Renae Ditmer
Special to ICT
If you’re expecting a robust discussion of economic data that addresses whether tribes’ next silver bullet is cannabis, so was I. That means that we’re all going to be disappointed, but not for lack of trying.
The data is not there, but opinion abounds. So, off we go!
It’s no secret that tribes are looking for their next economic silver bullet. It’s also no secret that many believe that cannabis, also referred to as The Green Rush, is that silver bullet. But the economics of the cannabis market tell a different story, one that tribes should dissect carefully before jumping on this latest bandwagon to easy money.
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One of the first and likely most pivotal things you learn in graduate school is to ask the right question. That’s a good place to open a discussion on whether tribes should pursue cannabis operations of any kind – to broaden their economic development portfolios, to improve their revenue streams or to reduce the damage to their bottom lines as casino revenues decline due to market saturation and generational shift in entertainment expectations.
The short answer is maybe, but in the immediate, it’s complicated. In economic speak, that translates to mean that financial models should contain numerous dependent variables, and that’s never a good position to be in, especially in the absence of data.
While the University of California has the only Cannabis Economics Group within its Department of Agricultural and Resource Economics, its director, Dr. Robin Goldstein, admitted they hadn’t considered the need to gather data on tribal cannabis operations.
He and his colleague, Dr. Daniel A. Sumner, the Frank H. Buck Jr. Distinguished Professor in the same department, have written extensively on discrete topics that impact the cannabis market. The information and data are extensive and informative, but pertain to non-tribal cannabis operations. Nevertheless, they are informative.
Their general opinion, based on what they know based on non-Native data, is that a vertically integrated cannabis operation could likely be started up for between $5 to $20 million. Goldstein summarized the risk of entering the market at this point as follows.
“Everywhere you’re seeing people going into industry with the notion that cannabis is legal now, has created a Green Rush, and anyone getting into business is going to make a fortune at it,” Goldstein told ICT. “What we’ve been seeing in their own work on businesses that are open is that it’s really, really hard to make money at it.”
He characterized it as a pipe dream to think otherwise, especially when businesses are forced to compete with longstanding illegal operations across the country that don’t have to deal with state regulations.
“The cost of legal weed is twice as much in California at this point, and there is no penalty for buying illegal weed,” he said.
As we say in economics, price is everything, and that’s true for most marijuana users. He noted that even thorough business plans are based on poor and unrealistic assumptions. One of the bigger mistakes is doing an outdoor grow operation that yields a single crop a year, while indoor operations can yield up to six.
Goldstein also believes that the market is saturated at this point and California – the gold standard for cannabis – is hitting a wall in sales due to oversupply of good illegal weed and a lack of cannabis connoisseurs willing to pay retail prices for a premium product.
Long story short? This might not be the best moment for anyone to get into the market unless they have a distinguished brand, ancillary products, or are willing to reduce their revenue margin.
Tribes would have a 30-40 percent advantage, “…if they could run cannabis sales like they
did cigarette sales, but tribes are subject to federal and state laws, which are a puzzle.”
Sumner said his experience with tribes had been their propensity to fail to research how to utilize both their trust and fee lands to generate income from agriculture. He was cautious to encourage tribes – or anyone – to get into cannabis right now.
“A lot of people thought of cannabis as an easy opportunity, including individuals to Wall Street hedge-fund types,” Sumner said. “Very few have found it as easy as they thought it would be.”
A November 2021 report forecasting the potential size of the cannabis market from 2019-2030 noted that the global cannabis market size was nearly $20.5 billion in 2020 in U.S. dollars and was expected to grow from $28.3 billion USD to $197.7 USD in 2028, according to Fortune Business Insights.
That would mean a compounded annual growth rate of about 32 percent in the 2021-2028 period,” according to the report.
State legalization of both medical and recreational marijuana is one factor. The other critical policy change was the SAFE Banking Act of 2019, which got rolled up into the HEROES Act in 2019 that led cannabis operators to believe that they would have an easier time depositing cannabis income more easily than to fly it by courier to offshore banks.
The SAFE Banking Act would prohibit a federal banking regulator from penalizing a depository institution “for providing banking services to a legitimate cannabis-related business.”
Among the prohibited penalties would be terminating or limiting the deposit insurance or share insurance of a depository institution solely because the institution provides financial services to a legitimate cannabis-related business.
Additionally, the act would mean that proceeds from a transaction involving activities of a legitimate cannabis-related business are not considered proceeds from unlawful activity. Proceeds from unlawful activity are subject to anti-money laundering laws.
The bill, however, has only been passed by the U.S. House, leaving cannabis growers still floundering over what to do with cannabis income.
Why buy retail?
As if simply legalizing pot hasn’t been difficult enough, the states that have done so are now seeing black market pot sales return with a vengeance. Let’s be clear here: the states didn’t legalize cannabis sales to do anything but bring in what officials hoped would be sizable revenue from legal cannabis sales.
However, black market sales are “strangling” legal businesses because they don’t pay the outrageous state excise taxes on cannabis. And there is little enforcement, according to a report in Politico.
Then came The Great Resignation of 2021, when more than 47 million people — about 23 percent of the total U.S. workforce — quit their jobs, according to the Bureau of Labor Statistics. In 2022, another 38 million quit.
That means many businesses like Taco Bell can’t fill their openings at $20 per hour, so where were states going to find the funding to build an enforcement branch? Enforcement of cannabis legislation would be much more expensive due to training and reporting costs, so the black market continues to thrive in the shadow of the legal market.
In an effort to protect its legal pot market – and the taxes it gleans from it – the California Department of Cannabis Control released its 2021 and 2022 enforcement statistics, highlighting year-over-year trends that show significant growth in the number of search warrants issued, arrests made, and illegal cannabis plants eradicated in an effort to tackle illegal market operations.
The department’s search warrant operations increased from 62 in 2021 to 155 in 2022, a 150 percent increase. The department also seized an estimated 41,726 pounds of illegal cannabis in 2021 and more than 144,254 pounds in 2022, a 246 percent increase, according to agency records..
Arrests more than tripled, with 17 in 2021 and 56 in 2022. And department-led operations seized $243 million worth of cannabis last year, a 212 percent increase from the more than $77 million seized in 2021.
Why buy tribal?
Cannabis consultants were more optimistic that cannabis, while not the silver bullet casinos have been for tribes, might close the revenue gap created by the glut of casino saturation and the generational shift in what younger people are looking for in terms of entertainment.
Well-known California tribal cannabis consultant Tina Braithwaite, Benton Paiute, and principal of Sovereign Nations Cannabis Consulting, sees the states as the biggest obstacle to tribal cannabis success.
“Only two states – Washington and Nevada – respect tribes and have agreed to do compacts with them,” Braithwaite said. “Everyone else has locked them out, so there is no legal pathway to success yet. It’s a billion-dollar industry, but it should be a trillion-dollar industry, and one that tribes don’t know how to maneuver yet.”
She continued, “There’s a lot of potential, but tribes are hiring consultants that don’t know how to maneuver in tribal space. All they’re thinking about is the dollar, and don’t realize tribes don’t have outlets for products …Add to that the reality that tribal governments or voters are aging, and many don’t understand a lot when it comes to complex economic decisions.”
In other words, potential doesn’t easily translate into income. Tribes need to be educated on the fine points of the economics of the market and make well-informed decisions rather than jump in unadvisedly.
Braithwaite is not alone in her analysis. Blue Quisquis, San Pasqual Band of Mission Indians, a self-described serial entrepreneur and owner of Quisquis Holdings, has made a concerted effort to fill that knowledge gap by trying to bring tribes together.
But neither the California Native American Cannabis Association nor the National Native American Cannabis & Hemp Association, which Quisquis started, have survived because “tribes getting themselves together didn’t work out,” he said.
Beyond that being a sorry judgment on our ability to combine and conquer, it speaks more to our jealousy that someone might do better than we are.
After his first two attempts at organizing tribes to pull together to devise solutions to the roadblocks states were putting up, he is now pursuing a vision that recognizes that each tribe has to make business decisions independently.
To do so, they need education on cannabis, products, best practices, branding, and especially beating the states at their own game by establishing label compliance using state-of-the-art security technology that would become accepted standards for tribal cannabis products, and eventually all cannabis products. He also wants to see tribes be more consistent with their values and be first in the market to promote sustainable packaging.
“It’s like buying a Coke,” Quisquis said. “We don’t need to wait for states to move things along. We can lead the pack … We’ve done self-regulation for gaming so we can do this, too. We need to come together and create standards. We also need to start thinking sovereign. The 109 nations in California alone could push this, but we have to educate in order to regulate. We should at least meet the state standards if not exceed them. We simply are not there yet, but we could be.”
His father’s words drive the vision: “Are we sovereign or just playing at sovereignty?” That’s where tribes need to start.
Mary Jane Oatman, Nez Perce, executive director of the Indigenous Cannabis Association, has stepped into the gap for organizing tribes that want in on the cannabis market. She is optimistic in the long term, but also cautious in the short term.
While functioning much like a traditional association, Oatman herself is a strong proponent for tribes exerting their sovereignty. She also sees the positive link to what happened with Indian gaming.
States, however, have been very predatory with regard to cannabis, putting up regulatory walls wherever possible, right down to water rights. Worse, she said, “there is no deference to tribal sovereignty,” and tribal consultation is not taking place.
“States keep us out of all markets, not just cannabis,” she lamented.
Ideally, Oatman would like to see tribes come together in some way to speak truth to power, a revival of the No Tribe Left Behind concept. She also worries about the lack of data and research on illicit cannabis markets.
“Although we know what’s going on with opioids, etc., why haven’t we pursued this?” she asked.
The lack of federal legalization has led to a patchwork of laws and a mountain of complexity.
“Where are our Indian colleges on doing research?,” she mused.
Richard Tall Bear, Sisseton Wahpeton, chief executive of Tall Bear Cannabis, is both optimistic and realistic. He’s been up to his knees setting up his own cannabis operations in South Dakota as well as consulting to other tribes on the same.
His best advice?
“A tribe must be really committed from concept to completion,” Tall Bear said.
That includes tribal capacity to actually build a business that has more and more diverse regulations to deal with than gaming. He also sees cannabis replacing gaming as a form of entertainment as tribes age out.
The question remains whether cannabis revenue alone can replace gaming revenue generationally. They aren’t likely to do so, unless tribes provide space for people to smoke, since gambling revenue is dependent on two- or three-day stays in the hotels to keep their target demographic playing.
That said, he doesn’t necessarily see setting up cannabis operations on trust land as an advantage.
“Tribes need to be pro-business rather than simply pro-Native,” he said, and that means operating wherever they can make money, regulations and taxes be, well, darned. Tall Bear is equally unflappable about regulations.
“Tribes are letting a tremendous opportunity go by if they are not getting into cannabis at this point,” he said. “A waiver of sovereign immunity should not stand in the way of doing business.”
Although that adds a layer of regulation, in the meantime, tribes could pursue something similar to the Indian Gaming Regulatory Act of 1988. Waiting to get into the cannabis market only makes it less profitable for tribes in the long run, according to Tall Bear. Get in now and grow, is his battle cry.
But don’t try to do it without a solid government or without ancillary products that are well-tested, such as drinks, pills, gummies, etc., which make up 60 percent of the current cannabis market. Tall Bear, like Quisquis, is an advocate of testing products so consumers know what they are getting.
But he’s also a realist, advising tribes, “There’s always opposition to new things and they need to learn the facts.”
There are some 200 molecules in cannabis plants and only four – THC, CBD, Delta-8, and CBG – have been exploited. The rest of the market may lie in the development of the other 196 molecules, but not one is looking yet. We should be.
Making the sale
So, what’s impacting cannabis sales?
According to a Vangst survey, even though regulations and compliance, inflation, federal prohibition, domestic economic conditions, and domestic competition costs were a concern to more than 40 percent of cannabis business respondents, they remained optimistic that it was a viable business opportunity.
In terms of ownership diversity, the news is even worse, according to MJBizDaily. Minority ownership declined by almost 5 percent between 2017 and 2022.
And that brings us to what is happening in Indian Country.
As state laws evolved rapidly to legalize both medical and recreational marijuana, many tribes saw untapped opportunity to leverage their status as sovereign nations. They thought that they would be able to establish their own laws and policy on cannabis growing, products, and sales, but they thought wrong.
To complicate matters further, as states legalized marijuana, laws that pertained to tribal growth or sales varied significantly, creating an uneven playing field across the United States.
In a hot minute, states rolled out regulations on cannabis without consultation with the tribes. Before they knew it, tribes had become economic islands with little ability to enter the cannabis market without partially waiving their sovereign rights and becoming yet another arm of the state in bringing in revenue for state coffers.
The only available entry point into the market was to create a vertically integrated market on trust land, where tribes could sell only to their own members or to visitors that came to them to procure retail products.
Vertical integration is a strategy that allows a company to streamline its operations by taking direct ownership of various stages of its production process rather than relying on external contractors or suppliers. Companies can achieve vertical integration by acquiring or establishing their own suppliers, manufacturers, distributors, or retail locations rather than outsourcing them. Vertical integration can be risky due to the significant initial capital investment required.
Cutting tribes out of the wholesale market was likely the most damaging aspect of state cannabis laws because states knew that no matter how much cannabis tribes might grow, they had no legal way to sell enough to make their efforts highly profitable.
So much for tribal sovereignty. To date, no tribe has been courageous enough to challenge any state on the issue of sovereignty.
If tribes were genuinely sovereign, they could operate under international law and independently negotiate trade deals with states. With the U.S. government still generally the tribal trustee, that frankly is not going to happen, especially if the 574 tribes continue to behave as lone actors.
We need to combine and conquer politically to overcome that limitation, but that is not happening.
Thus we plunge ahead, remarkably uninformed, bypassing deliberate business planning and risk analysis under the false assumption that it can’t be that difficult to grow and sell unlicensed weed at rock-bottom prices but still make a profit.
“I think we’re already approaching the point of no return,” said one executive at a medical and adult-use cannabis company with operations in New York, who requested their name be withheld because regulatory negotiations are ongoing.
If lawmakers don’t contain the issue by next year, “the first set of dispensaries will have been set up to fail, and the state will either have to spend money bailing them out or we will see people turning in their licenses,” Politico reported.
That’s definitely not what tribes want to hear.
More info
Here are some cannabis industry statistics from several sources as of January 2023. The data is derived from non-tribal sources:
—Potential buyers: First, it’s no secret that cannabis is an industry that is growing rapidly and that has replaced tobacco as the drug of choice for young adults. Flowhub, a clearinghouse for cannabis statistics, states that as of January 2023, 21 states had legalized recreational and medical cannabis for adults over the age of 21.
—Economic impact: Flowhub reports that Wall Street projects that the cannabis industry could add nearly $100 billion to the economy by 2030, though New Frontier Data puts that number at $57 billion.
—Tax revenues: States collected nearly $3 billion in retail cannabis excise taxes in 2022 even though average retail cannabis prices had fallen approximately 20 percent, and in no state did those taxes provide even 2 percent of state tax revenue.
—Demand:The Urban Institute found that tax revenue declined in the five largest grower states – California, Colorado, Nevada, Oregon, and Washington. Flowhub also claimed that a Jushi poll shows that “demand for cannabis is resilient” even though 39 percent of people polled said they bought cheaper in 2022 than 2021 but spent more per transaction.
—Supply: Flowhub’s numbers from Whitney Economics found that the US cannabis supply will succeed 48.8 million pounds (legal and illegal) in 2022, and that by 2026 they projected that most of that will be legal. The big “but” in that is that Headset’s data shows that the COVID effect that increased cannabis sales starting in February 2020 has been rapidly declining from their 2020 highs. While markets pulled back nearly 20 percent from that point, they still remain up overall over the January 2019 baseline. Unfortunately, however, that signals significant elasticity in the market — not something investors like to see.
—Retail prices: BDSA Retail Sales Tracking found that average cannabis retail prices have fallen about 20 percent in the same period, with Apex Trading seeing a 50 percent price drop in Colorado and a 36 percent decline in Oregon. That’s not chicken feed for either the growers or the states.
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