So how quickly did the US change its mind on cannabis?
Here is Ronald Reagan when he was running for president in 1980.
Marijuana, pot, grass, whatever you want to call it, is probably the most dangerous drug in the United States and we haven't begun to find out all of the ill effects.
Cannabis was illegal back then and remains so for years.
How about today? The vast majority of Americans support some form of legalization and cannabis is fully legal in 24 states.
It's sold in 14 more for medical use, although to be honest, the medical tag is often a very small fig leaf.
Oklahoma, for instance, leads the US in per capita cannabis dispensaries and it is one of those 14 states that allows only medical use.
In other words, when it comes to cannabis it's pretty easy to get a note from your doctor.
So how widespread is cannabis use today?
Last week, in part one of this series, we heard that the US just reached a milestone.
There are more daily or near daily users of cannabis than there are daily or near daily users of alcohol.
The cannabis industry today employs half a million people, includes 12 ,000 licensed retail locations and takes in $30 billion in annual sales.
So today in part two of our series, we started out with a simple question.
Who is making all that money in the cannabis economy?
But we learned there might be a better question.
Is anybody making any money?
Everybody believed that this would be like Silicon Valley, this giant growth industry.
The cannabis industry is a bit of a mess and we explore the reasons.
There are a lot of reasons.
I sunk my life savings and raised over $2 million to get into the game.
It's hard to articulate the regulatory complexity of every single thing you have to do.
Taxes are high and there's a lot of product in the market.
There's illicit product in the market.
We had this myth that with legalization, we could stop all enforcement.
I was totally wrong.
Fun fact of the day, there are more weed stores in Los Angeles than there are Starbucks.
And more than 70 % of those LA weed stores are illegal.
This may explain why one of California's biggest legal cannabis companies, once valued at $3 billion, recently filed for bankruptcy.
As the great social critic Kermit the Frog once observed.
It's not that easy being green.
This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host, Steven Dubner.
California has a history of helping to create industries that turn into juggernauts.
Think about Hollywood, think about Silicon Valley, both the tech and venture capital industries.
You've also got aerospace and biotech.
You can go all the way back to the gold rush in the mid 19th century.
And for a while, it looked like there would be a new 21st century juggernaut, the green rush, legal weed.
California was already an agricultural powerhouse with a long history of growing cannabis.
Up north, the Emerald Triangle, Humboldt, Mendocino, and Trinity counties, was known for producing some of the planet's best weed during many decades when it was illegal.
In 1996, California voters approved the Compassionate Use Act, making it the first state to allow the sale of cannabis for medical use.
And then in 2016, California became the sixth state to fully legalize cannabis.
By 2021, sales in California reached nearly $6 billion, but that number has been falling ever since, even though the demand for cannabis across the country continues to rise.
So why has the green rush slowed down?
Let's start with one California entrepreneur.
My name is Nikesh Patel, and I run a cannabis house of brands called Mammoth Distribution.
We are based in Los Angeles.
Okay, so house of brands, distribution in the name.
I assume that means that you don't cultivate, that you market and sell, but tell me if I'm wrong.
Yeah, correct. We do product development, we manufacture our products, but we do not cultivate.
There's over 10 ,000 licensed cultivators in California, and so we have deep relationships with key suppliers who, you know, the ecosystem is pretty complicated because there's indoor farms, there's outdoor farms, there's greenhouse farms, lots of different genetics in this industry.
Just name for me some of your products.
I mean, how many different formats are there?
There's pre -rolls, there's edibles, there's vapes, there's pills, there's capsules, there's bombs, there's tons of different formats in which a plant manifests itself now.
What about beverages?
Beverages is one of the fastest growing segments in the industry, which is relatively new.
We also happen to run and own the largest cannabis beverage manufacturer in probably the world.
We do the most in California.
It's called Space Station.
Patel got into the cannabis industry in 2017.
Before that, he helped start a company that sold barware, cocktail glasses, shakers, things like that.
And before that... I studied business at Berkeley and public policy, and I wanted to go be a public policy professor.
My first job out of college was a research associate at the Public Policy Institute of California, where I learned more about, like, oh, interesting, how the government kind of boosts certain industries.
My first research was on Silicon Valley and some of the things that helped California become the leader in tech.
One reason Patel moved into cannabis is because he thought it might be in a similar position, to be boosted.
Everybody believed that this would be this giant growth industry.
And so a lot of investment dollars went into building an insane amount of infrastructure.
And you're in California, where people thought this would be the epicenter of it all, because if federal legalization happened, just like most agricultural products, California, especially with its history of cannabis, would be the leading exporter.
Ah, if federal legalization happened.
If you're looking for the main reason why the cannabis industry has not lived up to its hype, and why much of the industry is in a state of chaos, this would be a good place to start.
Even though cannabis is legally sold in most states, it is still illegal at the federal level.
In fact, it's still classified under the Schedule I Drug, along with heroin and LSD.
That is drugs with no legitimate medical use and high potential for abuse.
That may soon change for cannabis.
We'll hear more about that in the final episode of the series.
But for the time being, the federal government still sees cannabis as an illegal drug, and that has many downstream effects.
For starters, a cannabis entrepreneur won't have access to traditional financing or investing, since most financial institutions don't want to partner with an industry that Washington considers illegitimate.
You will not have access to any of the big banks.
There's been a few credit unions that have been starting to bank the cannabis industry.
When I started five, six years ago, it was 100 % cash.
Now, pretty much every cannabis operator of size has a bank account with a local credit union that you've probably never heard of.
So if you are banking with a credit union or something equivalent to that, maybe a small local bank decides to do it, does that mean you can accept credit cards?
No. It's basic banking functions.
I'm talking like storage of cash, being able to wire money, and you pay exorbitant fees.
Another result of the federal illegality is that you can't sell your product across state lines, or open a shop in another state without going through that state's licensing process.
And when it comes to state licensing, there is no standard playbook.
Some states license at the local level as well as the state level.
Some put a tight cap on the number of retail licenses, Arkansas and Alabama, for instance, while others are more laissez -faire, like California and Michigan.
Some charge a lot for license.
In California, there are many types of license and some cost nearly a quarter million dollars.
In some states, they're cheap, like Oklahoma, where license costs only $2 ,500.
That may explain why Oklahoma has the most dispensaries per capita of any state.
The entirety of the cannabis market is filled with an amazing number of contradictions and confusion when it comes to policy and government and states versus federal and whatnot.
All these complications make it hard for a cannabis entrepreneur to achieve any kind of scale.
And then there are the regulations.
It's hard to articulate the regulatory complexity of every single thing you have to do.
You have to have live cameras everywhere.
You have to have locking ID mechanisms everywhere an employee goes.
You have to have a plan for everything that you have to submit and get approval before you can move things around or change things.
It feels like you have a microscope on you.
There are also testing requirements.
The cannabis plant is what's known as a bio -accumulator.
It can absorb many substances in the air, water, and soil where it grows.
In some places, that could include pesticides and heavy metals.
The amount of lab testing through the entire process is insane.
No agricultural product has this.
Every single part of the plant has to be tested for final sale.
The idea is to make sure that the cannabis sold in licensed stores is safe, and many states monitor all cannabis with a tracking system called metric or marijuana enforcement tracking reporting compliance.
Metric is the software that the government in California decided to use to do what's called seed to sale.
So the moment a cannabis seed is planted, it has to be tagged.
Every part of it and every every single plant is tagged.
Every single plant is tagged.
So if you're a cultivator, you are tagging and putting into the government database, I planted this product.
This is the tag number.
And then as you harvest it, every single product that comes from it has to be tagged all the way across the system so that if you bought a pre -roll at a dispensary, they can track that all the way back to every single plant or multiple plants that made that product.
And there's one more big wrinkle that comes from cannabis being illegal on the federal level and still being a Schedule I drug.
This has to do with taxes, specifically a section of the IRS tax code known as 280E.
This came about in 1981 during the Reagan administration when a convicted cocaine trafficker argued in court that he should be allowed to deduct his legitimate business expenses, even though his business was illegitimate.
Congress responded by creating Rule 280E, which prevents anyone trafficking in controlled substances from deducting their business expenses.
For someone like Nick Patel, this means that other than the cost of the cannabis itself for expenses like storage and transportation, banking and franchise fees, packaging and marketing, none of that is tax deductible as it is for other industries, which means that a legal cannabis operator might pay an effective
federal tax rate of around 70%.
That's in addition to state and local taxes.
Los Angeles, for instance, has a 5 % cannabis excise tax.
So what do you do if you're an entrepreneur with that kind of tax burden?
You might consider just not paying your taxes.
That is certainly what's been happening on the state level.
A recent report from Green Wave Advisors found that in California alone, cannabis businesses owe more than $700 million in unpaid taxes.
But it's unlikely the state will ever see that money.
More than 70 % of those companies are no longer in business.
Coming up after the break, there's one more huge problem for the legal cannabis industry, the illegal cannabis industry.
I'm Stephen Dubner.
This is Freakonomics Radio.
We'll be right back.
Because cannabis is still illegal on the federal level, even a legitimate cannabis business faces many hurdles, as we've been hearing today.
You have limited access to banking and financing.
You face intense and expensive state regulations.
You pay very high taxes, and in order to expand to a new state, you have to get a new license and navigate an entirely different set of regulations.
Despite all these unkind business conditions, some firms have managed to scale up.
They are called MSOs, multi -state operators.
And they tend to be vertically integrated, cultivating and processing cannabis, creating their own brands and operating retail shops.
One of the biggest is Cureleaf, which is headquartered in New York City and has roughly 150 stores in 17 states.
There's also Green Thumb Industries based in Chicago with 95 stores in 14 states.
Another big one is TrueLeave, which is based in Florida.
As of this recording, Florida allows only medical cannabis, and TrueLeave dominates that market.
On November 5th, Florida voters will have the chance to allow recreational use, in which case TrueLeave would be in a strong position to satisfy what will likely be a lot of new demand.
This is a common strategy for some MSOs.
Set up shop in places with medical licensing, so that you're ready if that state adds recreational use.
This may remind you of how two of the biggest sports gambling platforms, FanDuel and DraftKings, set up their operations years ago around fantasy sports.
Back then, sports gambling was legal in only a few places, but in 2018, the Supreme Court lifted the ban on national sports gambling, leaving FanDuel and DraftKings in a perfect position to start taking in real money.
Anyway, back to these cannabis MSOs, even the biggest ones just aren't that big.
This is an industry where scaling up is, at least for now, very hard.
Even Pureleaf, the biggest American cannabis company by revenue, is thought to have only about 4 % of the entire legal market.
Some of this has to do with state licensing.
Most states have limited the number of licenses any one company can own.
And in many cases, it's not a lot.
The maximum number of licenses that you can have in New Jersey is three dispensaries.
Three dispensaries in a state of 12 million people isn't exactly market domination.
That is Adam Gores.
I'm a senior vice president with the cannabis company, as well as the chairperson of the Coalition for Cannabis Scheduling Reform.
The Cannabis is a multi -state operator based in New York.
I got involved in the cannabis space about seven or eight years ago, after a career in politics.
I was a senior advisor to a number of Democratic governors.
And after business school, I was looking for an opportunity that was both mission driven, but also a growing economic sector.
The Cannabis started out with medical cannabis.
They were originally called Columbia Care, and they've been trying to ride the wave of recreational legalization.
The problem is that every state has its own way of setting up their licensing process, and the result is often confusion and controversy.
To be fair, this often happens when a long -standing ban is lifted, when something goes from illegal to legal.
It happened with alcohol.
It happened with fireworks.
It happened with gay marriage.
But Adam Gores argues that with cannabis, some states have done a particularly bad job.
Adam Gores I'll point out one that's done it probably the worst.
It's New York State that delayed the rollout of their marketplace by not allowing their medical businesses to get started and waiting to let new businesses join in first, which took years.
And in that vacuum, the illicit market just dominated.
And so, you know, headlines everywhere that there's thousands and thousands of illicit shops in New York that have been very difficult to shut down.
Jared Polin As a New Yorker, I can vouch for those headlines.
There are now a few dozen licensed cannabis shops in New York City, but since legalization in 2021, there have been 3 ,000 illegal shops.
The average customer would have no idea those illegal shops are illegal.
They have real neon signs, real employees, and real weed.
Their products might be properly labeled, and they might have been tested for contaminants, but also maybe not.
So why has it been so hard to shut down illegal shops?
The economist Coleman Strumpf has been studying legal and illegal cannabis markets in the U .S.
He's the one who found that fun fact I shared earlier that 70 % of the weed shops in LA are illegal.
Here's what he told me in an email.
It is rare for police to permanently shut down a store.
In short, this comes back to jurisdictional confusion, demoralization of police.
Essentially, they were told they were villains in the war on crime, and now they have to figure out not if a drug is legal, but if the seller is legal, and perseverance by illegal stores.
After an arrest, they often reopen a store right near where their old store was.
If you happen to walk into a weed store and you aren't sure if it's legit, one fun thing to do is ask to see their license.
That usually turns into an interesting conversation.
You can also check the prices.
If the store is unlicensed, they're going to be cheaper, maybe half the price you'd find in a legal store.
This makes sense. Running an illegal operation is a lot cheaper.
No licensing fees, no testing fees, no taxes to pay.
According to one estimate of California's cannabis market, annual sales of the legal product are at $5 billion with illegal sales at $8 billion.
It's hard to think of another industry where the legal version gets so badly beaten by the illegal version.
If you can think of one, let me know.
In most heavily regulated industries, think of pharmaceuticals, the manufacturer can pass along all those regulatory costs to the customer.
When cannabis firms do that, they make the illegal version even cheaper by comparison.
So legal firms try to keep their prices down, which makes it harder to make money.
A recent survey by Whitney Economics, a big cannabis research firm, found that only 24 % of licensed operators in the US are turning a profit.
There's a lot of unrealistic expectations.
That is John Calkins.
He is a drug policy researcher at Carnegie Mellon University.
We heard from him last week too.
This time, I asked Calkins why the legal cannabis market isn't working so well.
He says there are at least three major reasons.
One is just legalization is like a radical technological innovation creating a brand new market.
Cannabis isn't used for thousands of years, but the kinds of production methods you can use after legalization are entirely different.
So it's like a brand new market.
It is actually normal when there's a brand new market for thousands of people to jump in trying to get rich and 80 % of them to go bankrupt.
So some of it is actually just a normal, healthy shake out of a market.
A second issue is the thousands of people jumping in didn't all clue in to the fact that prices were going to collapse.
They didn't all clue into this reality that it is way, way, way less expensive to produce cannabis when it's legal than when you're trying to do it while hiding from law enforcement.
But the third issue is the one that's really an important policy question, which is how do legal companies compete against illegal companies?
The misinformation story here is the legal industry says, oh, it's all the taxes.
You just got to repeal the taxes.
That's what's killing us.
That's not the right way to think about it because the costs of operating within the legal regulated market go way beyond cannabis specific excise taxes.
They include things like social security and income taxes, things like having a workplace that meets workplace safety standards.
All of those things collectively drive up the cost of business, much above people who just get to totally ignore the rules.
Let me tell you a story that I love because it makes the point way back in 2013, I happened to be interacting with, call them a gray market entity.
They were not like an organized criminal group.
They were trying to operate like a business and the guy said, the regulations are killing me.
They're asking me to put wheelchair ramps into my greenhouses to make them ADA compliant.
Following the whole set of rules that legal companies are supposed to follow does put them at a big cost disadvantage compared to the companies just get to not follow the rules.
So the answer to that is not repeal the cannabis taxes.
The answer to that is don't let the people who are flouting the rules, flout the rules.
As Culkin sees it, the cannabis economy has entered a vicious cycle of non enforcement, which is bad news for pretty much everybody except a handful of illegal entrepreneurs.
We had this myth that with legalization, we could stop all enforcement.
I was totally wrong.
After legalization, you still need to enforce the regulations.
The good news is you can do that without filling up prisons.
You're going to do things like seize their assets, but the complete hands off.
I'm not going to mess with the people who aren't following the rules is directly harming the people who are trying to follow the rules and incur all the costs of following the rules.
In California, came to that realization late.
They got a slow start and they're in a bit of a hole trying to get out of that.
There is one more feature of cannabis legalization that has made some state rollouts confusing and controversial.
In the past, a disproportionate share of the people arrested for using cannabis were black.
So a lot of states and cities are trying to right that wrong by building a social equity component into their licensing procedures.
After the break, we will hear how that's working out in San Francisco and it turns out you can't talk about cannabis without talking about Minnesota.
That's coming up. I'm Stephen Dubner and you are listening to Freakonomics Radio.
We heard earlier from Nikesh Patel, the CEO of a cannabis firm in Los Angeles called Mammoth.
Here now is our next guest.
My name is Nikesh Patel and I'm the director of the San Francisco Office of Cannabis.
That's right. Two Nikesh Patel's, both in the California cannabis industry, one a producer down south, the other a regulator up north.
That's a little surprising, but honestly, we've had a lot of surprises ever since we started reporting out this cannabis series.
So Nikesh, I see you have an undergraduate degree from Stanford, a graduate degree in Oxford and a law degree from Berkeley.
Did you think when you were getting all that education that you would end up running the San Francisco weed office?
If you ask my high school friends whether they saw this coming, they might laugh you out of the room.
But if you ask the people I grew up with in the Tenderloin, they would say, yeah, you know what?
It was always a part of your makeup because every time we came to where you lived, we could smell it everywhere around you.
I grew up on Eddie in Polk.
The hotel that I grew up in is still there.
My parents were running a single room occupancy hotel.
About 90 individuals were saying they're apart from us, but I was going to school in Pacific Heights.
So there was this daily juxtaposition between extreme have -nots and then a more affluent part of the city.
It's the reason why I do a lot of the work I do now because I recognize that there are a lot of people who have the ability, but not necessarily the means, to get ahead in life.
And that's why the equity program and the work we do at the Office of Cannabis and the city as a whole is so inspiring because it's designed to bridge those opportunity gaps and give people who may not have a seat at a table an opportunity to say, look, I'm willing and ready to try if you're willing
to give an opportunity.
San Francisco's legal cannabis system doesn't just include a social equity component the way many cities and states do.
It is built around this idea.
It's supposed to be this program that gives people that have been disproportionately impacted by cannabis enforcement in this country and opportunity -owned business.
Cannabis also has the added difficulty of having a rich history that's rooted in criminalization in a way that also applied to alcohol, but feels different and it feels like it extended for longer and was more specific against the types of communities that it was exacted against black and brown people
in particular. Imagine walking into a store, a cannabis store, that's in any one of San Francisco's neighborhoods.
You might learn that the owner of the store is actually someone who grew up in San Francisco.
They may have experienced some housing insecurity in the city.
And Nikesh, what are the odds that the person running that store or maybe owning the store was arrested for selling cannabis when it was illicit in the state?
Pretty high. That's part of what makes these stores really unique.
So how many legal retail shops are there in the city of San Francisco right now?
In terms of our equity businesses, there are 54 that we've issued permits to.
And then when you factor in the medical cannabis dispensaries, that's about another 30.
So all told, it's in the vicinity around 80.
And then how many illicit shops are there?
Really good question.
I almost don't want to answer it because I'd rather not jinx the way things are right now.
But in San Francisco, there are far fewer illicit retail businesses.
Far fewer than the legal ones you're saying?
That's right. It's a reflection of the relationship between the Department of Cannabis Control, the Office of Cannabis, the San Francisco Police Department, the Fire Department.
We're working on becoming even more integrated than we currently are to step into the world and say, look, this is what's going to happen when you're operating illicitly in the retail space.
We went back to the economist Coleman Strumpf and asked him to share his data on legal versus illegal stores.
He told us that as of the end of 2019, there were around 100 licensed retailers in San Francisco and just 21 unlicensed.
That is the opposite of LA and New York City, where the vast majority of the shops are illegal.
So does this mean that the legal weed shops in San Francisco are making a lot of money since they don't face much competition from illegal shops?
It does not. Even with all the support from Nikesh Patel's office, revenues have been falling significantly.
It's an economically challenging time for anyone in the cannabis space.
Part of that is because there are a lot of regulations.
Part of it is because there are high taxes.
Part of it is because there's still federal uncertainty around the legal status of cannabis.
You don't get to claim the same tax exemptions.
When you're applying for an insurance policy, the premiums are going to be really high.
When you are looking for financing, you're going to be paying more than other small business entrepreneurs.
So there are some economic challenges that come with being in cannabis.
Right now they are exacerbated by local conditions in San Francisco.
We're still recovering from the pandemic.
There's a lot of product in the market.
So that also makes it harder to compete.
There's illicit product in the market.
I will say this much.
I have a lot of respect for anyone who's in the cannabis space because it's a very challenging time.
And I take great pride in the operators in San Francisco being able to endure these challenging times.
It's a resilient bunch.
I've read one report that says only about a quarter of cannabis operators are profitable.
It sounds like San Francisco, you're having similar challenges that everybody's having in terms of supply and demand and tax and regulation and so on.
But in San Francisco in particular, does this mean that the city or some institution, some office is subsidizing these stores in particular?
Interesting question.
We refer to the dollars that come through the state and then through the city as grant relief.
And so there are grant dollars that the Office of Cannabis is working very hard to make directly available to our equity operators and equity applicants.
To date, the Office has dispersed around $12 .3 million and that's since 2021.
That means that if you are an eligible business or an operator applicant, your business may realize anywhere between 50 to $250 ,000 over the last couple of years alone.
And that's only on the retail side.
That's not on the cultivating side or manufacturing side.
Is that right? That's inclusive of both retail and supply side.
I see. Okay. So I mean, if I take a step back, especially if I'm a person who's really anti cannabis, I take a step back and I say, wait a minute, wait a minute.
The city of San Francisco and the state of California are paying weed store operators to operate.
They're making these pretty substantial grants into a market that was supposed to be robust and was supposed to support itself, but is not.
So how would you respond to that concern?
I would say that cannabis is heavily taxed and the dollars that are coming through the grant relief to these programs are actually a portion of the taxes that cannabis businesses are paying.
The broader picture is that only a portion of the taxes that cannabis businesses are paying are going back into those businesses.
The other portion of the taxes are going into other services that are beyond just cannabis.
Like what? There's a lot of money that's going into doing research around cannabis itself that wasn't previously available.
That's tremendously important.
There hasn't been much academic study that's gone into the effects of cannabis, what they are long -term versus short -term.
Now the funding is becoming available to actually do that work.
San Francisco may be the friendliest jurisdiction imaginable for a minority cannabis entrepreneur.
One report from 2021 found that nationwide, fewer than 2 % of owners in the cannabis industry are black.
Even in the places that do profess a strong interest in social equity, the policies and politics can be tricky.
New Jersey, for instance.
My name is Precious Osaigarese and I am the founder and CEO of Precious Cana Company.
Precious Cana Company is the first black woman owned pre -roll brand to launch in a state of New Jersey.
A pre -roll in case you have forgotten.
A pre -roll is cannabis that's already been enrolled for you in a joint -like form.
So you don't have to do nothing but pull it out, light it up, and enjoy yourself.
New Jersey began to roll out its recreational cannabis program in 2022.
We're in about 20 dispensaries and growing.
That's a pretty small footprint, to be honest, especially when you hear what Osaigarese was hoping for when she got started in the cannabis business.
Listen, I went up for licensing, I tried to open my own dispensary, I sunk my life savings and raised over two million dollars to get into the game.
I was not able to get that dispensary.
Okay, so let's back up.
I never thought I'd be in cannabis, okay?
If you would have asked me, my parents, I am a Nigerian -born African -American woman.
When I sat my parents down and told them I was entering the cannabis industry, they asked for a PowerPoint presentation as to how this makes sense for my life.
Before cannabis, I was an aspiring journalist.
I interned at CNN with Wolf Blitzer.
At one point, I just really enjoyed news, and the news of the day in New Jersey was weed.
I remember our governor running on weed and wages.
That was the news of the day.
So, in 2019, she and a business partner started a CBD delivery company called Roll Up Life.
CBD is one of the people who likes it for pain and stress relief.
CBD was already legal in New Jersey, as it was in most states, and Osagie Arese saw it as a good entry point, a way to get the feel for the industry while awaiting full legalization in New Jersey.
She and her partner got exposure to the supply chain logistics, the financial regulations, and other wrinkles of the cannabis industry.
The goal was obvious, to be in position to win a license when the time came.
Everyone wants to have this license.
This license gives you the green light to cultivate, manufacture, dispense, distribute, wholesale, or deliver.
But the number of licenses are limited, and there was a lot of competition.
Osagie Arese thought she had a good chance for two reasons, her experience with CBD, and the fact that as a Nigerian -born African -American, she would score high on the social equity portion of the New Jersey application.
So what happened? She thinks politics got in the way.
I'll give you the short of it.
Our property was located near another property that was being backed by very high political figures within the New Jersey Democratic Party and within the East Orange Democratic Party.
I even got a call from a council person who said, hey, if you move your property, we'll give you your license.
I'm like, this is not how it's supposed to work.
If we are on a merit -based system and my application proved to meet those merits, why do I have to move my property?
There was a big city hall meeting.
As they were calling out the names of the winners for the dispensary licenses, Roll Up Life Inc.
was not called. And that was very hard for us.
I can't even begin to tell you how much it stretched me as a founder, stretched my family when we weren't able to really overcome that.
That's her understanding at least.
Here's a statement from a spokesperson for one of the political figures that she says received this favor.
There has been no undue political influence on behalf of the cannabis firm in question, as they have been treated the same as the other applicant every step of the way and have presented a strong application for consideration.
In any case, without a license to cultivate and manufacture and distribute, Precious Osaighe Arese didn't have a lot of options.
So she came up with a new company name, Precious Kanna, and she partnered with a firm that does have a license to cultivate and manufacture.
All she does is the packaging and marketing.
So her brand is just one of the many that compete for shelf space in New Jersey cannabis shops, and even when she succeeds, there isn't much money to be made.
Those numbers can be pretty small when you're in a licensing deal.
Between 9 and 15 percent is usually the average negotiation you can get as a licensee.
In order to grow, she would have to expand Precious into other states, but that would mean finding a cultivating and manufacturing partner who's got a license in those places.
You have to look at where some of these new states are coming online because that provides new opportunity.
When you look at Florida coming online in November, it's very exciting.
And you watch how larger corporations have already put their stake in the ground for states, you know?
Florida is really habitated by true leave.
They have dispensaries already there on the medical side in Florida.
So imagine when that flipswitched to recreational.
Huh, be cool to be a true leave company right now.
When Osaiga Arese mentioned legal cannabis coming online in Florida in November, that is still a maybe.
It's up to the voters in Florida.
But there is one more wrinkle in the cannabis economy, more of a loophole than a wrinkle, actually, which means that even if you are in a state where recreational cannabis is not legal, there is still a legal way to buy products with THC, the intoxicating component in cannabis.
Let me explain. In 2018, Congress passed a new farm bill as it does every five or six years in order to keep the country's agricultural policy up to date.
The 2018 version allowed the cultivation of hemp, which are cannabis plants with low THC content.
Here again is John Calkins, the drug policy researcher.
The intent of the farm bill was to allow farmers to grow the cannabis plant for shirts and rope and seed and so on.
And the clause in the bill said a product with less than 0 .3 % THC will be called hemp and will be outside.
Well, that created three layers of loophole exploitation that's dysfunctional.
One is people put the THC in a gummy or a candy bar and said, hey, it's less than 0 .3 % by weight THC.
But that doesn't mean that it's a negligible quantity of THC.
It just means that the weight of THC is divided by the weight of the food product.
And then there was a whole bunch of producing plants with CBD, but not THC and then converting the CBD into THC or sometimes converting into THC eight because the farm bill specifically was THC nine THC nine, also known as Delta nine THC is the most abundant cannabinoid in traditional cannabis.
It is the one that gets you high, but entrepreneurs taking advantage of the farm bill hemp loophole began making a new class of intoxicating hemp products, which isolate other cannabinoids like Delta eight THC and Delta 10 THC and CBD.
There's been a lot of research by now on CBD, which doesn't get you high and is generally considered a safe medical treatment for a variety of conditions.
But cannabinoids like THC eight and THC 10 are much less well understood and their psychoactive effects can vary from person to person.
The licensed cannabis industry through the tracking and testing we heard about earlier is heavily regulated.
This signals to consumers that their products are consistent and not dangerous, but new players who come into the industry through the hemp loophole may not have the same standards.
And then the most recent loophole is people say, Hey, wait, wait, I grew regular old cannabis.
It's just like the stuff that you mean to regulate, but technically until it's heated, it's not THC nine.
It's THC that hasn't been made.
So all of that stuff is happening totally outside of any regulation and there's nasty stuff that happened.
Some of the byproducts of the conversion of the CBD into THC, you can get some unnatural cannabinoids that are really not well understood.
There's horrible labeling.
So there's a lot of ways in which the current situation is much more of a wild West.
So even in many States where cannabis is illegal, you can buy intoxicating hemp based products in gas stations, corner stores, online retailers.
You can even use a credit card since those sellers are not locked out of the banking system.
The way that licensed cannabis sellers are in States where cannabis is legal.
One research group puts the U S market for hemp derived cannabinoids at nearly $3 billion up from just $200 million a few years ago.
If you are the kind of person who likes to take note of the unintended consequences of well -meaning legislation, well, this was a pretty big one.
Some lawmakers in Congress are trying to close the hemp loophole in the next farm bill.
Until then, some States are happy to take advantage Minnesota.
For instance, Minnesota did recently vote to legalize recreational cannabis, but the infrastructure to start selling won't be ready until at least 2025 until then hemp derived products are the only legal recreational THC in Minnesota.
And there is one product that has proven especially popular.
If you remember part one of this series, we heard from the author, Tom Standage about the history of alcohol.
Here's another question I asked Standage during that interview.
Given what you know about alcohol and other drugs and given what you know about human history and civilization and all the connections, technological, economic, political, and so on with alcohol, could you imagine a world in which cannabis perhaps in many different varieties and formats and strengths
like alcohol had been the dominant social drug over the past few millennia rather than alcohol?
Yeah, that's a good question.
The thing about liquids is that they're very easy to divide.
So you can share them very easily.
There's a huge amount of flexibility and versatility.
There are reasons why they're so embedded into our culture in a way that something that you smoke can't be quite as much.
So Tom Standage sees the social component of alcohol as unbeatable.
It is true that for many of us, there is nothing more enjoyable than holding a glass of something you love while hanging out with the people you love.
We've been doing this for millennia.
If cannabis is ever to replace alcohol to any significant degree, it would need to perform that function.
In Minnesota, it does.
Thanks to the hemp loophole, bars there have begun serving THC drinks alongside booze.
So when we learned that one of our producers, Augusta Chapman, was going to be in Minneapolis this summer, we asked her to show up thirsty at one of these bars with a microphone.
She went to a place called the Iron Door Pub.
Can you tell me your name and what you do?
I'm Rick. I'm a bartender.
How long have you been doing THC here?
We've done it ever since it was legal in the state.
We have everything from seltzers to more of a soda pop kind of deal.
We also sell edibles like puffed popcorn, cookies, gummies.
And is it popular? Very popular, yes.
A lot of people when they switch from alcohol over to THC becomes a lot more of a we can actually go out socialize still, still grab a meal, not feel obligated to sit there and drink water kind of deal.
Can I try one? Which one would you recommend?
Personally, I really like the flying cloud.
Kind of tastes like an orange dreamsicle.
Otherwise, the modest melts are one of our best sellers here.
The Blood Orange vanilla raspberry is quite delicious.
I'll try the melt. That looks great.
The Blood Orange. Cool.
Thank you so much. All right.
We're gonna try it.
Honestly, if I didn't know that this had THC in it, I'm not sure that I would be able to tell you that it does.
And I caught up with Augusta when she got back to New York.
I asked how she enjoyed her visit to the Iron Door.
Yeah, I was so high when I got home from that.
It was not good. What did the drinks taste like?
Were they weedy or boozy or more like soda?
Yeah, they're like sodas and they were delicious.
That's why I got high because I was like, Oh, I'm just gonna try it.
And then I kept sipping them.
How did you have? I had like a quarter of three different ones and they were each 10 milligrams.
So I got through all the reporting and then I got in the car with my girlfriend and she was driving us home and I was like, Whoa, don't let me talk to your mom when we get back.
I think what's happening in the Minnesota THC adult beverage market is really very important and very innovative and could interact with alcohol consumption in ways very differently than other cannabis products do.
That again is John Kalkins.
What I mean is THC adult beverages might substitute for alcohol even if smoked, vaped, dabbed cannabis does not.
The other thing that's really interesting in Minnesota is the degree of responsibility that the retailers are demonstrating in this space.
So I think what's going on is that the sellers, the restaurants and bars, are alcohol licensees and they care a lot about holding onto that alcohol license.
So they're trying very hard not to get in trouble, not to serve someone who ends up being an impaired driver, for instance.
And I think that is potentially creating a much healthier industry than the aggressive wild west culture that is common in a large number of the cannabis firms.
So I think we should be watching what's happening in Minnesota with great interest.
And I went back to Nikesh Patel, the first Nikesh Patel we spoke with today, the CEO of Mammoth Distribution, the LA cannabis company that's one of the biggest cannabis beverage manufacturers out there.
I mean, for me personally, it's way better than alcohol.
It feels better. Like there's this whole Cali sober thing.
Cali sober meaning I don't drink alcohol but I consume cannabis, correct?
Correct. Yeah, exactly.
I think it's like a mix of calories and just like the negative effects that you've learned about, you know, drunk driving and aggression and all that kind of stuff.
Let me ask you to just take a step back for a minute.
Try to pull yourself back from the momentary chaos.
I'm curious to know where you see the industry being in five or 10 years.
And what I really want to know is how much do you think that cannabis might replace alcohol?
So I think in five years, I see the ability to recreationally consume THC and derivatives of it is going to be way more accessible.
The impact on alcohol, you're already kind of seeing it, right?
This is the first time that there's more daily cannabis users and daily alcohol users.
I do see a variety of tieups of various sorts.
Green Thumb Industries, GTI, I read very recently expressed interest in merging with Boston Beer, maker of Sam Adams beer.
I see that Tilray, the cannabis company announced an expanded strategic partnership with Novartis, the pharmaceutical firm to work on medical products in legal markets.
Do you think the most likely outcome for your company, Mammoth, will be some kind of tie up with some more established firm like that?
Yeah, I think that's the hope, right?
Whether it's alcohol or even cigarette companies have said they need to move their money away from cigarette sales.
I hope that also the non sin businesses might be interested.
Coca -Cola might be interested in a beverage that does XYZ.
I mean, Coca -Cola started with cocaine.
Yeah, no, you're right.
You're right. But I also think if the landscape becomes more clear, there'll just be more general investment.
So I think cannabis will stand on its own legs too.
I think it will be as big if not bigger than alcohol in total market size.
If the cannabis market is going to get that much bigger, they're going to need a lot of cannabis.
We grow killer weed.
Coming up next time in part three of our series, what does it take to be a successful can of business person?
This is outdoor flower.
These fan leaves are starting to turn yellow, so they're not really doing anything for the plant.
We spend the day on a cannabis farm watching everything from seed to sale.
That's next time on the show.
Until then, take care of yourself.
And if you can, someone else too.
Freakonomics Radio is produced by Stitcher and Renbud Radio.
You can find our entire archive on any podcast app also at freakonomics .com where we publish transcripts and show notes.
This week's Caulman strump for his weed store data and analysis.
Our staff also includes Alina Coleman, Augusta Chapman, Elinor Osbourne, Ellen Frankman, Elsa Hernandez, Gabriel Roth, Greg Ripon, Jasmine Clinger, Jeremy Johnston, Jon Schnarz, Lyric Bowditch, Morgan Levy, Neil Carruth, Rebecca Lee Douglas, Sarah Lilly and Theo Jacobs.
Our theme song is Mr.
Fortune by the Hitchhikers.
Our composer is Luis Guerra.
As always, thank you for listening.
Are we done recording?
The Freakonomics Radio Network.
The hidden side of everything.
Stitcher.
