« links for 2007-11-12 | Main | "Why So Glum? The Meese-Rogoff Methodology Meets the Stock Market" »

Monday, November 12, 2007

"Marijuanomics 101"

As the exchange rate continues to fall, illegal imports are declining. Get ready for a glut of B.C. bud in Canada, and a dry spell in Montana. Given the asymmetric flexibility in these markets - exit is much faster than entry for obvious reasons - it will take awhile for supply lines to be reestablished in Montana, but things should return to normal in Canada much faster:

Pot trade slows, by Michael Jamison, Missoulian: For years, backpacks crammed with cash have slipped north into Canada, followed closely by hockey bags packed with premium marijuana skating south into Montana. A favorable exchange rate (not long ago, one American dollar bought one and a half Canadian dollars) made the smuggling profitable, and thus popular.

But last month, for the first time in more than 30 years, the two currencies were at par, ... and Sunday a Canadian dollar bought $1.06 U.S. The financial tables have turned, and global economics have done what U.S. law enforcement could not: Capitalism has stopped the smugglers in their tracks.

Call it Marijuanomics 101.

America borrows itself deep into the hole, ratchets up its trade deficits, buries itself beneath subprime mortgage debt, devalues its dollar with interest-rate cuts, and the currency plunges. Meanwhile, Canada’s economy booms on oil, foreign investors turn north for stability, and the “Loonie” — Canada’s dollar, named for the bird on the coin — hits a 50-year high.

Suddenly, it’s far more expensive to buy Canadian exports, legal or otherwise, and smuggling profits disappear. “It’s very simple,” said Stephen Easton, professor of economics at Simon Fraser University in Vancouver, B.C. “Canadian marijuana production costs are met in Canadian dollars, and those are worth more now.”

Previously, he said, pot growers could produce a pound of potent “B.C. bud” for about $2,000 Canadian and, with the exchange rate, smugglers buying with U.S. currency could sell it for a hefty profit south of the border. In those days, an American dollar in Canada was like a 50 percent discount card, and there’s nothing like a wholesale discount to bolster retail profits.

Production costs remain in the range of $2,000 Canadian, Easton said. But with the currencies at par, the profit margin is completely gone, unless Montanans are willing to pay 50 percent more for the prime northern bud. A smuggler’s risks and transport costs are no longer offset by profit.

“The upshot is that the Canadian marijuana is now less competitive against marijuana grown elsewhere,” Easton said. “This is a cost-driven business. With exports no longer viable, the British Columbia marijuana industry has certainly taken a hit, so to speak.”

As has green-bud availability for Big Sky pot smokers. ... Canadian pot ... commands a strong presence in border states such as Montana. “Sure, I’ve known people who have brought it down and made a pretty good living,” said Bradford Moore, who owns the Heads Up pipe shop north of Kalispell. “I won’t deny it. They’d go up there, buy it on the Canadian dollar, bring it back and make a nice profit. ...” ...

These days, though, hardly any Canadian-grown marijuana crosses the border, because it just doesn’t pay. And Easton predicts things will get worse before they get better for those on both sides of the illegal industry, because without exports, Canada’s pot crop will swamp the domestic market and prices there will plummet. (One British Columbia grower predicts “a great glut of pot” due to the loss of export markets.)

That’s a very big deal for a province that, unofficially at least, counts marijuana exports as a major economic contributor. Back in 2000, Easton and his university colleagues published a study he says estimated the annual market value of British Columbia’s pot at around $5 billion, with perhaps 90 percent of the crop shipped south into the U.S.

“It’s huge,” he said. “It’s a very large player, right up there with our traditional industries.” ... But whether Canada has enough smokers to puff up this season’s entire crop, it’s harvest time in Nelson. Right now all agree on one thing: exports have ceased, Montana is dry, and with California growers located so far away, the stage is set for a homegrown bonanza under the Big Sky. ...

    Posted by on Monday, November 12, 2007 at 12:24 AM in Economics | Permalink  TrackBack (1)  Comments (9)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference "Marijuanomics 101":

    » BizLinks | 11.12.07 from Loren Steffy

    Oil prices drop on OPEC output report -- but it's still likely to be aWild week ahead for price of oil Energy official calls for steps to cut speculation that has pushed oil prices to near US$100 Gold shines... [Read More]

    Tracked on Monday, November 12, 2007 at 06:29 AM


    Feed You can follow this conversation by subscribing to the comment feed for this post.