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Demand, Sans Supply

A Q&A on New Mexico's medical cannabis economy

August 17, 2016, 12:00 am

Economist Kelly O’Donnell, former New Mexico Regulation and Licensing Department secretary under Gov. Bill Richardson, and Duke Rodriguez, president of Ultra Health, a state licensed cannabis producer, recently discussed their views on cannabis program regulations that they say could lead to a 7-ton shortage and a new lawsuit aimed at improving patients’ access to the drug.

SFR: New Mexico already ranks low for several health and well-being indicators. Do cannabis shortages create more disparities?
O’Donnell: The burden of poor health is far heavier on some New Mexicans than it is on others. Low income people, rural residents, recent immigrants, and certain racial groups, most notably Native Americans, are at a real disadvantage when it comes to healthcare, resources for disease prevention and healthy living, and a number of debilitating diseases and conditions including diabetes and chronic pain.

Do the plant caps have other side effects?
Yes. It prevents suppliers from innovating and offering the broader array of products that better target certain health conditions or the needs of different kinds of patients. With such a limited supply of plant material, suppliers are going to play it safe and limit production to the one sure thing—higher-THC cannabis flower, which is great if that’s what you’re into, but not so great if your medical issues require a more nuanced or sophisticated treatment.

Are unreasonable regulations creating other market barriers?
Let me start off by saying that, as a former regulator and a member of the general public, regulation is a very good thing, particularly when it comes to the substances that we put in our bodies and the protection of people who are sick and suffering. But to be beneficial, regulations need to thoughtfully constructed with active input from experts who know the topic inside and out. Cannabis regulation is complicated. It involves aspects of agriculture, economics, state revenue collection, public safety and health. If you don’t think through all of these aspects carefully, you end up with unintended consequences like we have now. Supply limits that force some people who are legally entitled to purchase medical cannabis to buy it from illicit suppliers because they can’t get what they need, when they need it, at a price they can afford in the regulated market.

What’s needed to create a well-functioning market here?
Regulators need to focus on public safety and consumer protection, making sure high standards of quality and purity are sustained and that consumers are adequately and honestly informed about the products they are purchasing. Done well, regulation benefits the highest-caliber licensees and levels the playing field by ensuring that everyone is playing by the same rules and held to the same standards. Bad regulation telegraphs to business that either the regulator doesn’t really understand what they or regulating or they have other objectives, not related to public health and well-being. Either way, the message that gets sent to the market is one of uncertainty, and uncertainty is the last thing you want if you’re trying to build a business or create jobs.

Can a well-supported medical cannabis program displace black market dealers?
In states where adults can buy recreational cannabis legally, a primary objective of regulation is to drive the black market out of business with better quality and lower prices. This is a much more efficient strategy than continuing to wage the war on drugs—telling dealers not to engage in a business that our own laws have made very profitable and then locking them up on the rare occasions that they get caught. A medical cannabis market like New Mexico’s obviously can’t crowd out the black market, but it can at least shrink it by preventing medical cannabis cardholders from having to buy from illegal, unregulated sources.

You discuss the benefits of allowing producers to capitalize on economies of scale in your report. Will you explain what that means exactly?
Economies of scale are present when average production costs drop as production increases. In other words, the 110th widget costs a little less to produce than the 109th—and the more widgets you produce, the less each subsequent one costs. Economies of scale are present, up to a point, in many agricultural and manufacturing processes. Cannabis production is no exception. Growing more plants enables workers to specialize in certain tasks, increasing their efficiency. It allows certain commodities, including soil, nutrients and light bulbs to be purchased cheaper in bulk. It also spreads capital costs, like building a greenhouse or setting up irrigation systems to handle bigger production volume. Maximizing economies of scale minimizes cost. So far, lack of competition does not appear to be a problem in states that allow large-scale production like Oregon and Colorado.

Even if some of the businesses are allowed to scale up, do you think that there will still be room in the market for boutique dispensaries?
There is ample evidence in other states and other markets that large producers don’t crowd out smaller, more specialized suppliers. Right now I can go to Walmart and buy tomatoes for 99 cents a pound, or I can go to Whole Foods and drop $6 on a purple heirloom the size of a golf ball, and I wouldn’t be the only one.

In your view, are public health officials in a position to effectively regulate essentially agricultural crops?
Not without actively soliciting, listening to, and acting upon the advice of experts in agriculture.

Do you think that the state’s regulation and licensing department may be better positioned to manage the medical cannabis industry?
It’s hard to say. A lot would depend upon the underlying state statute and how the board was structured. If the board included subject matter experts, was representative of the broad range of stakeholders, and had rule making and disciplinary authority, it could potentially do a very good job of protecting consumers while at the same time fostering a robust market.

Duke, why did you commission a New Mexico cannabis market report?

Rodriguez: If 'adequate supply' is the question, then 'adequate information' has to be a huge part of the answer. Anecdotal information will only get you so far. If you are serious about a topic you have to subject it to serious scrutiny. In this case, we thought a valid demand model/analysis would be the most effective way to prove beyond any reasonable doubt the dire situation the NMDOH has placed patients' wellness. It’s hard to believe we have a $45 million program with no meaningful modeling, projections, or vision from NMDOH on how this program should be operated. We took on the burden of doing the heavy lifting of securing the expert analysis needed to make the best informed decision for patients. This study is long overdue and hopefully the NMDOH, the Legislature, the Governor's Office, the courts and most importantly the patients will have something so indisputable that folks will set aside their personal or political beliefs and make decisions focused first on patient well-being. 

Without collecting this kind of market data, has the health department put patients at risk?

The evidence is clear: Current demand greatly exceeds any allowed cultivation to ensure adequate supply under current regulation. The department has continuously underestimated patient needs, whether it be timely issuance of cards, appropriate regulation and, now, ensuring adequate supply. This is so important because you can’t be making decisions based upon 'guesstimates', especially when it involves the well-being of over 30,000 vulnerable New Mexicans. 

The health department hasn’t seemed willing to engage in dialog with program stakeholders. Why do you think they’ve been unwilling to discuss these issues outside of formal public hearings?

We have tried to exercise every form of diplomacy in dealing with the NMDOH, but there is clearly a hidden agenda or a belief system that precludes them from seeing the reality of what is at stake here. The entire issue at stake here is guaranteeing what is already provided by law to New Mexicans, the continuous "uninterrupted availability of cannabis for a period of three months."

The legal right of adequate supply is due every single qualified patient statewide, for whatever cannabis medicine or dosage needed. The ongoing availability of medicine is a legal obligation to make certain we never run out of medicine for any patient, ever. It should not matter if you are in Albuquerque or Silver City, or whether you are nine days old or 99 years old.

Do you think the study and lawsuit will help regulators shift their thinking about the way they regulate the program?

They may not be able to fully make the shift on their own. To move from being the agency that advocated against the use of cannabis in any form for so long to now being the agency that is charged to promote wellness and health through the proper use of cannabis, may be too great of a policy pivot. Ultimately, the truth of this needed policy shift may be too great a challenge for the Department.


Editor’s note: Edited for space and clarity.


 

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