Cannabis Crunch

I have been joking for a year that when Legalization Day arrives in BC we won’t notice any difference. I suspect that will be true tomorrow simply because very little of the infrastructure of legalized pot will be ready to go on Day 1.

The biggest difference will be that the people who will assemble to enjoy being able to smoke pot without the slightest chance of arrest (not that there is much chance of arrest now) will all be smoking illegal pot because there is, according to the Globe and Mail, exactly one fully licenced pot shop ready to go for Day 1. Plus there is and will remain a significant supply shortage as the various licenced growers ramp up the production of their “biological assets”.

The great error of the Canadian marijuana advocates was to accept “legalization” rather than demanding “decriminalization”. This has doomed Canada to repeat the American experience of creating a heavily regulated cannabis industry with so called “seed to sale” product tracking, licenced pot shops, provincial wholesale monopolies and all manner of other state intrusions. The layers of regulation might even suggest that the idea that pot is harmless does not reflect the Liberals’ actual thinking.

At the same time, the personal grow show exemption allowing the cultivation of up to four plants for personal use is going to hole the great barge of regulation under the waterline. It will not take all that many people growing to provide an abundant, unregulated, supply of potlatch pot. The potlatch element comes from the fact you cannot sell your crop, but you can give it away. A mildly competent grower – and there are plenty out there – should be able to grow a pound of pot per plant. An ambitious grower should be able to harvest 3 or 4 times per year. A pound is roughly 450 grams and if you think about that at the notional rate of $10 a gram, that is $18,000 worth of untaxed pot every quarter.

There is no question that home grows in closets will be a thing, the only question is how big a thing.

At the moment there are some very big companies involved in the cannabis business in Canada. Companies whose market caps are several times the estimated size of the Canadian retail recreational marijuana market. There are also plenty of large scale growers who have not jumped through the Health Canada regulatory hoops. There will be pressure on the federal and provincial governments to enforce the seed to sale regulation of legal pot. But there will be market pressure to ignore the regulatory scheme from pot activists, “independent growers” and, I suspect, urban and rural First Nations who have no particular stake in the regulatory scheme. Just as I can drive three miles from my home and buy fireworks on a nearby reserve in defiance of municipal and provincial law, it would hardly be surprising to see excise stamp free marijuana for sale in those same locations.

Astoundingly, the legalization of marijuana is likely to be the only basic accomplishment of the first Trudeau government. The early indications are October 17 will be celebrated with clouds of illegal pot, regulatory chaos and a boost to the grey and black markets as police and Crown will no longer have even the threat of possession charges. A few months from now there will be the inevitable “oversupply” of recreational marijuana with the corresponding drop in wholesale and then retail prices. Which, in its turn, will collapse such tax windfalls which legal pot were promised to bring.

The chaos of the Canadian “legalization” of marijuana will take a year or so to really hit home. Just in time for the October 2019 federal election.

Pot Leaks

Here are your brownies Mrs. Smith. Can I see some ID?

To my not very great surprise, John Ivison of the National Post had parts of the Canada Marijuana Task Force Report leaked to him.

What was a tiny bit surprising was to be called by “The Morning Show with Matt Gurney and Supriya Dwivedi” http://www.640toronto.com/morningshow/ at 5:30 AM this morning (Producer Ryan…you owe me baked goods.) to comment on the information disclosed in the leak. You can listen to my remarkably coherent (having been awake for a minute and a half) ramblings here.

A couple of slightly less random thoughts on the leaked material.

The leak itself is interesting and more than a little outrageous. The Report clearly favours Health Canada Licenced Medical Marijuana growers and many of those corporate grow shows are publically traded companies. Allowing the report to come out in dribs and drabs (because “translation”) could cause deep uncertainty in the public markets. The government should release the report, in toto, immediately.

Substantively, the Report apparently recommends that legalization efforts be directed at “getting rid of the $7-billion-a year black market. Sources familiar with the report, which is expected to be made public Dec. 21, say all the other recommendations flow from that guiding principle.”

It is not clear whether that “black market” includes the grey market of dispensaries and pot shops which has grown up in Canada and which continues to expand.

Using “legalization” as a weapon against the “black market” is pretty much the level of restrictive thinking I expected from the Task Force. Rather than seeing legalization as an opportunity to regularize the marijuana market, the language suggests a resumption of the war on drugs by other means.

The Task Force is apparently suggesting that the 40 Health Canada approved licencees remain the only legal source of marijuana and proposes that recreational pot, like medicinal pot, continue to be delivered by Canada Post. A nostalgic bow to the mail and a suggestion pretty certain to keep dispensaries and “Bob on the corner” in business for the foreseeable future. Here is a free clue for the Liberal government: recreational pot users are impulse buyers. As I say in my book, “The most common triggers for the decision is that, by their lights, a customer is running low on pot, has run out of pot or has been out of pot for some time but only now has the money to buy more pot.” In short, not likely to wait a week for Canada Post to deliver.

But recreational pot users may be waiting a lot longer than that. Let’s do a bit of simple math. A 7 billion dollar a year “black” market at, say, $10 per gram implies a 700 million gram market or 700,000 kilograms. According to Health Canada’s market data, Canada’s licenced corporate grow shows, in the quarter ending September 30, 2016 produced 5734 kilograms of pot and had inventory of 13,236 kg. Just for fun, lets say we take quarterly production to 7000kg. Annualized, in round numbers, 30,000kg.

Yup, the combined production of all the Health Canada licenced corporate grow shows is, optimistically, less than 5% of projected recreational demand aka “the black market”. Don’t be looking for the postie with your pot anytime soon.

There is no question that some, but not all, of the current licencees can scale up their operations; however a 20x increase in production is not likely with only 40 licencees.

Ivison’s story goes on to suggest that, at least initially, Canada Post would have a monopoly on pot deliveries. The logic here being that Canada Post would verify the identity and age of the people it was delivering to. Right. Just for fun think about how that would work. Would you go to your local post office and present ID to pick up your pot? Would the postie (for those of you who still have home delivery) ask for id at your door? Canada Post according to its 2015 Annual Report delivers millions of parcels. Some days it delivers over 1 million parcels. E-commerce is taking off and Canada Post is getting its share of the business. But a great deal of the parcel post does not involve any interaction with the recipient.

If you take the “black market” number of 700 million grams and assume people will buy in 10 gram parcels – call it $100 – that is 70 million face to face deliveries a year. There will be new jobs at the Post Office.

The only encouraging thing in the Ivison piece is that distribution and production will have to be discussed with the provinces. Ivison suggests that, at least in BC, “which already has a large number of pot shops, the expectation is that the provincial government will require dispensaries to buy marijuana from a licensed producer.” This would make a heck of a lot more sense than distributing through the Post Office.

I am waiting for the release of the actual report, but if Ivison’s article is substantially correct, the Liberal Government is being handed a largely unworkable plan for marijuana legalization. Insufficient supply, inefficient distribution and a prohibitionary mentality seem to have destroyed the entrepreneurial opportunity marijuana legalization presented.

I’m not surprised.

 

Pot, Trump, Winning

How can Donald Trump really reach black and Latino voters? Promising jobs is a great start. Cutting illegal immigration will help with that.

But none of that really has much emotional impact.

Want to build the movement?

Try this three part plan.

First, announce that a Trump administration will decriminalize marijuana.

Second, announce that every single person serving time for marijuana related offences is going to be pardoned on condition that they spend a three month intensive period in a pre-employment boot camp. And announce that, from the day Trump takes office, any criminal record for marijuana offences will be expunged as of right and right now.

Third, commit serious federal resources to creating paths to employment for the people who have either been in jail or who have had criminal records as a result of pot convictions.

You can picture Trump saying, “Let’s bring our kids, and their fathers, home.”

The last twenty years have been about incarcerating black people and Latinos for all sorts of crimes. Some of that is justified, but a lot of it has been felony marijuana arrests which should have been traffic tickets but got bumped because of priors, plea bargains and three strikes laws. It’s time for that to stop.

People’s children, husbands and wives have been sent to prison for a reason that an increasing number of states think is wrong. Washington, Colorado, Oregon and Alaska have legalized recreational pot and the federal government has gone along. Medical marijuana is legal in many other states. More states have either medical marijuana or recreational marijuana on the ballot in November.

The Donald does not have to say pot is a good thing. In fact, if he is smart he will say it is a bad thing and that he does not want any sensible American to use it; but it should not be a criminal thing because, if it is, there will be a disproportionate impact on black, Latino and poor white communities. That is just a fact.

For Trump to come out for full legalization, full pardons and a serious commitment to reintegrating the real victims of the marijuana prohibition into their communities, will mean the world to the hundreds of thousands of people, black, white, Hispanic whose lives have been destroyed by that prohibition. Will they be grateful? Perhaps. But that is not the reason Trump should announce an end to the marijuana prohibition.

Trump should do it because it is the right thing to do.

Right now Donald Trump has Teddy Roosevelt’s “bully pulpit”. He has the wind in his sails, an opponent who seems to have gone on vacation and an electorate which wants to hear a new message. An inclusive message. A smart message.

Pot seems an odd place to start. It is; but it also is a set of criminal laws which have put the disadvantaged at a greater disadvantage. You do not have to be pro-marijuana to realize that sending people to prison for possession or small scale trafficking is a cure far worse than the disease. If Trump tells that story people will listen.

Cynically, I’d say that if Trump made a speech with my three points about pot he’d win the election. In a landslide. Black people, poor people, hipsters, kids in the suburbs worried about their “permanent record” and police officers fed up with having to enforce laws which long since ceased to make any sense, will climb onboard.

Most of all, the family and friends of the black, white, Latino, poor kids, dads and moms who are sitting in jail will, for the first time, hear a politician actually speak to their pain. They’ll hear a potential President who promises to bring their kids home.

It’s about time.

Gone to Pot

A client of mine alerted me to tonight’s 5th Estate program on Pot Fiction. It is the full hour and worth watching for a variety of reasons. Here’s the link.

The point of the program is that, in Vancouver at least, the practical effect of Health Canada’s Medical Marijuana regulations is de facto legalization. And, in fact, the program does not actually deal with the effect of the injunction against those regulations which has meant that the regulations themselves are suspended until a case against them has been heard, likely all the way up to the Supreme Court of Canada.

Despite the fact that I don’t smoke pot – because if I do I will be asleep in approximately three minutes – I have long advocated complete legalization. Largely for libertarian reasons but also because the criminal law is essentially unenforceable. But the medical marijuana regulatory scheme interests me as a grand example of government getting something entirely wrong.

The original medical marijuana regulations allowed people to buy from a single supplier or grow their own or designate a grower. While the system was far from perfect, and found to be unconstitutional, it had the advantage of regulating with a very light hand. But, oh Heavens, there was “leakage”. Medical pot was not always only used by medical users. Yikes.

So Health Canada came up with a regulatory scheme which was going to licence grower/distributors and put the users and their growers out of business. Enter Big Green and a bunch of promoters who sold shares in publicly listed companies based on the new regulations. The promoters made a lot of money using a simple story: there were 45,000 medical pot users in Canada (projected to grow to 450,000 users in a decade) who each used about 3 grams a day and who would have no choice but to pay between $8 and $15 a gram for their “medicine”. You do the math.

To my not very great surprise, people used to paying $0 to $5.00 a gram did not rush to sign up. And, very quickly, at least in Vancouver, pot shops – for registered users only of course – began to spring up. Becoming a registered user was not tough. As the 5th Estate guy discovered, telling a naturopath a charming story about stress and sleep disturbance over Skype gets you your registration. At which point you are free to buy. (I note the 5th Estate did not ask the pot shop owners where they were getting their pot – which is a rather good question because it is certainly not from the licenced growers as they are not allowed to sell except by mail order.)

As anyone who has lived in Vancouver knows, the Vancouver Police Department has better things to do than bust dispensaries. Plus, given the injunction halting enforcement of the Health Canada regs, it is not obvious what they would bust the dispensaries for that would have a chance of getting past the Crown. But even if they did bust the dispensary and even if the Crown brought charges, it is pretty difficult to see how a judge could find a person guilty who was selling to a registered user.

The problem is that the boffins at Health Canada have not quite figured out that their regulations are assuming a world which does not exist. First, they assume that people want to smoke “legal pot”. That might be true if police forces were in the habit of kicking down doors to arrest people smoking pot at home but, I fear, that hasn’t happened in years. (It may occasionally occur as a means of harassment but the probable cause issue is usually sufficient to kick the charges.)

Second, the boffins assumed that “medical marijuana” would somehow be policed by the medical profession. While it is a happy thought, all that is needed are a few doctors, nurse practitioners and naturopaths who think pot is just fine for what ails you, to render the “policing” function meaningless. Given that there is very little evidence either way as to pot’s medical efficacy, putting the burden of policing on the medical profession was a non-starter from the get go.

Third, the idea of centralizing growing and distribution of a relatively easy to grow plant in the hands of a group of entrepreneurs was a forlorn hope. Why would Mrs. Smith give up her little personal grow op only to buy her arthritis pain reliever at five times the price from clever marketers? And why would people who were growing illegally stop when they now had a fool proof means of distribution.

The only way that the regulations – if they ever manage to survive judicial scrutiny – will work is if Health Canada can somehow convince the Vancouver (and many other city police departments) to enforce the Criminal Code in the face of wide spread public opposition. Health Canada’s regulations will only work if the cost of “illegal medical marijuana” is, by draconian enforcement, raised to the point where the legal alternative is cheaper. Which would mean a level of enforcement which far exceeded the scale of enforcement we saw in the 1990’s. Which is not going to happen.

Health Canada is in way over its head. It has 1200 pending licence applications and it has only managed to approve 17 of them. It’s regulations are suspended by a Federal Court injunction. Its rules saying that only dried smokable pot is legal have been struck down by the Supreme Court of Canada. It has never managed to provide guidance as to the conditions marijuana is indicated for and what dosages might be efficacious.

Meanwhile, people who want to smoke pot are running rings around the regulations and using them to have a “Get out of Jail Free” card on the off chance they are found “in possession”. Now the law is in disrepute with the public and, more importantly, the police, Crown and judges.

We have legalization through the backdoor.

Unregulated, un-taxed and entirely beyond the state’s control.

I’d call that a win.