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Off The Charts Thirsty For Growth (copy)

Anyone who's followed the legalization of recreational marijuana couldn't have been surprised by a pair of reports last week examining the state of the pot market.

The first report, an audit from the Secretary of State's office, found that Oregon's system for regulating legal cannabis likely fails to prevent spillover to the black market. This remains a big issue for law enforcement officers, in particular Billy Williams, the U.S. attorney for Oregon, who has issued warnings about state-grown pot flowing into other states via the black market.

Shortly thereafter came a report from the Oregon Liquor Control Commission, which analyzed cannabis supply and demand in the state and came to this conclusion: The pot industry in Oregon has so much product in hand that it could meet demand for the next six and a half years. That oversupply means that prices for legalized pot have been dropping, and sales (particularly for extracts and concentrates) are growing. And it seems a sure thing that this is some of the pot that's being illegally siphoned out of the state.

The oversupply has not yet triggered the sort of shakeout in the recreational market that observers have expected for years, although it only seems to be a matter of time. In fact, when the state last year announced that it would suspend processing applications for new recreational licenses, the agency was inundated with another 600 submissions in the weeks before the suspension date. Pot entrepreneurs want to get in on the ground floor of the state's legal marijuana business, betting that will give them an advantage when the shakeout finally arrives.

The report from the Liquor Control Commission suggested as much: “Supply exceeding demand in and of itself is not an indicator of illegal activity that warrants drastic policy action but may instead be an indication of speculative bets and pending market corrections,” it said. 

And, in fact, part of the glut in supply was inevitable, considering the choices Oregon lawmakers and officials made as they worked to implement Ballot Measure 91, the initiative legalizing recreational pot that voters approved in 2014. Oregon regulators took a different approach to regulation than did other early-adopter states such as Colorado, which linked production limits to demand. Oregon also allows unlimited producer licenses and has relatively low licensing fees.

In all of this, it's worth remembering that legislators and other officials didn't have a clear path for going forward as they built the regulatory structure around legal marijuana; some hiccups were to be expected (and, undoubtedly, provided valuable lessons to other states that legalized pot after Oregon).  

This year's legislative session may consider solutions to the oversupply issue, and although some tweaks in the regulatory system may be in order, a major overhaul may be premature until we have a clearer sense of how the market will adjust. Other proposals, such as one that would allow Oregon growers to export pot out of the state, may find tough sledding in the Legislature. Legislators could try to beef up the ability of the Liquor Control Commission to oversee recreational marijuana — or they could consider a proposal to create a new state agency that would combine the pot-related functions of the commission and the Oregon Health Authority, which regulates medical marijuana. It's not clear whether such steps would satisfy Williams and other law officials.

That federal response to states that have legalized marijuana remains the biggest unknown factor facing the market in Oregon and other states. President Donald Trump said last week that he would support legislation protecting the marijuana industry in states that have legalized the drug. But Trump also has criticized legalization — and his first attorney general, Jeff Sessions, was a well-known foe of pot. William Barr, Trump's nominee to replace Sessions, has said he doesn't plan to target marijuana businesses that comply with state laws. If Congress passed that legislation, and Trump signed it, it would help clear the air — and it would give state regulators a better chance to grapple with the inevitable issues that arise as we continue our experiment with legalized marijuana. (mm)

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