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What Makes Cannabis the Next Big Commodity?

July 6, 2017

 (Photo Credit - Nick Youngson)

 

It’s easy to name some well-known commodities; gold, crude oil, and even frozen concentrated orange juice as made famous in the classic comedy Trading Places. But, did you know cannabis is a commodity? It most certainly is!

 

If cannabis is a commodity, then you as an educated cannabis consumer, investor, or someone who's interested in the growth of the legal cannabis industry should probably have an idea about commodities are and the properties that make a commodity, well... a commodity. So what are commodities? 

 

Commodities 101

 

 

Commodities are goods that can be supplied in a standardized and interchangeable way. The market treats units of a commodity as equivalent (or nearly equivalent), disregarding who produced them or where they came from.

 

For example, there is little difference between one pound of "Sour Diesel”  and another pound of “Sour Diesel”, regardless of who the producer is. Cultivators, calm down... surely there can be slight differences in the quality, but it is pretty much the same product. In the industry, people refer to this property of commodities as fungibility.

 

What is Fungibility?

 

Fungibility means that price is what matters most in terms of commodities, if 'everything' is the same, you'd want to buy wherever you get the best price.

 

Fungibility is also the reason why commodity prices are determined by the entire (often global) market for the given product. Although this isn't the case yet for cannabis due to differences in local and national laws, this is very much the direction the industry is heading.

 

Give Me an Example!

 

If cannabis was traded globally without restrictions, producers and sellers of cannabis would have more options as to how and where they can trade their product. For example: if the price per pound of cannabis was higher in Canada than it was in the state of Washington, a cultivator in Washington would want to sell product there at the higher price. It's basically just supply and demand!

 

This supply imbalance would eventually equilibrate the price in Canada to the point where the price would be nearly equal on both sides of the border. U.S. Federal law currently prevents the movement of cannabis across state lines as well as national borders regardless of cannabis' legal status in the various geographies. This means that each state effectively has its own segmented market, with its own market prices and participants for marijuana. While this is currently the case, we believe that this could change in the coming years.

 

Differentiation in a Commoditized Marketplace

 

Because price is what matters most in terms of commodities, a lot of producers want to differentiate their product so that it isn't as much of a standardized commodity. This allows them the power to command higher prices for higher quality products. Thankfully, this is also the case with crude oil (there are different grades of crude) and almost any other commodity, so the powers at be in the commodity world have applied a system of premiums and discounts to the market price to account for better or worse product.

 

One way that cannabis-producing companies can overcome this is through branding. Branding is a major way of differentiating commodity-based products, and is seen in day-to-day life on a regular basis. 

 

For example: coffee beans are a commodity, but once they are ground and brewed into a cup of Starbucks coffee they become a differentiated product that commands a higher price. In the cannabis world, we can see this in the edibles market. The cannabis that is used to make these edibles has very little differentiation, however through branding and recipe differentiation we see a wide range of prices for these goods.

 

Conclusion

 

Cultivators, don't worry just yet...cannabis is not yet a commodity. With that said, take note that this is the direction that the industry is heading due to the sheer size of the industry. Be sure to stay tuned for more coverage from the Daily Marijuana Observer about the exciting world of cannabis and commodities!

 

In the meantime, keep up with cannabis industry updates from the Daily Marijuana Observer by subscribing to one or more of our free email newsletters and by following us on Facebook, Twitter and Instagram.

 

D/M/O

 

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