Three Reasons for Cannabis Commoditization

by Daniel Gauci
0 comment

Last year the first private commodity trading desk exclusively for cannabis launched. The goal was simple. . . to connect buyers and sellers for the purchase and sale of raw cannabis products. And oh baby, was it a success.

What is a Commodity?

A commodity is a basic good or raw material often used in the production of other highly traded products. Oil is an energy commodity, while gold, copper, and silver are metal commodities. Corn, wheat, soybeans, sugar, are all considered agricultural commodities.

Cannabis fits well into the agricultural commodity category. But cannabis is not officially a commodity yet.

Agricultural commodities such as soybeans and corn are subject to rapid price fluctuations. Weather, pestilence, crop, and harvest disturbances cause rapid price fluctuations.

Why Commoditize Cannabis?

There are several reasons to commoditize cannabis. But now nothing can happen on a global level until restrictions on the plant lift.

The UN currently prohibits trading cannabis for recreational use. Until this restriction is removed cannabis won’t truly function as a commodity.

Nonetheless, we’ll glimpse into the future for cannabis’ sake. Let’s look at why cannabis ought to be commoditized when the opportunity arises.

Commoditization reduces the buyer’s risk

Like any other crop growing cannabis comes with risk. These risks are pests, weather, and crop failure beyond the cultivators’ control. When this happens, it drives the prices of the unaffected cannabis product up.

Commoditization ensures wholesale buyers receive cannabis supplies. The buyer can continue production at normal cost. The buyer purchases cannabis in advance at a certain price. The seller delivers the cannabis on the date set forth in the contract. Thereby eliminating risk for the buyer.

Production of the cannabis-dependent product continues without interruption or price increase.

Commoditization reduces the seller’s risk

Sometimes a harvest can produce more than expected. In these times sellers find themselves with more cannabis than there are buyers. Commoditization serves as insurance for the sellers. They can rest easy knowing their cannabis will not sell for an unfair price due to market conditions.

Commoditization protects both the sellers and buyers from unfair pricing and supply issues.

A Global Cannabis Benchmark

Right now, there are two major benchmarks in the cannabis industry. On the Spot Index benchmark in the U.S. cannabis is trading at USD 1369 per pound. In Canada, the cannabis benchmark is CAD 6.30 per gram. Varying benchmarks tell little of the actual price of wholesale cannabis.

Canada has the most sophisticated legal cannabis system in the world. Yet costs associated with producing cannabis in Canada are sky-high compared to Colombia. In 2016, Colombia legalized cannabis production for export. Colombia is preparing to become the leading exporter of cannabis in the world. Their low production costs make it easy to see why they believe they’ll be able to reach their goal.

In Colombia, one pound of cannabis costs less than $100 to produce. These prices are the result of Colombia’s favorable growing conditions.

It’s easy to imagine how wholesale cannabis prices will change when cannabis is legal.

In the meantime, Colombia looks to places like Germany to export medicinal cannabis. And companies in Colombia are taking commoditization into their own hands. Some companies have private commoditization so wholesale buyers can take advantage.

Cannabis commoditization favors cultivators, buyers, and by result the consumer. Commoditization will keep products affordable and keep growers in business. But, before commoditization happens on a global scale cannabis must be legal.

Related Posts