VIDEO: Despite Legalization, The Cannabis Black Market Thrives
Welcome to my “Weed Report” video presentation for Thursday, March 30. The article below is a condensed transcript; my video contains additional details and several charts.
Marijuana industry leaders and investors are frustrated by the persistence of illicit pot sales. The black market undercuts potential legal sales, to be sure, but it also poses a health hazard and tends to feed crime.
Illicit marijuana is unregulated and isn’t subject to any sort of quality assurance or tests. What’s more, unlicensed marijuana dealers often intersect with the criminal element; street deals sometimes involve weapons, physical violence, and the purveyance of harder, more dangerous drugs.
The stakes are high. Based on New Frontier Data’s latest analysis of state legalization efforts, the likelihood for several new cannabis markets to legalize by 2030 will drive combined U.S. legal sales past $72 billion in that year.
In 2021, the U.S. legal cannabis market was worth an estimated $26.5 billion, and in 2022 it exceeded annual sales of $32 billion. Sales are projected to reach roughly $38 billion in 2023.
However, despite strong sales growth in legal state markets, the illicit market continues to serve most of the national demand.
The majority of marijuana sales nationwide are generated in the illicit realm, a fact that will continue for at least the next couple of years. The percentage of marijuana procured through a legal source is expected to increase, but it will still represent only 42% in 2025.
The black market is primarily driven by higher retail costs due to state taxes. Cannabis taxes vary greatly by state. The highest cannabis taxes are in Washington, with a whopping 37% excise tax on the sale of each cannabis product. Oregon is next, with 17%. California and Colorado follow with 15% each. Maine and Nevada share fifth place with 10% each.
However, with continued expansion in the number of cannabis consumers nationally, both legal medical and adult-use markets will increasingly erode the demand met by illicit sources.
California changes course…
Consider California, the largest marijuana market in the world. Black market sales in California have been strangling the legal market. But that’s on course to change, as Gov. Gavin Newsome (D) and the state Assembly continue to reduce cannabis taxes, thereby making pot in the state much cheaper.
In 2019, sales in the illicit cannabis market reached $8.7 billion in the state of California; the legal cannabis market had sales of $3.1 billion in the state that year. However, it is projected that the legal cannabis market will overtake the illicit one by 2024, with sales reaching $7.2 billion in the legal market for marijuana, and $6.4 billion in the illegal market.
That said, in California and the nation at large, it’s likely that the black market won’t completely go away, especially (of course) in states where marijuana remains banned.
Even in legalized states, officials have failed to establish a regulatory framework that effectively keeps both producers and consumers in the legal market. This has been a particularly acute problem in New York State.
Marijuana is legal for both medical and recreational purposes in the Empire State, but illicit sales continue to thrive because regulators have been tardy and inefficient in setting up necessary regulations.
Another reason for the persistence of the cannabis black market nationwide is psychological. Behavioral scientists say that ever since the 1960s, part of marijuana’s allure has been the fact that it’s forbidden.
Marijuana is still seen in many ways as an act of rebellion; buying it over the counter at a retail dispensary removes its mystique. It’s reminiscent of Prohibition in the 1920s, when alcohol consumption actually soared and “speakeasies” made drinking glamorous.
The good news is, state leaders and policymakers have gotten the message. An increasing number of states are lowering their marijuana taxes, because they don’t want to kill the golden goose. They’re also stepping up law enforcement, when in the past in legal states, many police departments turned a blind eye toward unregulated sales.
The black market will always be with us, but it will steadily shrink, which means marijuana companies can look forward to more customers coming their way.
In fact, after a sluggish 2022 for marijuana companies, we’re now on the cusp of a “break out” year for marijuana and the ancillary industry of psychedelics. That’s why I’ve launched an investment service called Marijuana Profit Alert.
My publication provides specific, actionable advice on the best investments in the psychotropic revolution. In my portfolio of holdings, I strive to strike the right balance between risk and reward. Click here to learn more.
John Persinos is the editorial director of Investing Daily.