Weedless in Seattle: Washington's looming pot shortage

As state begins legal sales next month, sky-high taxes and lack of product could mean prices twice as much as what smokers pay on the black market.

By MSN Money producer Jun 27, 2014 4:27PM

A young cannabis plant grows at The Joint Cooperative in Seattle. © Cliff DesPeaux/ReutersBy Jacob Sullum, Forbes Forbes.com

Washington's state-licensed pot stores are expected to start opening next month, but they won't have much to sell.

A slow state licensing process for marijuana producers, combined with the difficulty of obtaining local approval for grow operations, will result in shortages that are apt to be more severe than those seen in Colorado after recreational sales began there in January. The result could be prices almost twice as high as those charged by medical marijuana dispensaries and black-market dealers. 

The Washington State Liquor Control Board plans to award 20 or so retail licenses July 7, meaning the first stores could open as soon as July 8. Eventually there are supposed to be 334 outlets across the state, although that plan looks doubtful in light of temporary or permanent bans by about 90 local governments. Meanwhile, as of last Tuesday, the LCB has awarded just 62 marijuana production licenses; more than 2,500 applications from would-be growers are still pending. 

Scott O'Neil, who expects to receive a retail license on July 7 and open a pot store in Spokane the next day, knows where his supply will come from. He has a contract to buy marijuana from his friend and former employer Sean Green, a medical marijuana supplier who received Washington's very first cannabis cultivation license back in March. Green's grow operation is located in the same building as O'Neil's store, which will do business under Green's Kouchlock Productions brand. But not every retailer will be lucky enough to have such a close relationship with a grower who is already harvesting marijuana.  

"There will be high demand and only a handful of people growing," O'Neil says. "It's going to take at least a year to sort it out, get everybody up and running." 

In addition to shortages, pot store customers will face taxes that are projected to make retail prices about 60 percent higher than they would otherwise be. Add to those factors the costs of establishing businesses that comply with state and local regulations, and the upshot, as explained in a recent Reason magazine story about legalization in Washington, is that prices for legal pot will be substantially higher than current black-market prices. 

$15-25 a gram

How much higher? Seattle Post-Intelligencer reporter Jake Ellison, based on interviews with growers and retailers, estimates that "prices per gram (after taxes) will range from $15 to $25 (with some higher spikes and brief lows, possibly at $12 a gram)." Assuming a 30 percent discount for buying an entire ounce (which seems reasonable, based on prices charged by stores in Colorado), that range amounts to something like $300 to $500 per ounce.  

"Our products are all top shelf, and we are asking $2,800 per pound," one grower told Ellison. "We are asking the retailers we work with to cap their price at $420 per ounce to consumers. We are avoiding the temptation of price gouging." 

Even $420 per ounce is pretty pricey compared to the black market. The Price of Weed website, which collects data from cannabis buyers around the country, is currently reporting an average price of about $232 per ounce for high-quality marijuana in Washington. Looking at neighboring states, prices are a bit lower in Oregon ($209) and a bit higher in Montana and Idaho ($268 and $276, respectively).

Another point of comparison: Denver dispensaries are charging medical customers around $10 per gram, 50 percent less than the low end of Ellison's range. Recreational customers pay more than that, but often less than $15 after taxes. Seattle dispensaries catering to patients charge $8 to $15 per gram. 

Six months ago, recreational stores in Colorado, which also had serious supply problems, were selling an eighth of an ounce for as much as $70, three times what dispensaries were charging patients. Prices have settled down since then but remain substantially higher than medical or black-market prices.

Prices could eventually plummet

Kayvan Khalatbari, co-owner of Denver Relief, a medical grower and dispensary that will start serving recreational consumers next week, says after-tax prices in that market average $50 to $60 per eighth. He expects those prices to plummet by next year, however, as growers ramp up production and new suppliers enter the market. 

"I would not be surprised, given the flood that's going to happen, if we see $10 and $15 eighths by early next year," Khalatbari says. "I would believe that. I would see ounces being sold for $50. I truly see that happening, because there is going to be so much competition (and) people are becoming so efficient in their production. They're automating much more. We're seeing best practices settle in. There's less risk in operating because people are operating at a higher level.

"I think we're going to become a very efficient industry very quickly. We're going to see competition, and we're going to see prices hit rock bottom early next year." At that point, he says, the black market will dwindle away. 

Something similar could happen in Washington, but it will take considerably longer given the state's slower start, higher taxes, local restrictions and cap on production, which is currently set at what the state estimates to be 25 percent of the market. Last February, when the Liquor Control Board was saying pot stores would open this month, the Washington State Economic and Revenue Forecast Council, an independent agency charged with projecting tax revenue, deemed that expectation unrealistic.  

"Although LCB has indicated that it expects retail sales to start in June 2014," the council said, "local moratoria on cannabis businesses and other production uncertainties have the potential to impact the timing and amount of cannabis produced and sold. As a result, we have assumed retail sales will start in June 2015." Current estimates put marijuana tax revenue during the four years beginning in July 2015 at $586 million, 69 percent less than projected in 2012.  

"The problem with the Washington market is that the local zoning issues have not been settled like they were in Colorado," says John Davis, who operates two dispensaries in Seattle. "So what are these retail outlets going to sell? I would say it's reasonable to believe that the shortage problems will be much, much greater than in Colorado."

Black-market dealers 'not worried a bit'

Philip Dawdy, communications director at the Washington Cannabis Association, which represents medical suppliers, thinks state-licensed pot shops will have trouble competing with black-market dealers.  

"The market, to really work and to really capture that 25 percent, will need to have consistent supply and quality supply," says Dawdy, who has applied for a production license. "If you put up enough barriers for consumers, it discourages a certain percentage of them and sends them to another market. I think we're going to see that here. I think you'll see a lot of people in the beginning go to the stores just for the novelty of it. But at a certain point they're gonna say, 'Why the heck am I paying $20 a gram when Jimmy the pot dealer's gonna sell it to me for $13 a gram?'  

"I think we're going to continue to have a black market for several years. I know pot dealers in my neighborhood in Seattle. They've all told me they're not worried a bit." 

More on Forbes

Jun 27, 2014 7:32PM
I can only hope that the Washington LCB management and staff, the Governor and every State legislator read this article, and become ashamed at what they read.  This has turned into a laughable display of incompetence by the State Government.  They were handed a silver platter heaping with cash in the form of potential tax revenue, and they turned around and made the issue as complicated and as screwed-up as possible.  Shameful.
Jun 27, 2014 8:16PM
The 70's ...3 finger bags for 10 bucks, cheap beer, cheap munchies, no Aids, No Obama, and Lynard Skynard on the 8 track..I miss those days.
Jun 27, 2014 7:37PM
No thanks, I`ll keep buying from Skimmy down on the corner.... F the state and taxes...

Pot shortage concerns, No ID needed to vote, a tax for doing yoga..

Where did my country go?

Jun 27, 2014 7:42PM

Has no one been paying attention to Colorado?

It was all a money scam by the state.  They are writing pot 'dui's' left and right, taxing everything, and NOT providing police protection for the shops or growers... who now have to reveal how much they are growing and where.

From the beginning, it was all about the money.

Now excuse me while I go sit on my porch, watch the waves, and smoke a little 'untaxed'....

Jun 27, 2014 7:35PM
Why get the government involved in marijuana in the first place?  If your going to legalize pot then do it but don't overregulated it and make it another big money thing for big business to profit.  Next the banks will be getting into this with Acapulco Gold VISA credit cards.   
Jun 27, 2014 7:18PM

A weed shortage in Washington state is a example of job creation when more people need to grow marijuana to supply the demand.

I'm buying stock in PepsiCo and YUM brands because people who use weed get the munchies.

Jun 27, 2014 7:27PM
It doesn't surprise me,  the way WA State Government works, they want the dollars but get lost in the politics of weed and don't consider supply and how restricted that is.

Jun 27, 2014 7:22PM

I guess I would get ridiculed for asking for a nickel bag. 

Jun 27, 2014 7:48PM
comedy. There is no shortage on the black market. you have to be an idiot paying $500 an OZ in a store for weed you can get off the streets for $100 now. There's so much weed in the west you can't give it away
Jun 27, 2014 7:29PM
I live on the east coast and havent seen a shortage in years
Jun 27, 2014 7:30PM
In this state it is legal to brew your own beer! And I could be wrong but believe you can make 50 gallons of moonshine a year! Why not grow your own? Charge for permits? Then those who want weed will have weed and us sinners will still be paying out the ****
Jun 27, 2014 7:55PM
                      People relax .............. jeeeze .... this is America..... supply and demand ,  supply and demand .... the legal sellers will have to lower the prices, to compete with illegal sellers ....  actually its a good thing, as is, medical marijuana is too expensive for most people
Jun 27, 2014 8:04PM
As soon as weed became 'medical', the price gouging began. For $15.00 per joint, you can have it. The greed does nothing to eliminate the cartel market. It inspires people to use less expensive drugs, whether it be marijuana from a black market source or heroin or a synthetic drug. People are going to catch a buzz, no matter how many you incarcerate or kill. Why drive people to use less safe drugs ? They could charge 1/3 the price they're charging and still make a killing, on volume alone. Of course, that wouldn't be the capitalist way. That wouldn't be American.
Jun 27, 2014 7:37PM
It's just another way of keeping mother nature illegal longer.
Jun 27, 2014 8:14PM
A nation of selfish morons, that is what we are.
Jun 27, 2014 7:45PM
Go to the dealer....there's never shortage there....this was coming....greed begins to play into de marihuana field....forget the legit....go back to the old and proven  ways....jejejejej
Jun 27, 2014 7:56PM
How do you justify huge fines and long jail sentences for selling a product now legal? Let all MJ growers sell their product to the licensed stores so it can be taxed by the states and the large supply will insure fair prices.
Jun 27, 2014 9:00PM
First, stop lying to the public.  Anyone will be able to buy marijuana whether you have a medical condition or not.  Second, what are the plans for releasing and exonerating all the people who were convicted of selling and/or possessing marijuana?  Our government needs to stop being hypocritical liars.
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