Operation P.R.E.-R.O.L.L.

Also TAM and cannabis futures

New York

Yesterday, in reference to the lawsuit filed in New York seeking to open the limited market, I wrote about the irony in John Boehner/Acreage Holdings’ positions. That was the point of the commentary, but a reader emailed to ask I clarify my position on license-holders being shut out of the market, and bodegas selling ‘illegal’ weed. I’ll touch on both.

I applaud New York for its efforts to promote and prioritize social equity businesses. Those operators have been unjustly impacted by the failed War on Drugs in more ways than anyone can count. It makes sense to give their businesses a head start in this new market — their storefronts should have been permanent locations, opened by now to exuberant fanfare.

But what does not make sense — is in fact, wrong — is promising help with funding and real estate for those social equity businesses and wholly failing to deliver. Especially after projecting lofty sales goals and encouraging production to supply demand.

There are clearly license holders in New York (both social equity and not, big and small) right now who would be up and running if it were not for the regulators — so should they be?

Long term, the answer is yes — the industry will eventually normalize to allow a host of license-holders and consumption methods, just like alcohol. But in the short term… it’s hard to argue for the current state of play, so something is likely to change.

Operation P.R.E.-R.O.L.L.

It would be unfair to criticize policy without providing an alternative, so I’ll introduce my half-baked, limitedly thought out plan for the New York market. It’s called ‘Operation Protect Registered Entities’ Retail Opportunity under Limited Licensure’ (P.R.E.-R.O.L.L.).

A pre-roll is the cheapest product you can buy at a cannabis retailer. It’s often a product that is used to get weed out the door for a cultivator — which is good news in the case of New York’s supply glut. The program would go something like this (brackets where there is particularly limited thought):

1. Non-CAURD retailers can sell pre-rolls, and only pre-rolls, under the adult-use program, effective [ASAP].

2. Bodegas and all the other ‘illicit’ sellers can register for this ‘pre-roll’ program.

3. The pre-rolls must be supplied from registered New York cultivators.

4. All taxes collected under the program will go to the social equity fund.

5. The program will run until the cumulative tax revenue for the state reaches [$200 million], at which time the adult-use market will open to all applicants. Bodegas and other shops can continue selling under the ‘pre-roll’ program.

6. Medical dispensaries continue to operate under the current medical program for medical patients.

I wrote about the reasons why consumers want to shop at bodegas, and also about the dangers of vapes. Allow bodegas and everyone else to sell pre-rolls, and only pre-rolls. New York farms can sell New York weed to New Yorkers — quickly, cheaply, and easily. Taxes on those sales should also go into the social equity fund, which will open up even more storefronts where consumers can buy all of their other recreational cannabis products.

At the end of the day, regulations and expectations should center around the long-term, steady state of the market. The consumer can decide how and where they want to buy their weed — the industry’s job is to accurately forecast and account for demand. Speaking of…

Word of the week: TAM

Stevie Cline, writer of Highly Regulated, brought up an often-used term in corporate cannabis discussions this week:

stevieis... @steviemctweets

i cannot be the only person that thinks the TAM slide in pitch decks is almost always useless???

TAM stands for ‘Total Addressable Market.’ It represents the economic opportunity available to a business — high-level projections are based on assumptions around ‘market penetration.’ In cannabis, the TAM is most often thought of as the total retail sales to the end consumer in a given year.¹

TAM is particularly important in cannabis. For one, it is a highly regulated industry, so — as we see in New York — regulators have outsized influence in who makes money when. It’s a big part of the risk profile in the industry; we’ve talked before about the large discount rates that investors impose on cannabis companies.

The second reason why TAM is so important in cannabis is because expectations are often not grounded in reality. The ‘green rush’ incited a frenzy over this ‘new’ market; only, it wasn’t new, and consumers understandably continued to access cannabis through the same channels they have for decades. Operators have responded by announcing massive cuts in production, retreating from competitive markets, or crying foul over the ‘illicit’ market.

A lot of this can be solved with a grounding in economics, the ‘dismal science.’ Thankfully, economists Robin Goldstein and Daniel Sumner at UC Davis have laid a solid foundation in their book, Can Legal Weed Win? The answer to that question is, of course, complicated, and involves a whole host of stakeholders with competing interests. But the economics of the market can be examined, and claims by industry insiders put to the test.

The authors spend a good deal of time investigating the most commonly cited TAM projection of $100 billion in North American retail sales by 2030. I’ll lay out the simple math they perform for these projections, based on the latest 2022 data. Let’s say that North American cannabis retail sales in 2022 came in at $30 billion. The authors — through their research and deep industry knowledge — assume $40 as the average price for an eighth of weed in the legal market. That means a pound goes for ~$5,000, and ~6 million pounds were sold in 2022.

$100 billion in sales in 2030, at $5,000 per pound, comes out to 20 million pounds, or a little more than triple the current legal quantity sold. That doesn’t sound unreasonable — many more states will enter the legal market by then. But will prices remain constant? Very unlikely. As the authors note, ‘Fancy tea sells for $10 per pound, dried organic parsley is $20 per pound.’

Weed is different, sure, but we also have to remember that we are in a fractured, inefficient market. Prices are already way lower than $5,000 per pound in parts of the country, and a national market will quickly sort out price discrepancies. The authors’ best guess at steady-state pricing? $300 per pound (or lower). That would put the 2030 market, at 20 million pounds sold, at… $6 billion dollars?!?

As the book notes, ‘Don’t tell the suits!’

Cannabis futures

I’ve been reading a lot about futures markets recently, because some Bitcoin evangelist made an entirely uneconomical bet (or is practicing market manipulation). There was also a hilarious snafu at the London Metal Exchange where bags that were supposed to contain nickel ended up containing rocks, and so Matt Levine gave a succinct description of a futures market yesterday:

If you want to make batteries or cars, you might need nickel. If you buy some nickel from a nickel merchant, and she delivers it to you, and you open the box, and the box is full of rocks painted to look like nickel, you will be disappointed. You will not be able to make a battery or a car with a box of rocks.

If you are in the business of building batteries or cars, you might want to hedge your exposure to global nickel prices by trading nickel futures on an exchange like the London Metal Exchange. Or if you are a hedge fund or bank with a view on commodity prices, you might want to trade nickel futures to express that view. These futures do not, in the first instance, involve any nickel. If you buy nickel futures, it is purely a financial trade: If the price of nickel goes up between now and when the futures expire, you get paid money; if it goes down, you pay money. You buy the nickel for the batteries or cars through normal industrial channels — your nickel merchant delivers nickel in the types and quantities you need — and the point of the futures is just to have a financial hedge to your cost of buying actual nickel.

We just talked about the massive price discrepancies that exist in the future state of the cannabis industry. Do producers, or retailers, or investors want to hedge their exposure to this price risk? I would think so. Can they do that?

Not yet. It looks like New Leaf Data Services took a shot in 2019, but as far as I can tell nothing came from it. It would be a difficult undertaking, but if a guy can throw away $1 million on Bitcoin (and FTX can just steal people’s money selling futures) can’t we get some weed derivatives in 2023?

I’m putting out the Puff Signal! Calling all finance bloggers — we need cannabis futures!

Stolen from crypto Twitter (graphic design is my passion)

Discrete vs. Discreet

Yesterday, I tried to articulate a point about how vaping is secretive. I used the word ‘discrete’ multiple times. A reader pointed out that I swapped the ‘e’! I meant ‘discreet’! Not ‘individually separate and distinct,’ but ‘careful and circumspect in one's speech or actions.’

If you would like to edit Money Puff, I guess you can let me know?

1. You can derive the market for other steps in the supply chain from there: wholesale is a percentage of retail, cultivators sell into the wholesale market, etc.