Tuesday, August 25, 2015

Will $1-Gram Put BC Farmers Out of Business?

Also available at Cannabis in Canada.ca

Cheaper cannabis in Canada doesn't have to bankrupt BC's farmers and derivative producers. How we reach an equilibrium where consumers are paying less for their medicine, but BC farmers are seeing higher returns, is fairly simple. Known in economic circles as “deflation,” this is how an economy actually grows. (It's got nothing to do with “GDP” and “good consumption numbers”.) If we legalize correctly, then the cannabis industry will be an example for the rest of the economy to follow. But government regulation and crony-capitalist cartels are the antithesis to liberty. Understanding cannabis means more than reading about the endocannabinoid system or the plants history as a medicine. Learning about prohibition is enough to show the absurdity of government action, but one must take their reasoning further – even to radical and counter-intuitive extremes – if one is to truly understand what it means to liberate this plant.

Let's assume that cannabis was $1-a-gram because the Liberal Party won enough seats to form government and legalized. If Trudeau legalized on Day One, it would open up the recreational market to the licensed producers (LPs) who have been restricted to patients who don't want to use them (not to mention the production and delivery process is burdensome with costly bureaucratic requirements).

The problem, however, is that LPs are conditioned to grow to scale. By instituting the Marihuana for Medical Purposes Regulations (MMPR), Stephen Harper set the country up for legalization – albeit a crony-capitalist legalization like in Uruguay or Washington State. All Trudeau's legalization will do is allow the LPs to capitalize on a consumer market that's ready to buy cannabis from 7-Eleven; a market of consumers who don't recognize that this is essentially like buying from the brand new Wal-Mart down the street when the made-in-Canada hardware store has been around for decades and is already struggling under fascist globalization.

If we lived in a free and fair market, there would be no issues with LPs such as Tweed selling to the recreational consumer. But this is not a free market and Trudeau's legalization doesn't address that. The “legalize first, fix it later” mantra doesn't make sense. LPs are in every position to drop their prices to $1-a-gram because they grow to scale. Meanwhile, as the LPs have been positioning themselves for the commercial market, BC farmers are still limited by their illegality or quasi-legality as designated growers under the old system.
What we have right now is legalization for one group (the crony-capitalists of the MMPR) with prohibition for the middle-class of cannabis farmers and derivative producers. People act like this is Harper's problem, but it's a systematic issue no matter which political party is in charge. Crony-capitalism is rampant throughout the Canadian economy; it's little wonder that the potential billion-dollar cannabis industry is not exempt. Yet, this is our gateway to liberty.

Suppose you have 10 grams and $10. What would be the price of a gram? It can’t be $2 since there would be unsold cannabis, so the price would have to drop. As well, it can’t be 50 cents per gram since people with money would bid up prices. This would lead to an equilibrium where grams of cannabis would be sold for $1. Now suppose we double the amount of cannabis, so we have 20 grams and $10. The price will fall from $1 to 50 cents. Other things being equal, including the stock of money, the price will be cut in half.

Suppose the production cost of a gram of cannabis is 80 cents. The rate of return is 25 percent. But now suppose people hoard $5; the price of a gram will be cut in half, falling from $1 to 50 cents. If input prices also fall to 40 cents per gram then there's no problem since the rate of return is still 25 percent. But when have input prices ever fallen?

The central bank in Ottawa thinks that input prices are “sticky”, and therefore don’t adjust to output prices, so farmers will produce at 80 cents and sell at 50 cents. This leads to bankruptcies, unemployment, and falling output, et cetera. To avoid this, bad economists would advocate the government print $5, keeping the price of cannabis steady at $1, and avoiding a deflationary-depression spiral in the economy.

Of course, there are some major errors in this thinking. There is always a certain amount of “stickiness” in input and output prices. You don’t renegotiate your salary or wage on a daily basis, nor would you want to constantly check on the prices for your favourite goods and services. What's important is the lag-time between changes in output prices and input prices. Successful entrepreneurs forecast output prices and then bid for the inputs they need to make a profit. Government intervention, especially money-printing by the central bank, makes everyone poorer and on an unequal level. Some people get the new money before the others. You can bet seniors on fixed incomes aren't the first in line.

So a $1-a-gram only works if we already have deflation. That is, if the costs of production are falling alongside the consumer price. This won't happen so long as the Bank of Canada continues to keep interest rates low and borrow from abroad from private banks at compound interest. And of course, there are other factors, like electricity. How can BC farmers produce more when their electrical costs sore under the provincial Crown corporation, BC Hydro? 

Cannabis is a gateway to liberty. An immediate $1-a-gram price point would serve the LPs while bankrupting the BC middle class of cannabis farmers and derivative producers. But in an environment where the costs of production are falling, that is, where the purchasing power of our money retains its value or increases, then $1-a-gram is not only achievable, but achieving it won't harm BC's middle class.

But the wrong kind of legalization will flood the market with cheap LP cannabis, drive out the BC farmers (but not before getting their genetics), resulting in a cartel of cannabis producers who will inevitably send the jobs oversees unless Canada becomes some kind of international beacon for cannabis production. Unlikely, given social stigma and powerful lobby groups, as well as cheap international labour that Canada cannot compete with so long as we remain under fiat currency regime. That's why those calling for $1-a-gram of BC's top premium strains better check their premises.

No comments:

Post a Comment