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Fork in the Road

What is the future of adult use?

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One of the big questions facing those who wish to participate in the emerging cannabis industry is whether to focus on the medical market or the adult-use market. The medical market in California is relatively mature, with existing infrastructure and patients used to going to the dispensary. However, it remains to be seen how that system survives the adult-use market which comes online Jan. 1, 2018.

Right now, in order to go to a dispensary and buy medical cannabis, one must get a recommendation from a doctor. Though this is a not a particularly difficult process, it still takes time and money—usually less than $100. When the adult-use market opens, one will be able to buy medical cannabis with a driver's license. So who will go to a medical dispensary? Customer loyalty will only go so far if the adult-use market is more convenient.

I see two scenarios in which the medical-market survives. First, I expect a difference in how medical and adult-use cannabis is taxed. If the tax difference is significant, people may still find value in getting a recommendation and buying medical cannabis. Second, it is possible that the medical system obtains higher grades of cannabis, at least initially. While many Californians use cannabis, the adult-use market remains in its infancy, and it's unclear how the industry will respond to this new system.

One concern is that, in either system, it is possible that the cost of cannabis will increase—or plummet. I think that this is a real tension in the system. There is no question that the cost of growing and producing is about to go way up. The draft of state regulations is out, and it is estimated that compliance will be hundreds of dollars per pound. Will growers operate on a much thinner margin, or will they try to pass those increases on to consumers? Will the average consumer be willing to pay $20 a gram, as has happened in other states? Given the availability of cannabis, and the right to grow six plants, I think consumers will push back. This may lead to a race to the bottom in pricing.

I think all of these problems are solvable. The market will mature and many of these questions will be answered. My fear is not that some people won't be successful; my fear is that most of the people I know in the cannabis industry now will not be in it within a few years. To me the system seems to favor wealth and capital. Most small producers, unless they can find a niche market quickly or are doing it as a hobby, will soon find the cost of production too high to make a living. Again, I think this is a short-term problem, but by the time it gets sorted out, most of the small producers will have been driven out.

Ben Adams is a local attorney who specializes in cannabis law and compliance.

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