A Little History
In 1906, the Pure Food and Drug Act required the labeling of cannabis for over the counter remedies. Cannabis became unfairly attached to the influx of Mexican immigrants in the US during the early 20th century. Fear of cannabis rose during the Great Depression, and a wave of research was produced that connected cannabis use with violent, deviant behaviors. By 1931, 29 states had outlawed cannabis. In 1930, the Federal Bureau of Narcotics was created to harmonize federal narcotics control programs. It eventually criminalized use of cannabis with the passage of the Marijuana Tax Act of 1937, which limited the possession and the use of cannabis to medical and industrial uses. Then, the Uniform State Narcotic Act passed responsibility of control of cannabis to the states. The 1973 Shafer Commission concluded that cannabis should be decriminalized, but the Nixon administration largely ignored its conclusions.
Toeing the Republican line, President George H.W. Bush declared a “War on Drugs” in a nationally televised speech in 1989. But as the 1990s roared on, individual states drafted legislation that pushed against the federal government’s stance. In 1996, California passed Proposition 215 which granted use permissions to sufferers of chronic diseases.
Today in the US, more and more states are legalizing cannabis for both medical and recreational uses. Recreational cannabis use is now legal in nine states and medical cannabis use is legal in 30 states.
Specifics of the industry
Today’s commercial production of cannabis involves the use of seedlings, not seeds, as the propagation material. Seedlings are used to propagate cannabis plants to maintain leaf quality and homogeneity of the plants. The vast majority of cannabis plants are hybrids, and depending on the hybridization, plants can be tall and lanky—sativa characteristics—or short and bushy—indica characteristics. Cannabis intended for commercial use is mostly produced in greenhouses, as control of temperature and humidity is essential for a quality product. Like many other crops grown under greenhouse conditions, cannabis plants are fertilized and irrigated simultaneously, a method known as fertigation. Each cannabis plant can produce one to two pounds of product. After harvest, the flowers of cannabis plants are hung up to dry and the highest quality flowers are packaged and sold.
Cannabis plants are highly susceptible to pests, presenting a significant advantage to indoor growers. Unlike many row crops or fruits and vegetables, pesticides can have irreversibly detrimental effects on the quality of cannabis. Regardless, outdoor plants remain noticeably cheaper to produce, despite the massive improvements in indoor lighting efficiency over the past decade. And keeping prices low is essential for the long-term success of the legal cannabis industry. Even in California, where producer laws are much looser than the rest of the US, the black market continues to thrive and undercut legally-produced prices because current regulations prevent growers from realizing economies of scale (some are restricted to just 25 plants). In the week ending in July 20th, 2018, US spot prices for outdoor-produced cannabis was less than half of that for plants produced indoors, according to data from Cannabis Benchmarks.
It is no surprise that California is the largest producer of cannabis in the US, given its climate and early legalization of the industry. California produces roughly 13.5 million pounds, or just over 6,000 tonnes of cannabis annually. Since cannabis requires sunny days and warm nights yet suffers in areas with high humidity, only areas in the US West and Southwest are capable of providing proper growing conditions.
In 2017, sales of legal and medical cannabis in the US reached roughly $6.2 billion, however this figure does not take into account the estimated $50 billion in black market sales of cannabis. For reference, legal sales combined with the potential share of current black market sales would amount to a value over double what is currently spent on Netflix, McDonald’s, along with firearms and ammunition combined. At the current rate, legal cannabis sales are expected to grow 200 percent between 2017 and 2022.
As interest in legal cannabis grows, some countries are establishing a precedent for the role of big business in cannabis production. This past June, Canada joined Uruguay to become the second country to legalize sales of cannabis for recreational use on a national scale. As it stands, a small group of three Canadian companies are expected to produce 1.3 million kilograms of cannabis, or approximately 50 percent of the country’s crop. Recreational sales will begin in October of this year, and what shakes out from the Canadian situation may influence the future of cannabis elsewhere. Big business in Canada is expected to drive down the price of cannabis, which may paralyze the small businesses which currently dominate the cannabis market. A similar situation is already underway in Washington State due to investments in technologies which has made cannabis production significantly cheaper. Now, big businesses are turning their sights to locations like California, to strike while the iron is hot and seize sizable production shares in optimal growing regions.
In late 2015, Bank of America Merrill Lynch released a report on the industry’s future and prospects, a first for the industry from a major financial institution. Similar to tea, the size of the cannabis industry qualifies it for futures contracts in the mold of coffee. However, it faces similar hurdles in regard to commodity heterogeneity with different strains advertising varying tastes and cannabinoid concentrations. This, combined with the availability of various cannabis-derived products, may lead to significant market segmentation due to the prevalence of sub-markets. Cannabis may follow tea and take note of developments in the coffee futures market, which it will likely closely resemble if instituted. Coffee notably has futures contracts for several varieties, such as Colombian milds and Brazilian naturals, which could potentially be mimicked by cannabis futures contracts. Some companies, such as Amercanex, have already seen significant success attempting to do just that.
The nascent cannabis market currently sees investment interest in medical applications, hemp-derived textiles, beverages, foods, lotions, and even pet treats. Just this past week, Constellation, a company which produces Corona beer and Svedka vodka among other alcohol brands, announced a record-setting $4 billion investment in Canopy Growth, a major Canadian cannabis grower. Cannabis is expected to compete with alcohol sales if approved for recreational use, and investment activity by companies like Constellation and Molson Coors may foreshadow how the alcohol industry plans to manage their stake in the budding industry.
Given the relatively inelastic recreational demand for cannabis, monitoring shifts in supply will be crucial for any stakeholders in the burgeoning industry. Cannabis grows best in areas with plentiful sunlight, such as California and the US Southwest. Unfortunately, these areas have become increasingly prone to droughts and wildfires in recent years as climate change continues to make weather patterns more volatile.
As we wrote earlier in August, areas in California that were experiencing low levels of evapotranspiration as early as March were the same that were devastated by forest fires this month. Of course evapotranspiration cannot alone predict whether areas might catch fire, especially since most wildfires are still directly caused by human actions. But low levels of evapotranspiration are only part of the larger story. Land surface temperature, rainfall, and soil moisture all portray different aspects of environmental health that can be monitored and used to model crop health or potential danger.
Nearly all public satellite-derived datasets started collecting information over 15 years ago, making long-term trends and analysis of climate change possible in key-growing regions for cannabis. Lastly, normalized difference vegetation indices (NDVI) can help stakeholders understand a broader, retrospective picture of just how calamitous climate events are to an area’s vegetative health. With pixel resolutions of just 250 square meters, NDVI can provide insight into areas the size of a farm as well as its context within an entire region.
Averages of anomalies across the Emerald Triangle (Humboldt, Mendocino, and Trinity counties in California, which comprise the largest cannabis-producing region in the US) indicate that vegetation is still above a ten year trailing mean. Although the fires and harsh conditions have certainly taken a toll since early May, there is a chance that the destruction is less significant than the 2011-2017 drought incorporated as a part of the trailing mean. This theory is corroborated when vegetation is measured as an anomaly of the fixed ten year mean between 2001 and 2010, however the rapidly decreasing anomalies are still roughly in line with the historical average. Depending on how long the fires continue, which can be monitored using other daily environmental indicators such as rainfall, the US cannabis crop may not suffer an excess amount this season.
A majority of US citizens now live in a state that has decided to legalize cannabis for either recreational or medicinal consumption. Given the unique confluence of business, government, and grassroots interests in support of its legalization, cannabis appears to be well on its way toward a more widespread acceptance across the US. Another six states, accounting for over 44 million people, may join that cadre imminently. Although federal law might remain the same for some time, President Trump has recently acknowledged his support for a bill to leave the legalization decisions to states. Given the otherwise conservative nature of the Trump administration, it therefore seems unlikely that this administration or any subsequent administrations will pursue a federal crackdown. On the contrary, it has clearly emboldened stakeholders.
All else the same, the legal cannabis industry should increasingly capture market share from the estimated $50 billion value of its black market counterpart. But to do so, producers will need to achieve economies of scale and begin to plant outdoors in order to undercut the price of illegal and often imported cannabis.
If the industry is fully legalized, or federal regulations are loosened in a reliable and consistent manner, demand for legal cannabis will quickly outpace production capabilities. Like other crops, cannabis grown indoors has markedly higher production costs than its outdoor counterparts. Unfortunately for major producers in the US, the primary growing regions are also prone to increasingly unpredictable climatic events, underscoring the importance of geospatial data to monitor the health of the industry.