If Recreational Marijuana Can't Succeed in Oregon, Then the Industry Could Be Doomed

Source: Flickr user Mark.

Lately it seems as if the marijuana movement reaches a new milestone just about every week. Last week it was Oregon officially becoming the third state in the country to allow adults ages 21 and up to purchase marijuana for recreational use. Alaska also legalized recreational marijuana sales in the November 2014 election, but it hasn't given legal shops the OK to begin selling the drug as of yet.

Oregon gets the "green" light According to Oregon's new marijuana law, which was actually passed in November 2014, but only went into effect on Oct. 1, 2015, adults can purchase up to a quarter ounce of marijuana from any of the roughly 200 legal medical marijuana dispensaries located throughout the state. Furthermore, adults ages 21 and up are allowed to possess up to one ounce of marijuana outside their homes, eight ounces inside their homes, and grow up to four marijuana plants in their homes without fear of prosecution. As with the other recreation-legal states (Washington and Colorado), smoking marijuana in public remains against the law.

Like its preceding states, Oregon's lawmakers are anticipating that the legalization of recreational marijuana will provide a substantial tax revenue boost for the state, which it could use on anything ranging from education to infrastructure and jobs. After watching its neighbor Washington pull in $58 million in tax revenue over its trailing first year, optimism is high among Oregon's lawmakers and legal marijuana business owners.

Source: Flickr user Yutaka Seki.

However, the challenges facing the industry are intense -- both on a national lawmaking level, and on a state-by-state basis.

Marijuana's national challenges There are obvious challenges that all marijuana businesses face regardless of where they operate. For instance, the simple fact that Congress seems unwilling to bend on its current stance regarding marijuana is a major hurdle for the industry to overcome. Although the federal government has taken a hands-off approach to managing marijuana, leaving it up to states to regulate their own industries, it does leave open the possibility of a policy shift in the future if a new Congress or president doesn't have the same leniency toward the illegal drug that the current administration is showing.

Safety also remains a key concern for Congress. Although we do have clinical data demonstrating a positive correlation between marijuana use and patient wellbeing across a number of diseases, such as type 2 diabetes, aggressive brain cancers, and epilepsy, we also don't have a copious stack of long-term clinical data like we do for the potential risks of marijuana. Until the puzzle pieces are brought together, which will take more time, lawmakers have little incentive to push forward with legalizing or decriminalizing marijuana on the federal level.

Finally, there are the financial challenges the industry faces, with marijuana shops unable to deduct normal business expenses on their taxes, and having minimal access to basic banking services due to banks not wanting to be accused of wrongdoing in the future. Remember, the marijuana plant is still illegal in the eyes of Congress, meaning a bank lending money to marijuana shops, or even giving them access to basic banking services like checking accounts, could be construed as money laundering.

Source: National Drug and Alcohol Research Centre.

Marijuana faces plenty of local challenges, tooHowever, the marijuana industry has just as many problems on the local level as it does nationally.

Arguably the biggest issue the industry faces is black market growers and retailers. Operating in the legal marijuana business comes with a price -- and I don't mean that as a metaphor. I mean it literally comes with extra costs, such as licensing fees, and higher price points due to excise (and sometimes local) taxes along the way. Growers, processors, and retailers all want their pieces of the pie. What this does is push the price of legally grown marijuana up far beyond the cost of unregulated (and still illegal) black market marijuana. The response from some consumers is to simply bypass the regulated market and save money.

Source: Office of Public Affairs (Utah).

Local marijuana businesses may also have to deal with the widely varied opinions on the drug from jurisdiction to jurisdiction. In Colorado, for example, residents voted in favor of legalizing the sale of recreational marijuana in November 2012. However, more than a year after legal sales commenced, some three-quarters of Colorado's jurisdictions do not recognize marijuana as legal and still ban the drug. Enforcing marijuana laws and targeting consumers can be extremely tricky with this swiss cheese-like legalization.

And, of course, growers and retailers don't have a great grasp on their consumer base in the early going. In Washington, 3.5 tons of marijuana were grown in excess of demand over the past year. Some of it could be used for oils, but the presumption is that some if it was also wasted. Until growers and retailers have a better idea of in-state demand, it could be difficult for the marijuana supply chain to function optimally.

Why Oregon is the best predictor of marijuana's successIn my opinion, Oregon is going to be the greatest predictor of whether or not the marijuana industry can thrive, because it has a jump-start on a lot of the local problems that Washington and Colorado have been dealing with.

As mentioned above, the black market is a big problem that few states have any chance of solving at the moment. Oregon, however, may be able to put a dent into the black market since it currently maintains the lowest price for marijuana on a per ounce basis in the country.

PriceOfWeed.com, a website that allows users to anonymously input the cost of one ounce of marijuana regardless of whether it was purchased legally or illegally, suggests that Oregon's high-quality marijuana currently costs about $200 per ounce, with midrange costs around $180. By comparison, most of the country tends to be around $300 per ounce or higher. With lower starting costs and an established core of some 200 medical marijuana shops, Oregon's retailers have a genuine shot at being competitive with the black market.

Source: Social Security Administration.

Additionally, the licensing process is considerably more lax in Oregon than in other states (with regard to recreational or medical marijuana licenses). The application fee is relatively low, and there's no limit to the number of in-state licensees. The Oregon legislature practically put out the welcome mat for anyone wanting to get in on the marijuana craze.

With high use rates among its residents, the assumption is that Oregon will be that battleground state that demonstrates whether the marijuana industry can be viable long-term or not.

There's no guarantee of successAlthough Oregon has some clear advantages that make it the perfect test state for the marijuana industry, there's still no guarantee that the business model is going to succeed.

Even prior to recreational marijuana being legalized, the medical side of the business was performing poorly. In aninterviewwith Yahoo! Finance, medical marijuana shop owner Nicholas Saulsberry noted that his business has "been more of a charity or a nonprofit" in recent months, with only about 10 or 20 customers walking through the doors on a daily basis. Allowing the sale of recreational marijuana is one of the tools designed to boost traffic for medical marijuana business owners, but it's not a guarantee that the shops will be profitable with unfavorable federal tax laws denying owners the ability to deduct normal business expenses.

Oregon also has a large number of consumers who grow marijuana in their homes. This means the desire to go purchase the drug in a shop may be lessened, and the opportunity to buy on the black market could actually be heightened within the state despite its competitive prices.

Make no mistake about it, Oregon is definitely a critical state you'll want to be monitoring in the coming year or two to analyze how marijuana businesses perform and adapt in this new environment. Still, these challenges serve as a blatant reminder that investing in marijuana is a highly risky venture. Without any guarantee of long-term success, you're probably best off sticking on the sidelines until we see demonstrable changes on the federal level.

The article If Recreational Marijuana Can't Succeed in Oregon, Then the Industry Could Be Doomed originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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