Monopolistic Competition: Napa Valley Wine Industry As A Model For California Cannabis Cultivation

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In response to Ohio’s new recreational marijuana ballot initiative Keith Stroup, founder of NORML recently wrote, “Big money has entered the [marijuana legalization] picture, and we will have to deal with that. I prefer to keep the focus on personal freedom and stopping the arrests, but in some states we may have to swallow hard and accept legalization that is profit driven.” He said this in reply to Ohio’s new marijuana bill ResponsibleOhio. While I agree that big money will drive legalization, it is my opinion that Mr. Stroup is overstating the inevitability of the oligopoly market structure. I advocate for a middle ground that has been successful in other agricultural markets similar to cannabis, the Napa valley model of monopolistic competition. Monopolistic competition allows the little guy to compete with the big guy so long as his or her product is valued and therefore marketable. An oligopoly that allows a few key players to both persuade with their financial contributions, and dictate market structure, is not setting good precedent. If the government insists upon a monopolistic competition structure, big money will flow and small growers will be able to compete with larger growers. This model also promotes economic stability by keeping small growers viable, therefore increasing participation in the legal market for current cannabis famers. There is an answer out there to these goals and the Ohio Oligopoly is not it. California cannabis legalization can adopt the Napa model being advocated by growers in the Emerald Triangle that will encourage big money to align with small sustainable growers in a market dictated by the government, not big money.

In monopolistic competition there are many sellers with differentiated products on the supply side and many buyers creating demand based on preference, letting the market determine price and quantity. This is different from a monopoly where there is only one supplier and the buyers are subject to price fixing. The wine industry is an excellent example of monopolistic competition; the market is determined by many varieties, differentiated by growing regions, and consumer preference/demand for taste, price and advertising. There isn’t one market for wine, but many different ones depending on your price, tastes and brands. People select within reds or whites, or even within chardonnays or pinot noirs. This is why “wine” is a bundle of monopolistic markets, not a single undifferentiated market.

In contrast, ogopolistic markets are less competitive because several large firms have disproportionate control of the market. The cell phone industry is an example of an oligopolistic market in the U.S. where AT&T, Verizon, Sprint and T-Mobile determine price and we the consumers do not have any meaningful choice. To quote T-Mobile “[t]his is an industry filled with ridiculously confusing contracts, limits on how much data you can use or when you can upgrade, and monthly bills that make little sense,” and yet over 91% of American adults own a cell phone.

ResponsibleOhio would establish an oligopolistic market. According to the ResponsibleOhio website:

“There are ten initial commercial growing sites. They will be operated by separate companies and have to compete with each other on price and quality, which is the exact opposite of a monopoly. There is no coordination between them, they will be trying to make money by selling the best goods at the best prices to stores, dispensaries and manufacturers.”

Although ten cultivation licenses would not qualify as a monopoly, the amendment was introduced and paid for by the ten companies who will receive the ten cultivation licenses, making it look a lot like an oligopoly. We do not know enough about the marijuana market to be sure, but based on the fact that Colorado has approximately 800 cultivation licenses, it would stand to reason that 10 competitors, compared to 800, would have disproportionate control of the market and therefore the upper hand on cannabis price determination in Ohio.

After substantial pushback, the ResponsibleOhio Amendment added adult at home, non-commercial cultivation of four plants so long as that adult obtained a license. In short, if you are an adult marijuana user in Ohio, you can obtain a license to grow four plants that may or may not produce the amount of cannabis you need, or be at the mercy of the ten companies who proposed, paid for, and now own the cannabis cultivation market. Based on the above discussion of oligopolies, you can see why citizens of Ohio may not want this Amendment to pass.

On the other hand, if this is the only way to obtain access for medical marijuana users in some states and protect them from being criminalized for using medicine, we may have to accept “big money” and oligopolies as the lesser of two evils.

California is not Ohio, however. It is a progressive state when it comes to medical marijuana as demonstrated by being the first state to decriminalize and legalize medical marijuana all the way back in 1996. Because of this, California already has a cannabis cultivation industry supplying both medical marijuana retailers and illegal dealers. Some say that the lack of strict regulation on cultivation and other aspects of the medical marijuana market in California is genius; some say it is the worst medical marijuana legislation in the country. Irrespective of these opinions, California is known for its high quality and locally produced cannabis.

Recent polls in California show support for legal recreational marijuana use at 53%. Transitioning illegal growers into legal growers will be a determining factor in the success of any legislation with the goal of stamping out the black market. Trying to bring black market growers into a legal market is better because you’ll discourage other forms of crime that may happen if these people are simply pushed out. For California, the real question becomes what kind of legal recreational marijuana market can legislators, big money, and growers agree upon to ensure compliance and promote legality. One way to do this is to ask the growers.

As I talked about in my last blog post, at least 25% of Humboldt County’s economy is based on dollars from the illegal cannabis market. Because of that fact, this region faces a disparate impact with the predicted 2016 legalization of their illegal cash crop. However, the black market notoriety Humboldt has for its ability to produce large quantities of high value cannabis could provide a mutual benefit for local growers and state legislators. Both want to maintain their respective constituencies and to create rational and effective cannabis policies. The great news is California Cannabis Voices- Humboldt (CCVH) and Emerald Growers Association (EGA) have a solution- protect small cannabis farmers.

Cultivation and policies that provide a pathway to regulation for the states robust network of diverse cannabis farms was the focus of last month’s State of Cannabis Growing in 2015 conference hosted by the EGA. Simultaneously, EGA and the Mendocino Cannabis Policy Council (MCPC) are collaborating and working with Jeremy Daw of ForteFive Consulting to produce an economic white paper to highlight the importance of the cannabis market in Mendocino County. Mr. Daw is in the middle of his research but has already come to some important conclusions. According to Willits News, Mr. Daw believes marijuana has “low cross price elasticity and is fungible and that this quality will make it difficult for boutique growers competing in a market where large central valley farms are producing the product very cheaply.” Most products in monopolistic competition markets share these qualities. “However, if the state enforces regulations concerning regional and appellation, as with wine, it would create a way for growers to clearly signal the value-added nature of their product to consumers. Then small boutique cannabis growers, like Napa valley wineries, could be competitive.”

Perhaps in response to Mr. Daw’s call for state support of small cannabis farmers, Mendocino County CEO Carmel Angelo, 3rd District Supervisor Tom Woodhouse, and 2nd District Supervisor John McCowen participated in the first Northern California Regional Summit on the Economic Impacts of Legalized Cannabis on March 5, 2015. Representatives from the California State Association of Counties (CSAC) and the Rural County Representatives of California (RCRC) also attended the Summit. The goal of the Summit was to develop a regional and unified position statement to help shape state legislation. While the primary focus of the Summit was on the potential economic impacts on the region, additional critical topics included environmental impacts, regulatory framework and other local government issues.

CSAC provides a variety of lobbying and advocacy services for all 58 California counties. With regard to cannabis, CSAC’s medical marijuana policy supports the right of individual counties and their supervisory bodies to determine how to enact regulations, prohibitions and guidelines regarding all aspects of the cannabis industry.

The RCRC is a 34-county membership organization which also provides advocacy and services, but with a more focused mission of addressing issues that pertain to rural areas. The RCRC supports a statewide regulatory program which would include licenses to grow, transport, distribute and sell cannabis products, uniform standards for cannabis potency, proper labeling and an allowance for “appellation” or branding. It strongly supports environmental enforcement and believes that the composition of a state cannabis oversight board should include several rural county supervisors or representatives.

The Napa model is the height of the monopolistic competition market structure coupled with state enforced regulation. The Napa model creates an environmentally friendly as well as economically salient world-renowned smaller growers market. Both CCVH and the EGA are advocating making regions of the Emerald Triangle the next Napa Valley. Monopolistic competition is necessary to create the Napa Valley model. In order to create competition between smaller cannabis farms, the state will have to protect and enforce regulations concerning region and appellation of cannabis. The current California law regarding wine labeling could act as a model. Wine labeled “Napa” or “Napa Valley” must be made from 75% grapes from Napa and be produced within the state of California. (Bus. & Prof. Code §25241, Bronco Wine Co. v. Jolly). Napa Valley wines sell for between $50-$100 a bottle. California law prohibits wine companies like Charles Shaw from labeling their two dollar wine as being “from the Napa Valley” without meeting the above criteria.

CCVH proposed legislation mirrors Napa land use ordinance in three ways. First, the ordinance recognizes the unique appellation of Humboldt County cannabis and recognizes rural agriculture of the plant as cultural heritage. Second, it proposes a local commission to regulate the quality and environmental impact in order to hold the label “Humboldt Grown” cannabis in the same esteem as Napa’s registry. And third, it designates four different types of farms based on square footage and the regulation and licensing needed for those farms. The smaller the farm the less regulation is needed, which incentives smaller farms over larger farms. It appears as if the authors of CCVH land-use ordinance are teeing up to be the next Napa Valley.

In conclusion, a big money and oligopolistic model of cannabis legalization is not a foregone conclusion. By utilizing the framework of regulation and competition in the highly successful wine market in California, our legislators have a road map to follow which can lead to economic stability in the Emerald Triangle. A mode of legalization that promotes small business, encourages healthy competition, and keeps small farmers afloat is low hanging fruit well within our reach.

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One response to “Monopolistic Competition: Napa Valley Wine Industry As A Model For California Cannabis Cultivation

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