Blog : How Big is the MJ Market?

by Ed Zwirn on March 1st, 2014

Everybody from stone-cold state officials to stoned-out entrepreneurs is starting to see visions of sugarplums now that the legal marijuana trade has begun, albeit in a small way.

Colorado has been first out of the gate. The snowboarder state began allowing retail "recreational" MJ sales on Jan. 1, and revenues from the trade are exceeding the projections given to voters when they approved the legal change in a referendum.

This makes the $610 million estimate of annual revenues produced by Colorado Governor John Hickenlooper earlier this month the first official measurement of the MJ market.

This of course begs the question: How big is the market for marijuana? An illegal, clandestine market is by definition much more difficult to do studies on. But with the first scant evidence in from Colorado, it is possible to do some quick, crude calculations: According to the U.S. Census Bureau, Colorado, which has over 5.2 million residents, contained about 1.6% of the U.S. population (over 316.1 million) last year.

If everybody living in the U.S. were to smoke as many joints (or bong hits) as a Coloradan (although I suspect Coloradans can more than hold their own in this department), this would translate to a legal marijuana consumption of around $37 billion annually throughout the U.S., assuming the other states which have not yet done so follow Colorado and Washington and legalize and tax the stuff.

Any marketing analyst would laugh at this methodology. Colorado, given the circumstances of its being the first to launch, regulate and tax a legal pot industry, is at a unique point in U.S. MJ history, and there is no telling whether either the novelty effect will wear off (causing a decline in sales). On the other hand, the increasing availability and social acceptability of the weed may make any attempt to extrapolate from the Colorado results seem conservative.

Fortunately, any time there is money to be made there are analysts that crop up that try to quantify a possible market. These people are often wrong: AT&T once turned down an offer of internet technology from the U.S. government, seeing no way to commercialize it.

But, unlike the Flintstone-era internet, there have been ample studies of MJ use in the U.S. and some very good educated guesses as to the dollars involved. A particularly useful study along this line was done in 2010 by CNBC, and reaches the conclusion that the legal MJ market in the U.S. would probably total about $35 billion to $45 billion, or not far from my Colorado-based estimate. If this proves to be the case this would mean that people of Colorado, despite their Rocky Mountain highs, inhale at roughly the same rate as other Americans.

At the same time, the CNBC study admits to much uncertainty regarding this prediction. Some studies, CNBC reported, place this figure as low as $10 billion. At the other extreme, some estimates go north of $100 billion.

In a 2006 paper cited by the CNBC report, Dr John Gettman, a MJ reform advocate and professor at George Mason University, used data from the DEA and other sources to estimate that some 65 million cannabis plants at a weight of 22 million pounds were being grown domestically. In addition, he calculated that another 50% was harvested in Mexico and Canada.

Based on average yields of 7 oz per outdoor plant and 3.5 oz per indoor plant and using price estimates he obtained from a High Times index, the professor calculated this market at $120 billion.

Critics of this number argue that the DEA, trying to show results in the "war on drugs," may have an incentive to exaggerate these numbers. Also, they point out, a large amount of the stuff confiscated and weighed by law enforcement comes in the form of whole plants (not the buds and leaves typically used).

But, even if you were to take the $120 billion estimate at face value, the MJ market, as it stands now, would prove to be small stuff compared to its currently legal competitors. The alcohol and tobacco industries generate about $268 billion combined revenues, with alcohol accounting for $188 billion.

The upshot for investors: When deciding whether to invest in a MJ-related penny stock, bear in mind that you are looking at an untested market, one filled with consumers that have heretofore had every reason to lie about their consumption, whether to their bosses or parents. There is no way to do the type of "XYZ hopes to capture 20% of the $XXX billion market" analysis that often provides the rationale for other investments, in part because the size of the market in question is so hard to estimate.