Despite A US Cannabis Boom, The Black Market Remains Massive

The United States cannabis market was worth an estimated $74.6 billion over the course of 2018 according to the recently released 2019 U.S. Cannabis Report. However, only about 14 percent of those sales came from the legal market.

The report, issued by cannabis analytics firm New Frontier Data, highlights the impact the growing legal market has had on illicit sales and projects how and why the black market continues to thrive despite the massive expansion of medical and recreational use.

The Two Majorities

The report shows that the legal cannabis market has grown substantially over the past few years thanks to a growing medical or recreational market that, as of 2019, encompasses 33 states and the District of Columbia.

That contingent of legal sellers has managed to grow the U.S. cannabis market by roughly 30 percent between 2017 and 2018. That trend is set to continue between 2018 and 2019 as well according to New Frontier Data’s projected sales, largely on the expanding recreational market. Below is a chart from the report that illustrates the actual and projected compound annual growth rate (CAGR( of the cannabis industry through 2025.

Under the current legal framework that exists in the 33 states and the District of Columbia, the report found consistent growth in the previous two years and extrapolates similar total growth to continue. Of note is the fact that the lion’s share of the growth will come in the adult-use market, even though that now represents only 11 states and Washington D.C.

Another interesting fact the report points out is that the wave of state-level legalizations that has bolstered the legal industry“brings the total population of people living in a state that has legalized some form of medical or adult-use cannabis to 223 million, or 68% of the 2019 total U.S. population.”

While this does not mean that that entire population within these states is able to freely purchase cannabis, since the majority of states require medical verification, it is a substantial landmark that a majority of Americans potentially have legal access to what is still federally illegal.

Which brings up another interesting dynamic highlighted in the report. Although a majority of Americans have some access to legal cannabis, the black and gray markets still account for the vast majority of cannabis sales, based on data the researchers culled from the rates of illicit use by state.

High Crimes Come Down

Included in the report is a further look into exactly how large the illicit market is and will continue to be while cannabis is still federally classed as a schedule I drug. However, estimates do show that the legal market having a sustained negative effect of the estimated $60 billion black market, which is projected to lose about 9% of its sales to retail and medical establishments over the next six years.

Despite this, the illicit cannabis market will likely remain several orders of magnitude larger than the legal market in its current form. The report does offer some insight into how states that have, or will have, a legal market might be able to better capture some of the illicit sales, such as:

• Flexibility of regulatory structure to adapt to changing market dynamics;

• Market implementation timeline; 

• Allowances for diverse product types; 

• Taxes and Retail Prices;

• Product access (largely determined by number of licenses issued by the state for cultivars and dispensaries, as well as allowances for delivery services)

• Barriers to patient participation (largely determined by qualifying conditions in medical states).

Although changes in these areas, as well as further legalization in states with current prohibitions in place, might well draw further revenue away from the black and gray markets, the report stresses that population growth and growing rates of use will continue to sustain the illegal cannabis market in states with any form of legal barrier to adult-use.

New Frontier Data is a content partner of Benzinga