Why New York Legalizing Recreational Cannabis Won’t Kill The Illicit Market

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The city that never sleeps has always had a strong illicit cannabis market and adult-use legalization is unlikely to stub it out anytime soon.

Russell, a 60-something marijuana grower and distributor who lives in the New York suburbs, makes about $200,000 a year in the illicit cannabis market. He has a nice roster of clients who live along the Hudson River, from the quaint towns of the Hudson Valley to the cacophonous neighborhoods in Manhattan, and he offers free delivery. Ounces of New York’s favorite strain, Sour Diesel, is $200, a pre-rolled joint for is $10, gummies with a mind-melting 420 milligrams of THC go for $30 and vape cartridges made by legal operators in California are $30.

Since New York legalized medical marijuana in 2016, Russell says his annual revenue has gone up 200% and he expects a sales spike once New York passes its adult-use law. (The New York Assembly says the passage of the Marijuana Regulation and Taxation Act is imminent.)

“I’ve never had this many customers,” says Russell. “Legalization is not going to hurt—the illicit business is stronger than ever.”

There are a few reasons he believes that legalization only helps the illicit market. First, the stoner stigma around pot is gone. Second, people don’t feel like they’ll get busted anymore so they’re more comfortable. Third, legal weed is expensive.

“My business model is this: whatever Curaleaf sells for, I sell for 30% less,” Russell says. “The economic factor is big. People don’t want to spend $400 a month to feed their head.”

As New York prepares to legalize adult-use cannabis, whether the illicit market will thrive or die seems like an important question. The best place to look to see how legalization affected the illicit market is the Emerald Triangle in Northern California, which is the epicenter of cannabis cultivation in America.

According to Erick Eschker, an economics professor at Humboldt State University, the legacy cannabis market is alive and well in the hills of Humboldt County.

“The legal market will not crush the illegal market,” says Eschker, founding co-director of the Humboldt Institute for Interdisciplinary Marijuana Research.

Eschker says that when California legalized adult-use one of the main questions was around whether all the illegal production would go above board with recreational use. The answer was no. “I’m speculating, but the same dynamic could happen in New York,” he says.

Legalization, for many of Humboldt County’s legacy marijuana growers, was a bad business deal. Licenses to operate and other onerous and costly rules and restrictions created a strong incentive to avoid going legit.

“If you want the black market to go away, go light on regulation,” says Eschker. “You need to make sure product in the legal market is cheap. The illicit market exists because it can undercut the legal market.”

California’s legal market generates about $4 billion in annual sales. Dan Sumner, an agricultural economics professor at UC Davis and director of the school’s Agricultural Issues Center, estimates that the illegal market, which composes selling in the state and across the U.S., does about $10 billion in annual sales.

The reason about 70% of the cannabis grown in California goes into the unregulated market is, of course, all about economics. “As a business proposition, from profitability, at least so far it’s been fairly a good thing,” he says.

Nat Buttrick, the co-founder and CEO of Madrone California, a licensed cannabis distributor made up of small farmers that made the jump from the traditional, or illegal, market to the legal market, says the only way to end illicit sales is to bring the two together.

“Until federal legalization happens, the traditional market will thrive. That’s the culture, that’s where we all came from as legacy operators,” says Buttrick. “It’s no secret that the traditional market is still healthy and alive and well. It’s what happens when you have a Schedule I drug in a state that has made it legal.”

As for the multi-billion-dollar cannabis companies expanding across the U.S. in the legal market, most believe the illicit market won’t exist for long. There is a long way to go on this theory, however, as illegal sales are estimated at an annual $100 billion, compared to $17.5 billion in legal sales.

Boris Jordan, the chairman of Curaleaf, the world’s largest cannabis company with a big presence in the New York, says so long as the state doesn’t limit canopy size—how many plants legal producers can grow—and taxes are not too high, he’s confident the illicit market will gradually go away.

“Overtime, the legal market will win,” he says. “Just like in alcohol, you had moonshiners but eventually, once businesses get to scale, customers want more regulated products, and enforcement steps in, it will squeeze them out.”

It’s hard to track whether the illicit market has grown or contracted since New York legalized medical cannabis, but it’s clear that the state’s limited program, which is very strict and allows for only few product offerings, hasn’t crushed it.

According to the Drug Enforcement Administration’s New York field office, felony arrests for marijuana possession and distribution have only dropped 13% between 2016 and 2020. Cannabis is not the biggest priority when it comes to federally banned drugs, but a 13% drop doesn’t necessarily suggest the dealers left for greener pastures.

Nick Vita, the co-founder and CEO of Columbia Care, which grows and sells cannabis in 18 states and has a dispensary in Union Square in Manhattan, believes a more powerful, consumer-driven force will end up hurting the illicit market more than economics.

Recently, Columbia Care found out that their trash cans were being raided for used containers. Allegedly, illicit operators were making counterfeit products and filling the company’s containers to sell on the street.

“When the illegal market starts to take things from the legal market, I think it turns the narrative upside down,” says Vita.

The force Vita is talking about is reliable brands, an offering the illicit market never really had. “As legal barriers fall down it fundamentally changes access and consumer expectations,” says Vita.

Ben Kovler, the founder and CEO of Green Thumb Industries, agrees that lab-tested, high-quality products will win over the market. Eventually, the consumer won’t want anything less. “The question is why would you want to buy moonshine if I can offer you Jose Cuervo?”

All of that is to say that the illicit cannabis market is still exponentially bigger than the legal market and won’t go away easily. America’s illegal cannabis market is at least 80% bigger than the legal one that exists in a patchwork of states. A dealer who goes by the name of Liston, who spent years selling cannabis that was smuggled to New York from growers in Oregon and Maine, the black market will continue to thrive alongside legal pot.

“The golden days are definitely not over. If anything, the next 5 to 10 years will be better,” says Liston. “It’s legal, more widely accepted, more customers. Things will be good, especially while the state figures it out how to tax it right.”