Ohio’s Marijuana Oligopoly Concerns

Author: Maxel Moreland, Associate Member, University of Cincinnati Law Review

This November, Ohioans will have the opportunity to vote on Issue Three, a proposed state constitutional amendment legalizing the recreational use of marijuana. Ohio would only be the fifth state to legalize recreational marijuana and the first Midwestern state to do so. Potential marijuana producers, processors, and retail storeowners have the opportunity to mold this emerging market, but Issue Three limits the number of marijuana producers. The limit on the number of marijuana producers raises concerns that a few select producers will have too much control over the new market and have a constitutionally protected oligopoly over the production of marijuana. While many Ohioans are excited about the legalization of recreational marijuana, Issue Three is not the answer. Ohioans should wait for a legalization method that does not unnecessarily limit the production of marijuana and promotes freedom of the marketplace.

Ohio’s Proposed Legalized Marijuana Regulation

If passed, Ohio’s Issue Three would create a marijuana market unlike any other state. Currently, four states (Alaska, Colorado, Oregon, and Washington) have legalized recreational marijuana and each state regulates the production, processing, and selling of marijuana in different ways.[1] While each state has chosen different methods to regulate the marijuana market, no other state imposes as many restrictions and limitations as Ohio’s proposed Issue Three.

Issue Three creates a new regulatory commission, made up of seven governor-appointed members, charged with crafting all regulations regarding the production, processing, selling, licensing, and personal cultivation of marijuana.[2] Issue Three limits the right to produce marijuana to ten predetermined marijuana growth, cultivation, and extraction facilities (MGCEs).[3] The ten MGCEs will control marijuana production for at least four years, after which the commission may grant new MGCE licenses if the facilities cannot produce enough marijuana for consumer demand.[4] However, “any MGCE facility may expand its structures and related operations to adjacent real property;” allowing MGCEs to maintain their control over the production of marijuana.[5] Although private citizens can grow their own marijuana at home with a license,[6] these MGCEs will be the sole provider of commercial retail marijuana in Ohio, giving the MGCEs the ability to control the price of marijuana in the state of Ohio.[7]

How Other States Regulate Marijuana

Colorado was the first state to legalize the recreational use of marijuana, which it accomplished through the use of an amendment by referendum.[8] While Colorado’s method to legalize marijuana mirrors Ohio, Colorado’s amendment does not create an arbitrary limit to the number of marijuana producers.[9] Colorado grants licenses to any prospective marijuana grower so long as that grower does not violate any regulation passed by the department of revenue. [10] Citizens that wish to grow marijuana for personal consumption are permitted to do so with no licensing requirements.[11]

Similarly, Alaska and Oregon passed a ballot measure legalizing marijuana.[12] Neither Alaska nor Oregon limits the number of marijuana producers, and both permit home cultivation of marijuana.[13] By not limiting the number of potential producers, Colorado, Alaska, and Oregon have healthy competition amongst growers. Permitting numerous producers to grow marijuana allows the emerging industry to innovate and expand based on consumer demand.

Washington’s recreational market has the strictest production regulations of all current legalized marijuana markets. Washington passed a ballot measure to legalize marijuana and created administrative statutes to regulate marijuana through the Liquor Control Board.[14] Washington limited the availability of marijuana growing licenses by only allowing a thirty-day window to apply for a license following the effective date of the statute.[15] Washington disallows home growing marijuana.[16] Yet despite these limitations, over 600 producer licenses were granted in Washington.[17] The limitations did not significantly restrict production levels as retail stores reportedly “sold over 23,000 pounds (10.4 tons) of marijuana, out of the reported 31,000 pounds (14 tons) harvested in the state over the last year.” [18] Competition amongst marijuana harvesters allowed the price of marijuana to fall “from $25.12 per gram in August 2014 to $11.52 per gram in June.”[19] Despite Washington’s limitations on the number of producers, the limitations did not restrain the freedom of the marketplace.

Limitations on the Number of Producers Limits Economic Growth

The legalization of marijuana will create a new market with expectations of high profits. Production of marijuana has been such a money-maker in Colorado that warehouse space is in high demand, with about a third of all warehouse space being used by marijuana growers in 2015.[20] Colorado’s $700 million marijuana industry has caused the number of marijuana growers in Colorado to jump from 204 to 397 in just one year.[21] Washington, even with its stricter regulations, sold over $250 million dollars of marijuana last year.[22] Potential investors look to the success of the legal marijuana markets and are clamoring to get involved.

Ohio’s Issue Three puts ten producers at the top of the supply chain for the profits derived from selling legal marijuana. Issue Three was created and funded largely by ten key investors through the Political Action Committee, ResponsibleOhio.[23] These ten key investors of ResponsibleOhio are members of the investment groups in charge of the future MGCEs.[24] Currently, only twenty-four of ResponsibleOhio’s investors involved with the marijuana production facilities are known.[25] The early ResponsibleOhio investors have also made money by selling shares of their investment to additional investors.[26] The investors of ResponsibleOhio have latched on to the marijuana legalization wave and created a proposed amendment that greatly benefits themselves. One of those investors, Sir Alan Mooney, created controversy when he said, “Let’s hop on this tsunami of money and ride the top of that wave to some enrichment for us,” during a pitch to potential marijuana investors.[27] ResponsibleOhio claims that the main motives for legalizing marijuana include raising tax revenue for infrastructure, creating a sensible marijuana regulation policy, and job creation; but does not explain why Issue Three must limit marijuana production to ten facilities.[28] As already seen in Colorado and Washington, the legalization of marijuana should be highly profitable in Ohio. How that profit is shared depends on the number of producers, which will determine the viability of the market.

A constitutional amendment that allows ten production facilities to control the market poses several problems: initial investors have significant control over the subsequent buyers of marijuana throughout the production-consumption chain; prospective commercial marijuana producers are constitutionally barred from marijuana production; and there will be a lack of competitive innovation and experimentation in the market. According to proponents of ResponsibleOhio, limiting the number of MGCEs makes it easier to tax and regulate marijuana production rather than requiring Ohio to regulate hundreds of MGCEs.[29] Efficient regulation of marijuana producers would put less of a strain on the government and fewer governmental resources will be used to regulate marijuana than other states.

The limit on producers allows the ten investment groups to dictate pricing and practices in a new market, while prohibiting the entrance of new producers that would create economic competition. If and when the market expands to allow more production facilities, new entrepreneurs will be severely disadvantaged. Allowing the ten MGCEs to get a head start in an emerging market allows these facilities to make mistakes, price the product as high as consumer demand allows, and set the wage of workers before any competitive producer can start a business. Entrepreneurs desiring to enter into the production aspect of the marijuana market will not only have to wait for the statutory limitation to end, but will also have to compete against MGCE facilities that have enjoyed a competition-free period to grow and cultivate their business.  While the constitutionally-protected oligopoly may not last forever, the residual effects of the business norms created by the oligopoly would cause newcomers to assimilate to these business norms well after the oligopoly ends.

A major concern with limiting the number of MGCEs is that the large marijuana producers will not focus on the desires of the consumer, since no competing production facility can emerge with a better product.  The original ten MGCEs will not have to worry about keeping prices low or selling better marijuana. And consumers will have no other option. Lacking competition, the ten marijuana growing facilities will have no drive to innovate. An example of a consumer-focused market, the craft beer market, has seen a large growth in beer sales (compared to the larger producers) by creating more desirable beer.[30] Even if the MGCEs do find cheaper and more efficient ways to grow and harvest marijuana, the facilities would likely use the cheaper methods to cut down on their own costs rather than lower the price for consumers. Disallowing competition hurts the end consumer since the production companies will have no economic reason to create a better or cheaper product to entice consumers to buy their product rather than a competitor’s.

Allowing for more competition not only benefits the consumer but also spreads the profit gains to more people. The emerging marijuana market should not be limited so that a few investors can receive all of the profits from the production of marijuana. Unlike public utilities and other industries with exorbitant start-up costs, there is no reason for an oligopoly to exist in the production of marijuana. Removing the limitation on the number of MGCE facilities would allow more people to start an MGCE facility and benefit from the legalization of marijuana rather than a few investors.

Why Ohio Needs to Wait

The Ohio Constitution should not be used as a means to protect business investments through elimination of competition. Critics in the Ohio Legislature agree; the Ohio Legislature voted to place a constitutional amendment on the ballot that would conflict with the oligopoly aspect of Issue Three.[31] While this could just be a creative way for Ohio lawmakers to continue marijuana prohibition, the focus appears to be to limit a constitutional oligopoly rather than disallowing marijuana legalization. The Ohio Legislature’s crafting of this anti-oligopoly amendment proposal means that it finds a constitutionally protected oligopoly troublesome.

If passed, the limitations on marijuana producers would be unique to Ohio. States with legal marijuana have mostly allowed free market and have seen economic success as a result. The proposed Ohio legalization amendment creates a marijuana oligopoly at the expense of the general public. Ohioans should vote against Issue Three because of the marijuana oligopoly. Whether or not Ohio is ready for legalized recreational marijuana, Ohio should not allow a constitutionally protected oligopoly to control a highly lucrative market. Instead, Ohioans need to wait for marijuana legalization that allows the marijuana market to determine how many producers should exist.

[1] Practical Law Practice, State Medical and Recreational Marijuana Laws Chart: Overview, Thompson Reuters, available at http://us.practicallaw.com/7-523-7150.

[2] See Marijuana Legalization Amendment, §A and §L, ResponsibleOhio, available at http://yeson3ohio.com/the-amendment/.

[3] Id. at § (F).

[4] Id.

[5] Id.

[6] Id. at § (D), (Note that home-growers are still prohibited from selling their marijuana).

[7] Id. §(G)-(H).

[8] See Practical Law Practice, State Medical and Recreational Marijuana Laws Chart: Overview, Thompson Reuters, available at http://us.practicallaw.com/7-523-7150.

[9] Compare Co. Const. art. 18 §16 with Marijuana Legalization Amendment, ResponsibleOhio, available at http://yeson3ohio.com/the-amendment/.

[10] Co. Const. art.18, § 16(5)(a)(II)-IX); Colorado allowed its department of revenue to regulate the marijuana market. Id.

[11] Id. at § 16(3)(b).

[12] See Practical Law Practice, State Medical and Recreational Marijuana Laws Chart: Overview, Thompson Reuters, available at http://us.practicallaw.com/7-523-7150.

[13] Ak.  Stat. ann. § 17.38.070 and §17.38.020 (Alaska created the Marijuana Control Board to regulate marijuana); See Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act §19, available at http://www.oregon.gov/olcc/marijuana/Documents/Measure91.pdf (Oregon allowed the Liquor Control Commission to regulate marijuana).

[14] See Wash. Admin. Code § 314-55.

[15] Id. at § 314-55-083(4).

[16] Id. (An individual cannot grow marijuana without a producer license).

[17] See Weekly Marijuana Report, Washington State Liquor and Cannabis Board, available at http://lcb.wa.gov/marijuana/dashboard.

[18] Steve Dipaola, Seeing Green: Washington Rakes in Revenue from Marijuana Taxes, Reuters (Jul. 13, 2015 6:52 PM), available at http://www.rt.com/usa/273409-washington-state-pot-taxes/.

[19] Id.

[20] Robbie Whelan and Paul Page, Marijuana Producers Gobble Up Warehouse Space in Denver Area, Wall Street Journal (Aug. 25, 2015 5:30 AM), available at http://www.wsj.com/articles/marijuana-producers-gobble-up-warehouse-space-in-denver-area-1440495000.

[21] Id.

[22] See Weekly Marijuana Report, Washington State Liquor and Cannabis Board, available at http://lcb.wa.gov/marijuana/dashboard.

[23] See ResponsibleOhio Announces Key Investors, ResponsibleOhio, available at http://yeson3ohio.com/responsibleohio-announces-key-investors/.

[24] Id.

[25] Alan Johnson, Investors in Proposed Ohio Marijuana Farms are Diverse Lot, Columbus Dispatch (Sept. 2, 2015 9:52 AM), available at http://www.dispatch.com/content/stories/local/2015/09/02/investors-in-legal-pot-are-diverse-lot.html.

[26] Id.

[27] Id.

[28] See generally ResponsibleOhio Announces Key Investors, available at http://yeson3ohio.com/responsibleohio-announces-key-investors/.

[29] Anne Saker, Anne has answers: Who would own Ohio pot farms?, Cincinnati Enquirer (Sept. 28, 2015 2:59 AM), available at http://www.cincinnati.com/story/news/2015/09/27/anne-answers-ohio-pot-farms/72948548/.

[30] See U.S. Beer Sales Volume Growth 2014, Brewers Association, available at https://www.brewersassociation.org/statistics/national-beer-sales-production-data/.

[31] Jackie Borchardt, What Happens if Both Marijuana Legalization and Anti-Monopoly Amendments Pass?, Northeast Ohio Media Group, (Aug. 18, 2015 6:59 AM), available at http://www.cleveland.com/open/index.ssf/2015/08/what_happens_if_both_marijuana.html.

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