Recreational Marijuana in Virginia

electricity cost is a major factor in the location of indoor grow houses, in states where recreational marijuana is legal
electricity cost is a major factor in the location of indoor grow houses, in states where recreational marijuana is legal
Source: State of Colorado, Energy Use in the Colorado Cannabis Industry (p.8)

The Virginia General Assembly legalized use of marijuana for medical purposes in 1979, and expanded such use in 2015 and 2018. The laws protected patients from prosecution if they had a recommendation from a doctor that marijuana was medically advised. By the end of 2018, some form of medical marijuana use was legal in 46 states, and broad access to the drug under a doctor's guidance was available in 33 states.

In 2017, a Quinnipiac poll indicated that the 59% of the people in Virginia supported legalizing recreational use, while 35% percent were opposed. After the November, 2018 elections, recreational use had been legalized in the District of Columbia and 10 states but recreational use was allowed in no state closer to Virginia than Massachusetts.1

In the 2018 legislative session, a bill to decriminalize possession of small amounts of marijuana for recreational use was killed in the Senate Courts of Justice Committee. The vote was clearly partisan. All six Democrats voted in favor, while all nine Republicans opposed decriminalization.2

The political divide reflected the urban-rural divide of Republican and Democratic elected officials, and the different socio-economic character of urban districts represented by Democrats vs. rural districts represented by Republicans. Urban districts had higher percentages of minority voters, and they were arrested for marijuana possession at significantly higher rates than whites.

Statistics on marijuana-related arrests between 2010-2016 revealed a clear distiction based on race. Blacks were three times more likely to be arrested than whites, even though whites and blacks were using marijuana at equal rates. Law enforcement personnel evidently targeted 20% of the state's population more intensely.

There were dramatic differences in the average overall arrest rates between localities. Emporia and Colonial Heights made over 1,500 arrests per 1,000 people living within those jurisdictions, while police in Charlottesville made only 25 arrests/1,000 people. There were 589 arrests/1,000 residents in the City of Fairfax, but the similar City of Falls Church had only 51 arrests/1,000.3

arrest rates vary dramatically by race and by jurisdiction
arrest rates vary dramatically by race and by jurisdiction
Source: Blue Virginia blog, New Study: Marijuana Arrests, Racial Disparity in Those Arrests, Increase Sharply in Virginia

Virginia has no mechanism for a citizen-initiated referendum, so legalization for recreational use required approval by the General Assembly. Legalization proposals had to be approved first in the Courts of Justice committee of the House of Delegates and the State Senate, and no recreational use proposal was approved prior to the 2019 session.

The opportunities to create jobs by legalizing recreational marijuana was one incentive for legislative action. Commercial marijuana growing and processing grew rapidly in other states after legalization for recreational use. Virginia legislators saw new tax revenues grow in states that legalized recreational use.

Colorado businesses benefitted from "green tourism" after the state legalized recreational use in 2014. State law required growing, processing, and sale within the state's boundaies, but customers could cross state lines and come to Colorado to purchase and use marijuana. In 2017, revenue from cannabis sales exceeded alcohol sales in Aspen. After legalization in California, companies advertised California, "wine and weed" tours.4

Because the Federal government did not legalize recreational use, each state operated as a separate market, an island of opportunity. So many growers in Oregon started legalized businesses that the state ended up with an excess supply. Retail pices dropped 50%, from $14/gram in 2015 to $7/gram in 2017.

The Craft Cannabis Alliance pushed the Oregon legislature to authorize wholesale shipments to other states where marjuana use had been legalized. Oregon growers would benefit from access to a wider market, expanding their customer base. The executive director of the business association complained:5

There are plenty of markets that would be thrilled to have world-class cannabis... But prohibition keeps us from sending it into those markets.

The Craft Cannabis Alliance in Oregon was anticipating that the US Congress would change Federal law.

So long as marijuana was listed under the Controlled Sbstances Act as a Schedule I drug, with "high potential for abuse and the potential to create severe psychological and/or physical dependence," growing, processing, selling, and using marijuana was a Federal crime.6

If the US Congress changed the law, however, the state-based barriers to doing business would drop. The competitive position of growers in Colorado, Oregon, and California would be enhanced by expanding the market.

the products from cannabis flowers attract tourists to Colorado
the products from cannabis flowers attract tourists to Colorado
Source: Colorado Department of Agriculture, Industrial Hemp

Because Virginia was not one of the first states to legalize recreational marijuana, growers remained underground and sellers operated in a black market. No Virginia-based strains developed a broad, brand name recognition and no Virginia-based growers developed a broad reputation for a quality product. Virginia ceded the business growth opportunity, because it was "late to market" compared to other states.

The Virginia wine industry has demonstrated the time and effort required to create a market for a locally-grown and locally-processed agricultural product in Virginia. The wine industry required decades to overcome the general public's perception that good wine came from California and Europe, and to get custmers to say "make mine Virginia wine."7

cannabis buds produce the oils, terpenes and other flavoring agents that define the commercially-valuable differences between different strains
cannabis buds produce the oils, terpenes and other flavoring agents that define the commercially-valuable differences between different strains
Source: State of Colorado, Energy Use in the Colorado Cannabis Industry (p.10)

The banking industry has demonstrated the impact on Virginia corporations when state barriers to commerce are loosened by changes in Federal law. During the deregulation initiatives of the 1980's, Virginia was slow to allow banks to expand with branches, protecting small-town banks from cmpetition with bigger banks based in the urban areas.

North Carolina provided easier opportunities for its banks to expand. They gained experience acquiring and integrating smaller banks into larger corporations. When a 1985 Supreme Court decision liberalized interstate banking, North Carolina banks were better prepared for competition. Virginia banks were swallowed up, and corporate headquarters were moved to Charlotte.8

If the Federal government legalizes recreational marijuana use, then a few large growers are likely to dominate the wholesale market. Just as a few bourbon distilleries are concentrated near the clean water of limestone formations in Kentucky and Tennessee, one region could become the primary center of marijuana production.

Though Colorado legalized recreational use first, the Emerald Triangle of Northern California and Southern Oregon is a top contender for primacy in the marijuana business. Individuals operating outdoor farms and indoor "grow houses" there have learned from decades of experience how to breed specific strains and extract preferred oils from cannabis plants.

growing industrial hemp outdoors in Colorado includes acquiring water rights for irrigation
growing industrial hemp outdoors in Colorado includes acquiring water rights for irrigation
Source: Colorado Department of Agriculture, Industrial Hemp

In addition to being a center of practical experience, the Northern California and Southern Oregon region also offers low electricity costs and a mild climate that reduces heating/cooling costs. Grow houses there can be "mixed," with windows opened at suitable times to allow air circulation.

Federal legalization could create a shift in marijuana production that mimics the shift in computer storage and processing to the cloud. When companies first automated their operations in the 1980's and 1990's, they built small computer centers in their local offices. Later, even small companies shifted their data storage and processing to a relatively few data centers, shutting down the small computer centers within the company-owned buildings.

Marijuana growing also started in the 1960's with small, decentralized operations. Fragmenting the farming and processing operations minimized the risk of discovery by law enforcement officials, and minimized the initial investment required by marijuana capitalists to initiate their start-ups.

If legalized, larger and more cost-effective grow houses are likely to replace most of the black market indoor growing operations scattered in garages, basements, barns, and warehouses. Illegal and small facilities may disappear as investors finance larger facilities that benefit from economies of scale.

Legal grow houses will also require extra capital to meet regulatory requirements such as monitoring of pesticide applications, product testing, and security. Since each plant is worth thousands of dollars, theft is a constant risk for marijuana-producing operations. To reassure investors that product will not be diverted, grow operations may implement security that exceeds the requirements established by official laws and regulations.

outdoor grow operations require security to prevent theft, and simple screening/fencing is not adequate
outdoor grow operations require security to prevent theft, and simple screening/fencing is not adequate
Source: San Bernardino Sheriff's Department, Search Warrants - Outdoor Marijuana Grow (Phelan/Pinon Hills, June 21, 2018)

Acreage and electricity requirements of grow houses resemble those of data centers filled with computer servers. Just a few processing plants near centralized grow houses could create the majority of the tetrahydrocannabinol (THC), the primary pyschoactive ingredient in marijuana that produces the "high," and the non-psychoactive cannabidiol (CBD) thought to provide health benefits, needed to meet demand of a national and even international market.

Assuming Federal legalization, grow houses that produce the least expensive cannabis-related materials will capture a substantial part of the market. There will be a substantial demand from processors for low-cost cannabis-derived oils that can be infused in edibles and other items. Generic products sold in stores will compete primarily on cost, in contrast to brand name products.

Even branded marijuana procucts may seek the lowest-cost raw material. Packaging, advertising, celebrity endorsements, and other branding efforts can entice customers to purchase marijuana products without evaluating the source of the marijuana. The marketing of liquor may serve as a model, where companies price and advertise products based on aspects other than the source of the alcohol.

Advertising the health effects of various cannabis-derived products can be done without highlighting the source of the cannabidiol (CBD). For users seeking psychoactive effects, customers may not discriminate based on the specific strain from which the material was produced so long as the percentage of tetrahydrocannabinol (THC) is adequate.

If Federal law changes, Virginia growers and processors will have difficulty competing with Colorado or the Northern California/Southern Oregon region for production within indoor grow houses. Virginia facilities could be located in low-cost areas such as Mecklenburg County, which has already attracted a Microsoft data center. The milder climate of Hampton Roads There is less probability of placing grow houses near the data centers in the "Internet Alley" of Loudoun County, due to the high cost of land near the fast internet connections there.

Virginia has a better opportunity to compete in the outdoor grow market, for items with tetrahydrocannabinol (THC) that will be smoked. Marijuana plants are affected by the combination of soil, slope, aspect, elevation, and climate, just as grapes for wines are shaped by the terroir in which they grow.

plants from outdoor grow operations are affected more by local soil and climate than plants from indoor grow houses
plants from outdoor grow operations are affected more by local soil and climate than plants from indoor grow houses
Source: State of Colorado, Energy Use in the Colorado Cannabis Industry (p.25)

There may be a niche market for marijuana affected by specific geographic factors. Indoor grow operations are affected by location, especially mixed grow houses that open windows and allow local microorganisms to circulate in the air, but site-specific factors will have the greatest impact on outdoor marijuana farms.

Tourists might be enticed to visit places where Virginia-grown products are grown and processed, comparable to wineries. "Cannacultural areas" could be defined, comparable to the viticultural areas created for marketing Virginia wines. If the cannabis equivalent of wine snobs is large enough, Virginia farmers could develop outdoor grow operations and retail outlets despite the competition from outside the state.

Hemp in Virginia

Medical Marijuana in Virginia

Links

References

1. "Will Virginia Legalize Recreational Marijuana Use?," Bacon's Rebellion blog, September 17, 2018, https://www.baconsrebellion.com/wp/will-virginia-legalize-recreational-marijuana-use/; "Michigan is the 10th state to legalize recreational marijuana. This map shows every US state where pot is legal," Business Insider, November 7, 2018, https://www.businessinsider.com/legal-marijuana-states-2018-1; "Timeline for Marijuana Legalization in the United States: How the Dominoes Are Falling," The Motley Fool, September 23, 2018, https://www.fool.com/investing/2018/09/23/timeline-for-marijuana-legalization-in-the-united.aspx (last checked December 31, 2018)
2. "Virginia's 2018 marijuana decriminalization bill: What happened and what's next?," Bacon's Rebellion blog, November 1, 2018, https://www.baconsrebellion.com/wp/virginias-2018-marijuana-decriminalization-bill-what-happened-and-whats-next/ (last checked December 31, 2018)
3. "Racial disparities in marijuana arrests seen across Virginia," Emporia News, May 16, 2017, http://emporianews.com/article/racial-disparities-marijuana-arrests-seen-across-virginia; Don Rippert, "Marijuana arrests and racism in Virginia (especially Arlington County)," Bacon's Rebellion blog, December 3, 2018 , https://www.baconsrebellion.com/wp/marijuana-arrests-and-racism-in-virginia-especially-arlington-county/ (last checked December 3, 2018)
4. "The Next Big Thing In Cannabis: Tourism," Forbes, August 16, 2018, https://www.forbes.com/sites/nickkovacevich/2018/08/16/the-next-big-thing-in-cannabis-tourism/#6de7a0a5d9ba (last checked December 31, 2018)
5. "Oregon's surplus of pot? Because of easy entry into legal marijuana industry," Statesman Journal, June 1, 2018, https://www.statesmanjournal.com/story/news/2018/06/01/oregons-surplus-pot-because-easy-entry-into-marijuana-industry/659417002/; "Is pot the next pinot noir? Oregon may consider exporting weed to other states," Statesman Journal, December 31, 2018, https://www.statesmanjournal.com/story/news/2018/12/31/oregon-pot-marijuana-exporting-weed-out-state/2415786002/ (last checked December 31, 2018)
6. "Drug Scheduling," US Drug Enforcement Administration, https://www.dea.gov/drug-scheduling (last checked December 31, 2018)
7. "More people are saying, 'make mine Virginia wine'," Virginia Farm Bureau, https://www.vafb.com/membershipwork/news-resources/virginia-wines (last checked December 31, 2018)
8. "Branch by Branch: How North Carolina Became a Banking Giant," 4 Region Focus, Federal Reserve Bank of Richmond, Fall 2006, https://www.richmondfed.org/-/media/richmondfedorg/publications/research/econ_focus/2006/fall/pdf/economic_history.pdf (last checked December 31, 2018)


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