CANNABIS INDUSTRY REPORT

SEPTEMBER/OCTOBER 2010

Can n ab i s I nd ust r y R e po rt

Cannabis Entrepreneurship An Historical Look at The Cost of Cannabis in California

“Often the difference between a successful person The Price of Compassion

and a failure is not that one has better abilities or ideas, 18.00

but the courage that one has to bet on one`s ideas, to take a
calculated risk - and to act.” -Andre Malraux 16.00

The cannabis sector is growing disproportionately

14.00
relative to the rest of the US economy. While un-
employment and consumer confidence are sinking, the 12.00
cannabis industry is creating jobs every day, consumption
is increasing, and planned expenditures are up. There is 10.00
limited data to support these claims, but between players
currently participating in the cannabis market it is 8.00

indisputable that the industry is profitable, growing and yet

still immature. The creation of an industry report is key to 6.00

understanding the implications of the economic landscape 4.00

in this fledgling industry. Even without statistics defining
market fundamentals, many politicians acknowledge the 2.00
opportunity for governments to cash in on cannabis money.
This opinion is regularly touted by state senators who have 0.00
Total THC <10% Total THC 10%-15% Total THC >15%
endorsed and campaigned for California’s Proposition 19 to Potency  <  10% Total  THC  10  -­‐  15% Total  THC  >15%

tax and legalize recreational cannabis. Whether or not Prop Average % THC potency of all lab samples tested at Steep
19 passes is immaterial to the fact that there is a wide Hill Lab within range listed below bars.
spread understanding that the cannabis sector is ripe for Average retail price of all lab samples tested at Steep Hill
entrepreneurship and innovative risk taking. Lab within range listed below bars. Prices use axis at left in
Innovation in the cannabis sector has barely begun. US Dollars. Prices are calculated using 1/8th ounce price
Businesses, which do not produce or distribute cannabis, broken down to a per gram price.
but instead support the structural needs of the industry, such
as financial services, supply management, packaging, and
fascinating because it has grown without regulations and
software are only adding to the landscape of the industry. It
scope. Accountants are not certain how to structure
is here where the future lies.
cannabis businesses, lawyers are in disagreement over what
Historically, your average entrepreneur or venture
is and is not legal, and sector participants are largely
capitalist would jump at the opportunity to break into an
inexperienced business people.
undeveloped market because they will have few
Who are the leaders working in the cannabis industry
competitors and great potential for profitability. The
today? They are people not afraid to put a lot on the line to
cannabis industry differs by seemingly not following the
get their foot in the door now. The leaders and entre-
formula for emerging industries. Investors coming from
preneurs of cannabis business are risk takers from the old
outside the cannabis industry are begging for laws to
industry. They are accustomed to high risk business, often
regulate and define the legal scope of cannabis industry
having been growers and distributors. They believe that
business practices. Some are afraid to invest in an industry
when the industry inevitably changes they will be
that is too legally risky, or prone to sweeping structural
positioned to define it. The smart ones are probably right.
changes. The emergence of the cannabis industry is
-- AnnaRae Grabstein

ISSUE CONTENTS The Steep Hill Report aims to play a

2.1
WHOLESALE PRICES
Wholesale prices of cannabis in
California going back to 2004.
3.1
CANNABIS INDUSTRY MAP
Where does the money flow in the
cannabis industry? This chart starts
to paint the picture of the industry
as a whole.
leading role in advancing formal analysis
of the cannabis economy.  This work in
progress will look at the most important
growth drivers in the current U.S.
cannabis economy, starting with an
analysis of Californiaʼs market.  We hope
to inspire dialogue and offer insight.
Reach us at
industryreport@steephilllab.com

PUBLISHED BY STEEP HILL LAB INC. OAKLAND, CALIFORNIA www.steephilllab.com

 CANNABIS INDUSTRY REPORT
SEPTEMBER/OCTOBER 2010

Regional Wholesale Prices for Medical Cannabis 2004-2010

Wholesale medical cannabis prices have varied dramatically from year to year. The prices reflected
in the following graphs are for one or two pound lots.

$3,900.00 $2,700.00

$3,500.00

$2,200.00

$3,400.00
$3,000.00
$1,700.00

$2,500.00 $2,900.00 $1,200.00

Northern  California  -­‐  Outdoor  -­‐  Wholesale  -­‐  High  Grade Southern  California  -­‐  Outdoor  -­‐  Wholesale  -­‐  High  Grade" Northern  California  -­‐  Outdoor  -­‐  Wholesale  -­‐  Low  Grade

$4,000.00 $5,000.00
$6,200.00

$5,700.00
$3,500.00 $4,500.00

$5,200.00

$3,000.00 $4,000.00
$4,700.00

$2,500.00 $3,500.00 $4,200.00

Winter  06

Summer  07
Fall  07
Winter  07

Summer  08
Fall  08

Summer  09
Fall  09

Summer  10
Winter  08

Winter  09
Spring  08

Spring  09
Spring  07

Spring  10
Average  Price  -­‐  All  California  -­‐  Outdoor  -­‐  High  Grade Northern  California  -­‐  Indoor-­‐  High  Grade  -­‐  Wholesale Southern  California  -­‐  Indoor  -­‐  Wholesale  -­‐  High  Grade"

*Estimated price index is based on a survey of growers, brokers and dispensaries. Data from 2004-2010 is largely anecdotal, but
represents expert industry opinion from market participants during this period. High grade includes top shelf. but also one notch
below. Low grade is very poor quality, but not the poorest. If cannabis were graded A-B-C-D, low grade would be C. D grade
would encompasses anything below typical salable grade in California.

Expect North Coast Outdoor Quality Declines Due to September Rains

California's North Coast was subjected to an grades. The bottom has fallen out for the low grade
unseasonable early rain storm during the weekend of market, and further price declines should be expected.
September 17th - 19th. Rainfall amounts were highest in The National Climate Prediction Center is calling for
the north’s Del Norte County, which saw localized below normal precipitation through mid October, with
amounts of 2" or more. Humboldt County received temperatures expected to trend below normal. A series of
between 1"-2", while Mendocino County came in on the strong storms are expected to dip into British Columbia,
lighter side with .25"-1". Early rains have a significant bringing colder temperatures to the region, with a slight
impact on the outdoor market. Expect higher incidences chance of precipitation for the northernmost regions over
of mold contamination in the cannabis supply from this the course of the next month.
region. In addition, flower coloration is impacted by the Dryer weather coupled with cooler temperatures is not
increased moisture and cold temperatures that accompany a worse case scenario for the region. Plant phosphorous
a weather event of this magnitude. uptake is reduced by cooler temps leading to a darker
The low and mid grade outdoor markets, which were overall appearance in the buds. This results in a more
already poised to experience significant challenges this limited marketability, but does not necessarily impact
fall, will be even more hard pressed to recover from the potency and flavor.
crash level price declines experienced over the last several Farms that have taken the appropriate precautions to
years. Many buds that might have otherwise ranked as limit Fall time weather impacts will find that the effort will
high grade outdoor will slip into the middle and low pay off this season. -David Lampach

PUBLISHED BY STEEP HILL LAB INC. OAKLAND, CALIFORNIA www.steephilllab.com

 CANNABIS INDUSTRY REPORT
SEPTEMBER/OCTOBER 2010

CANNABIS INDUSTRY MAP

Where does the money flow in the cannabis industry? This chart illustrates the flow of the cannabis industry as a
whole. To chart the journey of cannabis from plant to patient, a picture emerges of a rapidly growing industry with an
expanding base infrastructure.
The chart is not drawn to scale, and does not reflect the relative sizes of each sector in the industry. Growers and
dispensaries are by far the largest sectors in terms of revenues, but edibles, financial services, and lab testing are growing
rapidly. Increased mainstream acceptance is already changing the interaction of cannabis industry businesses to the broader
business world. With an improving legal framework, we expect the legal services sector to transition away from criminal
defense and become dominated by more traditional business legal services. This is a trend that seems to have accelerated
in the last several years. Expect it to continue as other sectors such as insurance and technology tune in.

Possible Industry Impacts if Proposition

19 Passes

1- Shrinking of doctors’ sector. It seems

feasible that if patients can get their
cannabis without a doctor’s
recommendation, they will do so.
Black arrows show the
directional movement
of cannabis within the 2- Reduction of cannabis price overall.
industry While this seems inevitable, Prop. 19
passing or not, the passing could speed
up the process. Low income patients
Gray arrows show the
directional movement who cannot afford recommendations
of money within the would be able to utilize local
industry
dispensaries. The increased demand
would be met with increased supply and
increased competition from dispensaries.
This is a recipe for lower prices on the
retail side.

3- Increased effort from outdoor

growers to market their products.
Outdoor cannabis is far cheaper to
produce than indoor. With more price
declines, outdoor cannabis becomes
more competitive. Technological
advances in outdoor growing are already
closing the gap between indoor and high-
end outdoor quality cannabis. With
marketing, consumers may begin to
migrate back to outdoor cannabis.

4- Expansion of capital investment from

other industries. Investors are waiting
for legalization. Hundreds of millions of
dollars will flow into the industry over
the next five years.

PUBLISHED BY STEEP HILL LAB INC. OAKLAND, CALIFORNIA www.steephilllab.com

 CANNABIS INDUSTRY REPORT
SEPTEMBER/OCTOBER 2010

Packaging is the Next Opinion: Insiders Rant

Big Thing
The Cannabis industry has long relied
on outside suppliers for its packaging
needs. The once commonplace sandwich
bag is now viewed with disdain by the
modern medical cannabis consumer.
However, the ever pervasive heat resistant
nylon Reynolds Oven bag is still ubiquitous
in the wholesale market. Harborside
Health Center purchaser Rachael
Szmajda said, "Most flowers are brought in
[to the purchasing areas of dispensaries] in
turkey bags before we transfer them into 2
millimeter poly bags which reduces
possible contamination from other
batches." But, the popular turkey bag will
not remain the norm as the packaging
industry supporting the cannabis
distribution network matures. End users
are also demanding higher quality
packaging. For retail amounts, all-purpose
manufacturers like U-Line, Impak, and
GTBags are becoming the new industry
standard for retail packaging. Rapidly
increasing demand is generating new
opportunities for innovation. Cannabis
cultivators are awakening to the idea that
packaging their valuable, and perishable
product, is a valuable differentiation tool.
Independent businesses are offering
nitrogen sealing to protect cannabis from
oxidation and degradation. The sector has
yet to see sustainable packing materials
but they are bound to be introduced in the
future. – Wilson Linker
Whether people like it or not, there has always been a market for
cannabis. It is a useful plant, both medical and utilitarian in nature, and
wherein lies potency and practicality in a product, no amount of regulation
can prevent its spread. Be it on the street corners of New York City or the
legal dispensaries of California, regardless of its legal status, cannabis is a
commodity. It is traded as such, has always been traded as such, and will
continue to be traded as such in the future.
But the venue, and the circumstances around which cannabis is traded
is changing rapidly. No longer is cannabis confined to the counter-culture.
For better or for worse, cannabis is entering the mainstream of the
American Economy. Underground deals have been replaced by over the
counter transactions in boutique like dispensaries all across California and
Colorado. Municipalities everywhere are salivating at such a ripe
untapped market as a source of much needed tax revenue. Legalization is
on the ballot. Regulation is right around the corner. “Yankee Ingenuity” is
being applied on a staggering scale, and with it, good old American style
capitalism is edging in. Make no mistake about it, a slow train of capital is
on a crash course with the cannabis industry. Hundreds of millions of
dollars are shot-gunning down the track, seeking to corpsify the under-
funded and inefficient remnants of the old industry with a fierceness that
would invoke envy from Attila The Hun.
As the wave of legalization swells across the nation, here come the
surfers. They are strangers to this shore, but not the sport. They know
how to clutch and tear to catch the rising breaks. Each crash yields a swirl
of money, a shark like frenzy, and blood. The mom and pop locals are
already rolling while their sentimental graves are being dug. They howl
their lamenting cries to the moon, while wolves and tycoons pave over
their once pristine shore and steamroll the good intentions that got us
where we are in the first place.
But that's life in these United States. The mantra is get rich or die
trying. This industry has been partying for a long time. Things ain’t easy
anymore. Bummer.

WORD ON THE STREET

Major California Outdoor Strain Forecast

2010 Outdoor Grown 2011 Outdoor Grown

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PUBLISHED BY STEEP HILL LAB INC. OAKLAND, CALIFORNIA www.steephilllab.com