The Market for Medical Marijuana: Black to Gray to Everyday

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source: http://www.flickr.com/photos/31246066@N04/

source: http://www.flickr.com/photos/31246066@N04/

Despite some Reefer Madness-era stigma still tucked away in the corners of society, marijuana has become a thing in the United States — a controversial, quasi-legal, socially and medically important thing that the nation as a whole still doesn’t really know what to do with yet.

Research that has been conducted and has come to light over the past several years has pretty much laid to rest the myth that cannabis has no medicinal or therapeutic qualities, and 20 states plus the District of Columbia currently recognize this. While still (very) illegal at the federal level — cannabis and cannabis resin are Schedule I drugs under the Controlled Substances Act, in league with LSD, MDMA, heroin, and psilocybin – there are an estimated 2.4 million medical marijuana patients in the U.S., and more are signing up every day.

But in order for medical marijuana to truly join the pantheon of legitimate drugs, two things have to happen: cannabis will have to find its place within the market mechanism, and the federal government will have to give up on its failed war against the drug.

Determining which one of these things should come first is a chicken-and-egg problem. In reality, there is no on-off switch for either condition. Each co-evolves, one referencing the other. What once was a black market for cannabis is making the transition through the gray and into the light of day. As legitimate medical use of the drug increased in the shadow of existing regulation, policymakers have been pressured to relax controls. And as regulation eases, the market moves forward, and the process repeats itself in a virtuous cycle.

The medical marijuana debate in its current form really took shape in 1996, when California passed the Compassionate Use Act. The act ensures, among other things, that “seriously ill Californians have the right to obtain and use marijuana for medical purposes where that medical use is deemed appropriate and has been recommended by a physician.” It was the first time a state dodged the federal position and recognized legitimate medical uses for marijuana, and it was the first step the market for medical marijuana took toward legitimacy.

Of course, this created a conflict of interest between state governments and the federal government. The issue came to a head in 2005, when the U.S. Supreme Court heard Gonzales v. Raich, in which a California producer of marijuana for medical use sued the government for interfering with his right to produce (meaning the operation was shut down by the Drug Enforcement Agency).

The case addressed the inevitable issue: What happens when the federal government decides to exercise its authority over a conflicting state law? The short answer? The Feds win.

But the federal government doesn’t have the will or capacity to strictly enforce marijuana laws, and one by one, states decided to simply take action on their own. Following in California’s footsteps, Alaska, Oregon, and Washington passed state-level legislation recognizing legitimate uses for medical marijuana in 1998. Maine followed in 1999; Colorado, Hawaii, and Nevada in 2000 — by 2013, 20 states and the District of Columbia had jumped on the bandwagon.

In October 2010, United States Attorney General Eric Holder issued a statement regarding the Department of Justice’s position on the enforcement of the Controlled Substances Act. The address was given in response to another California action, Proposition 19, a ballot initiative due to be voted on that November, which, if passed, would have legalized various (read: recreational) uses of marijuana at the discretion and regulation of local governments. Holder said the following:

“Regardless of the passage of this or similar legislation, the Department of Justice will remain firmly committed to enforcing the CSA in all states. Prosecution of those who manufacture, distribute, or possess any illegal drugs, including marijuana and the disruption of drug trafficking organizations is a core priority of the Department. Accordingly, we will vigorously enforce the CSA against those individuals and organizations that possess, manufacture, or distribute marijuana for recreational use, even if such activities are permitted under state law.”

The message was loud and clear, but people didn’t really care. Medical marijuana advocates continued to push the issue, and on August 29 this year, Deputy Attorney General James Cole issued a memorandum regarding marijuana enforcement under the CSA:

“For states such as Colorado and Washington that have enacted laws to authorize the production, distribution, and possession of marijuana, the Department expects these states to establish strict regulatory schemes that protect the eight federal interests identified in the Department’s guidance. These schemes must be tough in practice, not just on paper and include strong, state-based enforcement efforts, backed by adequate funding.

“Based on assurances that those states will impose an appropriately strict regulatory system, the Department has informed the governors of both states that it is deferring its right to challenge their legalization laws at this time. But if any of the stated harms do materialize — either despite a strict regulatory scheme or because of the lack of one — federal prosecutors will act aggressively to bring individual prosecutions focused on federal enforcement priorities and the Department may challenge the regulatory scheme themselves in these states.”

The decision, as Republican Gov. Chris Christie of New Jersey said, amounts to de facto legalization of recreational marijuana. Washington and Colorado had already legalized recreational use to some degree, and it was really only the specter of federal prosecution that haunted the decision.

More importantly, though, it was a major step forward for medical marijuana advocates. This change in tone from the DoJ helps relieve some of the concerns that businesses have had about operating in the industry.

So what does the industry look like today? Estimates vary wildly because accurate measurement is hard, given the opaque legal environment and cottage-style nature of the industry. But there are still some informed estimates out there.

“The medical marijuana industry has grown at a rate of 13.8 percent per year over the last five years to about $1.7 billion in 2013,” said Nima Samadi, a senior analyst at IBISWorld, in an interview with The Huffington Post. “Over the next five years, we’re going to see even stronger growth. It’s expected to grow 24.3 percent per year and approach about $5 billion [by 2018]. The majority of that revenue growth has come from the nonprofit medical marijuana collectives.”

Samadi’s forecast covers just the medical marijuana industry. Specifically, it does not include growth upstream or downstream, or the recreational market. Recreational legalization at a large scale is farther down the regulatory road, but it also promises a much larger market.

Jamen Shivley, a founder of Diego Pellicer, is one of the few people willing to throw out estimates on the current size of the black-and-gray marijuana market that, ostensibly, equates to the size of the hypothetical legal market. His pitch to investors values the marijuana industry at $100 billion, which could grow as large as $500 billion worldwide.

Still, the ambiguous legal environment creates a sort of fog of war that is getting in the way of development.

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