid (as far as we can figure, given the unavailability of in-depth research) and this form of taxation would provide a subtle but effective(?) nudge to something more akin to “beer drinking” as opposed to “liquor drinking.”

    • Mark Kleiman says

      Yes, I think it’s fair to say that THC taxation is the wonk consensus. But I’m not aware of any actual policy movement in that direction.

  4. TomA says

    When I was in high school, I wanted to be the Phillip Morris or marijuana. If the US ever legalizes it on that kind of mass scale, then yes – there will be big money to be made as the industry consolidates around a few brand names and your normal agribusiness concerns start increasing the scale of farms.

    But until then, the market is still to small and fragmented to really make an informed investment.

    • J. Michael Neal says

      If the industry ever does start to consolidate in that way there are going to be a small number of big winners but most investors will get wiped out. It’s easy to think you’ll make money investing if you just assume that you’ll be one of the few rather than one of the many.

    • Vernon says

      There are three ways to make money in agribusiness:
      * production
      * marketing
      * services

      If we take Mark’s figure for $3/g for sinsemilla and assume legal production to meet existing sinse demand in the US would require, let’s say, 1k metric tons per year (or 1 billion grams), and if we make a further assumption that all of it could be grown on, say, 10,000 acres, then we’re looking at a crop that would bring farmgate revenue of about $300k per acre. (Mark please check my numbers — I know you’re closer to the sizings than I am). That’s a lot per acre. Strawberry farms (about the highest density $ / acre crop there is) bring in about $50k per acre in California. So I’d argue that there would still a huge incentive for SOME growers to continue to grow (but AT SCALE). So there’s still going to be a lot of money in production if allowed to consolidate. (I don’t yet have a sense of what the margins would be, but I bet they will be relatively high if we take strawberries as a guide: ~25%.)

      If I were looking to invest, I would be looking actively to companies that acknowledge that pre-tax prices will eventually drop a lot, and that there has to be some sort of consolidation in the supply chain (and a lot of branding / bundling) to make it work for the marketing part of the value chain. There’s actually not a lot of traditional marketing value to be added. Take eggs for example. They can be produced anywhere at any time, so they don’t have to be stored to smooth out supply, nor do they need to transported very far. In contract, take Kellogg’s corn flakes. All manufactured in one place (somewhere I can’t remember in the Midwest), from raw materials that are basically harvested only once per year and have to be transported to the manufacturing site. At that point, Kellogg’s pays for the commodity itself (corn), the storage, the transportation, the manufacturing and packaging, the distribution, and advertising and promotion. Customers then happily pay the markup (and more) because they want their corn flakes all year round, where ever they live.

      Weed will be way more like eggs than corn flakes (though concentration of production may change if it turns out those 10,000 acres are best placed in one part of the country versus another). So it’s hard to see how weed marketers will be able to justify a big markup unless they can find a way to brand or bundle the product with other services or customer demands (i.e., a weed bar or manufacturing of food / drink products, etc.). It would take a branded play to really break this up. And the branded play, I think would depend heavily on innovation in production (new varietals, high CBD:THC ratios for MMJ use, etc.).

      Services are bit different. These would include things like grow supplies, new seeds / varietals, products to help consumers ingest (by whatever means), new kinds of lighting or grow chambers, harvesting / planting / spraying equipment for scaled up operations, integrated pest management protocols and materials, methods for maintaining genetic segregation in large populations, etc. Services will scale with the markup associated with production or marketing. If money can still be made in production (and I’d argue it can be, just not the way it is now), then growers will spend a lot of money to ensure their yields. If money can be made in marketing (not sure), then marketers will pay for services, as well. And of course customers will always spend money on new and interesting ways to ingest MJ.

      But all of this depends on the way in which MJ is legalized. Right now there are two very different models in two states. It will be very interesting to see how this plays out. (I’m particularly curious about interplay between price, consolidation, and variety of products.)

      • J. Michael Neal says

        Well, there’s one big problem with your analysis right from the start. If the retail price is $3/gram and there’s a billion grams sold, the revenue for the farmers is going to be a lot less than $300/k per acre. The $3 billion is going to need to be split over all of the participants you cite plus several other groups, such as the retailers themselves.

        The fact is, if your numbers are right, a $3 billion industry is tiny and no one is going to be getting very rich.

  5. Vernon says

    Point taken. Then if weed is more like corn flakes: $15k per acre. If more like eggs: $150k per acre. So somewhere north or south of strawberries by a factor of 2 or 3.

    • J. Michael Neal says

      You’re still way off. Farmers don’t receive anywhere close to half of the retail price of what they grow. Since you were discussing corn flakes . . .

      A bushel of corn weighs 56 pounds and sells for about $4 on the commodities market.

      An 18 oz box contains about 13 oz of corn and retails for about $4.

      So the farmers are getting less than 2% of the retail price of the corn flakes.

      Marijuana growers might end up getting a higher percentage of the retail price, but my guess is that your off by an order of magnitude.