Cannabis In A Commodity Market

Cannabis In A Commodity Market

Corn and cannabis: They're both agricultural commodities, but they experience very different market circumstances. What's the difference, and what does that mean for cannabis growers?

Take a trip across the United States and you will be bluntly confronted with a major reality: this nation is all cornfields, from sea to shining sea. Understanding the law of supply and demand, and the effects on the cannabis market, one would assume that with such massive production of corn, prices should be rock bottom. They are low, but they aren’t bottoming out and never will, under currently policy. Corn as a commodity provides the perfect insight as to what cannabis should and shouldn’t look like in a future commodity market.

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So, what exactly is an agricultural commodity?

Let’s break it down. First, a “commodity” is defined as a “raw material or primary agricultural product that can be bought and sold; such as copper or coffee.” The markets for copper and coffee are different however. Copper, like oil or gold, is supplied by the earth itself. She isn’t making more of it fast enough for us either, making those resources “finite” or naturally limited by the amount already in existence. Prices for agricultural commodities like coffee fluctuate from harvest to harvest. If coffee prices rise, more farmers joining the market can bring them down. If prices fall too low for coffee, less farmers will be incentivized to grow it.

U.S. farmers now produce 32 percent of the world’s corn supply. Corn did not make its way to every corner of America because demand was increasing exponentially, but because the federal government subsidizes production. The reason for this is because governments around the world subsidize the production of agricultural commodities to ensure the stability of food supplies.

Farming is tricky business. No matter how dedicated a farmer is or how good his or her produce is, unpredictable weather and uncontrollable external supply production could drop prices so low the farmer goes out of business entirely and stops producing. In order to ensure farmers keep farming their crops year-over-year, despite fluctuating prices, the government pays some farmers of agricultural commodities to ensure they profit enough to keep planting.

Corn as a commodity in the United States

By definition, however, to be a “commodity” corn needs to be the building block of something else. With Americans growing more corn than they can eat, they have to use it for other purposes. Corn is a food that humans eat as-is, but most of the corn planted in the United States is not meant for eating. According to Scientific American, about 36 percent of U.S. corn harvests are fed to livestock, another 40 percent is converted to ethanol. Much of the rest (about 20 percent) is exported. The remaining few percent are mostly converted straight into high fructose corn syrup and used to sweeten sodas and processed foods (which has a host of negative consequences). According to the United States Department of Agriculture, 95 percent of livestock accustomed to eating grass are being fed with corn (which also has some pretty negative consequences).

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How is cannabis different, as a commodity, than corn?

Cannabis is not corn. As an agricultural commodity, it is closer to coffee or wine grapes. Why? A diverse market of buyers that demand uniqueness and quality. While the price of cannabis, coffee and grapes are also set by supply and demand, quality and genetics also affect prices.

Typical commodity markets rely on standardization, but agriculture isn’t naturally standardized. Like humans, plants and every other living biological organism on the planet, plant genetics vary from seed to seed just like human genetics vary from sibling to sibling. Plants, like humans, are constantly evolving and never standardized.

That is, unless you clone them. Cloned plants are standardized and grown en masse, converting them into an easier-to-define commodity. This process is referred to as “monocropping.” Bananas are a great example; every yellow Cavendish banana you eat is a clone of every other yellow banana you have eaten. Most banana consumers know no other bananas and do not demand genetic diversity, allowing producers to tightly control and concentrate the market.

Clone me not (as much): Cannabis diversity is prized

Cannabis, however, is prized as a raw good, and connoisseurs seek out new and rare varieties. The raw produce can be converted into oils, foods and other byproducts, but there is a large and thriving clientele that has come to prize the crop specifically for its genetic diversity.

Grapes, coffee and cannabis can be monocropped, mass-produced and priced like a commodity. There will be a low-priced market for the raw produce, but ultimately the cheap stuff will get converted into byproducts. This low-priced market easily exists side-by-side with a connoisseur’s market that values the unique genetics in different varieties of the plant and will pay a premium for these different varieties when great growers coax out their best qualities. So, while there will always be a market for cheap, bulk, Folger’s coffee, it doesn’t take away from the market for small batch, special blends and roasts, which are purchased at a premium.

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If you are a grower, especially one who doesn’t plan to specialize in higher-cost higher-value specialized cannabis flowers, it is time to understand how you fit (or don’t) in the commodity market, or you might find yourself outside of it. In the future, there will be more ways for the cannabis farmer to insulate themselves from commodity pricing, such as cash cropping and forward marketing (that’s how Iowa corn farmers do it). But, as long as cannabis remains federally illegal, it is not possible to utilize these strategies.

Unlike other commodities, cannabis isn’t sold on one singular market, because it isn’t exactly legal yet. As we move past state-by-state legalization and towards (hopefully) federal decriminalization, descheduling and a commercially regulated industry, cannabis will increasingly be priced by the laws of supply and demand in a commodity market.

Best to prepare now.