A hypothetical cost analysis for undercutting the black market

*The estimates in this article are open to debate, but they make the point.

Let’s just say that, hypothetically speaking, the current black market in Canada is based on three models of cultivation. The first model is the seasonal outdoor grower, the second is the hobby indoor grower and the third is the commercial indoor grower. Model one harvests every fall and sells his/her crop based on market prices which vary greatly from province to province, in the vicinity of 900-2500 dollars per pound. The second model harvests casually and sells privately and in small amounts ranging from 125-250 an ounce. The third group harvests every 3 weeks to 90 days and sells based on market prices ranging anywhere from $1400 to $3000.

According to a recent article in Lift, the average price of a gram of cannabis in a dispensary is $10, which equates to $4535 per pound. This price is based on a perverted/distorted marketplace and should not be taken into consideration when trying to set acceptable tax structure. Unfortunately, this is what is being done, and it is a critical mistake.

Examining the profit margins

If the average profit margin on 100 pounds of cannabis, based on an annual harvest for models one and two, is 90-250K and 2-10K respectively, cannabis cultivation would appear to remain profitable and worthwhile. For model three, an annual yield can bring in millions of dollars depending on the size of the operation. Model three also happens to be the most expensive cultivation method and the easiest to trace.

The only way the mandate to defund organized crime will be fulfilled is to effectively remove profit incentive. The fact that only 5% of the cannabis trade is affiliated with “organized crime” should make this goal attainable, but this does not mean that the black market is going anywhere at all. In the wild and wacky world of weed, the average cultivator, farmer and consumer are not gun-wielding gangsters, but ordinary folks who either enjoy farming and the additional income or are just growing a bit extra to subsidize their own consumption.

Defunding organized crime

If the federal government really wants to defund organized crime, two things need to happen. The government should do a cost analysis of what it really costs to produce a pound of weed and then tax accordingly at a rate, bringing the final retail price in under, or close to, what would make this commodity so profitable for the “bad guys.” The current large commercial indoor grow-ops that are typically favoured for covert operations are not the most cost-effective method. By adopting and incentivizing more visible, environmentally-friendly and naturally-grown cannabis the government will effectively kill two birds with one stone.

In the future, the price of cannabis will likely become more in line with other agricultural commodities.  If we approach this from a public safety standpoint, and not from a distorted version of what has been the norm for far too long, the potential for success increases. We have to be prepared to think differently—this is likely our greatest challenge moving forward.