Image: marijuana plant
ROBYN BECK  /  AFP - Getty Images
The question that looms over California marijuana growers is whether the economic advantages they've built up can survive a more radical legalization policy, like that being put forth in Prop 19.
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updated 10/31/2010 1:10:45 PM ET 2010-10-31T17:10:45

To reach Jason's farm you drive south out of the small town of Arcata, in Humboldt County, Calif., and plunge into the forest that gave the region its "Emerald Triangle" nickname. After passing through hilly ranch country and a stretch on a dusty dirt road, a wooden house peeks out of the fruit trees on 150 acres of land, completely off the electrical grid. Jason is in the kitchen, stuffing cannabis leaves into a juicer.

"Everyone around here is involved in some way," says Jason, a professional marijuana grower. What he means is that a large percentage of people in town, and every other town for miles, is either directly or indirectly subsidized by dope, from the young parents cultivating a few seedlings in the backyard to the owner of the sushi restaurant where seemingly unemployed people eat dinner, always paying in cash.

"I think we're in the middle of a boom time," says Jason, clomping over to a leather sofa with his juice. He's in his late 30s and wearing camouflage pants with a small knife clipped to his belt, heavy-duty work boots, and just enough chin scruff to keep him from looking groomed. Despite its rustic accommodations — personal business is conducted in an outhouse down the path — the house bears many signifiers of high household cash flow: gleaming new appliances, lots of products made by Steve Jobs, a Droid satellite phone. He got into the pot business almost by accident. After several years drifting hippie-style through California, Jason fell in love with the pastoral lifestyle and realized that he had to earn money to sustain it, so he became a businessman. He agreed to explain the economics of his trade, provided Bloomberg Businessweek withheld his full name.

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Golden Age
The 1996 passage of Proposition 215, which legalized the possession and cultivation of marijuana for medical use in California, ushered in a green golden age. The legislation permits use of the drug by anyone with a 215 prescription, which can be dispensed by doctors for ailments ranging from cancer to a stiff neck; the Marijuana Policy Project estimates there are 355,000 patients in California who have been advised to use medical marijuana by a doctor. Selling marijuana for a profit is still illegal under state law, and there is no specific definition of how much a person can legally grow or what constitutes a profit, while all marijuana sales remain prohibited by federal law. The very vagueness of the rules created opportunity: Midlevel entrepreneurs such as Jason who were willing to live with the risks and ambiguities of a semi-legitimate market rushed in and thrived, though there are no reliable estimates of how many there are.

Now a new set of variables has thrown the business into even greater uncertainty. On Nov. 2, California will vote on Proposition 19, the "Regulate, Control and Tax Cannabis Act of 2010," a ballot initiative introduced by an Oakland pot enthusiast named Richard Lee that proposes to legalize marijuana for personal use. The new law would permit individuals to possess up to 1 ounce and cultivate 25 square feet worth of plants at private homes, with no medical requirement. Beyond that the initiative's language is murky. Regulation of commercial production and sale of cannabis would be done by counties and municipalities, leaving the mechanics of how it would all work undefined.

One thing seems clear, though, if the measure is adopted: A quasi-black market will be replaced by a much more legal one, and prices for pot are likely to go down. It's impossible to know by how much, but a 2010 Rand study called "Altered State? Assessing How Marijuana Legalization in California Could Influence Marijuana Consumption and Public Budgets" estimates that retail prices could eventually drop by 80 percent. First, suggests Jonathan Caulkins, a public policy professor at Carnegie Mellon University and a co-author of the Rand study, there would be a "honeymoon" period of several years when production would ramp up as California product began to push out inferior Mexican pot across the country. Once that happens, you could have "a real change in industry structure," according to Caulkins. Growers would have to professionalize their operations and become even more industrial-scale to squeeze out smaller margins of profit. In such an environment, people probably won't make the $150,000 or so Jason says he clears every year, and "mom and pop" farmers will be wiped out. Jason is planning ahead. "You wanna go up top and walk through them fields of glory?" he asks. "If you can grow twice as much, you'll make the same amount of money, even if the price is half."

Above ground-underground market
For decades, the Emerald Triangle was sustained by logging and fishing, but both eventually died off. In the 1960s and '70s, hippies and counterculture types fled San Francisco and other cities to get "back to the land," and were drawn to the area for its potential as an agricultural utopia. The ideal was to be dependent on no one: Build your own house, grow your own food, and slap solar panels on the roof. It turned out that big redwood country was almost as well suited to the cultivation of cannabis as southern France is to Côtes du Rhône grapes. The region's inaccessibility made it suitable for growing in greenhouses, while the climate and exposure were conducive to agriculture. It was easy for people to nestle a few pot plants back behind the tomatoes and bring in a little extra money to pay the property tax bill.

Proposition 215 elevated the trade to a new level, spawning businesses to uphold and profit from it: an aboveground-underground market. Growers hire manual laborers to cultivate, harvest, and trim the crops. Others are brought in to transport the bounty to dispensaries in Los Angeles, San Francisco, and across the state, or to out-of-state middlemen who inject the product into the black market. Doctors write prescriptions authorizing patients to purchase what they need from a dispensary; lawyers provide defense services; bail bondsmen help people get out of jail. In Arcata, a tidy college town with a population of around 17,000, there are many more shops selling fertilizer and greenhouse supplies than there are people growing orchids. And then there are the arteries the drug proceeds flow through: booming truck dealerships, organic food markets, and the electronics store.

Humboldt County has a small population base relative to its California neighbors—129,000—so it's easier for the pot industry to have a dominant effect on the local economy, Caulkins points out. At a moment when Americans don't seem to actually make anything anymore, domestic producers have quietly distinguished themselves in the cultivation of high-caliber weed, demand for which has proved to be almost recession-proof. Jobs cultivating, harvesting, and selling the plants can't be sent overseas, and the profits are usually reinvested in the community. Caulkins calculates that anywhere from $1.5 billion to $2 billion worth of marijuana might be sold in California each year. The wholesale price per pound is below $3,000, according to locals familiar with the market.

Advantages at risk
The question that looms over the growers is whether the economic advantages they've built up can survive a more radical legalization policy, like that being put forth in Prop 19. "One thing that interests me is to what degree large-scale production can lower costs," says Erick Eschker, a professor of macroeconomics and U.S. economic history at Humboldt State University who directs the Humboldt Economic Index, a monthly indicator for the county. "If economies of scale do exist, small operations are going to be at a significant price disadvantage." Humboldt County could also lose the geographical advantage of its remoteness, which makes it ideal for producing an illegal product, as production moves closer to where most of the customers are, in Los Angeles and San Francisco. With taxation and regulation happening at a county or city level, there could also be a race to whichever area has the friendliest rules.

Image: Richard Lee
Justin Sullivan  /  Getty Images
Richard Lee founded Oakland's Oaksterdam University, the first college for training students in cannabis commerce and who helped push the city of Oakland to start taxing marijuana dispensaries.

The new proposition was initiated by Richard Lee, a marijuana entrepreneur who founded Oakland's Oaksterdam University, the first college for training students in cannabis commerce, and who helped push the city of Oakland to start taxing marijuana dispensaries. According to a recent poll by the Public Policy Institute of California, voters now oppose Prop 19 by 46% to 44%, after favoring it slightly in September. Last year, California Governor Arnold Schwarzenegger announced that it was "time for a debate" on legalizing marijuana (although he recently came out against Proposition 19, calling it a "flawed initiative"). Shifting public opinion has already led 14 states, plus Washington, to approve some form of legalization for medical purposes.

The cause has found interesting supporters in the business world: Two co-founders of Facebook, Sean Parker and Dustin Moskovitz, donated $100,000 and $70,000 respectively, to backers of Prop 19 this fall, according to campaign filings, and, in a Wall Street Journal opinion piece, investor George Soros announced that he was backing the initiative. The State Board of Equalization, which collects sales, property, and other taxes such as those on tobacco and alcohol, issued a report estimating that if marijuana were taxed at $50 per ounce it could lead to $1.4 billion in new revenue for California, which has been suffering from a $19 billion budget deficit. Jeffrey Miron, a Harvard economist, estimates that if the drug were taxed at rates similar to alcohol and tobacco it could create $8.7 billion in national tax revenue.

Different parts of the cannabis plant contain varying levels of tetrahydrocannabinol, or THC, the main psychoactive ingredient. The highest concentrations are found in unfertilized buds of the female plant, which yield the most expensive strains. Much of what is grown in Humboldt County is of this type, and the price (followed by all the grades below) has been dropping for the last several years. As the price slid, more people rushed into growing, farms became larger, and the market became glutted. It also attracted what some locals describe as outsiders and criminal elements, including members of drug cartels. Home invasions are more common than they used to be, and there are reports of shootings — six so far this year in Humboldt County, up from one two years ago, according to Mike Downey, the incoming sheriff. Many houses in Arcata have been taken over by indoor marijuana-growing outfits. "I've been involved in the drug wars for 25 years," says Downey. "My personal view? It's not worth it. We've spent a lot of money and it hasn't made a difference. It's been a frustrating issue. A lot of people have been killed. We've got bodies in these hills we've never found."

Land rush
"I'm probably selling more land than anyone else in the country," Charlie Tripodi says as he bumps along the highway in his mud-crusted Dodge Ram. Tripodi says he's sold $21 million worth since January, to be precise. "We missed a bit of the bullet of the real estate market. No real estate agents are out peddling hot dogs." And why might that be? "The marijuana industry," Tripodi says without hesitating. "That's obvious. It definitely kept us afloat."

Tripodi, a Realtor with Coldwell Banker who calls himself "The Land Man," specializes in selling remote parcels of former timberland to buyers who want to farm or live the so-called rural-residential lifestyle. A former white-water rafting guide, he has chin-length brown hair and a boyish cowlick. He spends his days cruising around in his truck with laminated aerial maps on the front seat and a fortified laptop on the console. Tripodi says that land prices in Humboldt have gone nowhere but up. "In the last eight years, the price for 40 acres has gone from $59,000 to $150,000," he says.

A good portion of the demand comes from people trying to diversify their assets. Over clam chowder at the Waterfront Cafe Oyster Bar in Eureka, Calif., the sister city to Arcata, which has a brand new waterfront and the lively air of a rich little boomtown, Tripodi slips into his sales pitch: "We're facing a devaluation of the currency," he says. "If there's another terrorist attack, people are going to be fleeing here. It's a safe haven.…Where are you going to put your money? Land has much more of an intrinsic value."

Of course, the demand has as much to do with high times as end times. "I hate to emphasize that," he says, but "hopefully most of them grow under the guidelines of 215; some of them do, some of them don't. I don't ask questions, it's none of my business." During the last few years, he's seen much more of this second type of buyer passing through town. "It's the end of the gold rush. People will be clamoring to be a part of it until the last nugget is taken out of the river."

Uncertainty for small business
On a quiet side street, just beyond Arcata's main square, sits a tidy white building that could pass for an insurance office. The Humboldt Patient Resource Center is a dispensary where people with 215 cards can sidle up to the counter and order one of the pot strains — Redwood Kush, and so on — that are on view in little clear plastic jars. If the clients don't feel like smoking, as many patients don't, according to Mariellen Jurkovich, the proprietress, they can buy one of the goodies in the display case: ganja pecan pie, "special" peanut butter truffle cups, and rainbow Rice Krispie treats — "Consume slowly!" the package warns. Chelsea, the perky blonde nutritionist, sits at a table by the door, offering paper cups of sunflower seeds and tamari roasted almonds.

Jurkovich has been here 11 years and is just the sort of small business owner who could see her world changed by the passage of the new bill, but she doesn't know if it would be for better or worse. "When you run a business, you need to know the rules. Here the rules are constantly changing," she says, sounding like a beleaguered member of the Chamber of Commerce.

Jason isn't sure how the shifting legal landscape will affect his own small enterprise, but he tries to be optimistic. As he finishes his carrot-and-cannabis cocktail and moves on to beer, he breaks down his business: He spends around $50,000 a year on labor, he estimates, and thousands more on "bourgie" organic nutrients that he orders from Chile and other far-flung locales to make his plants more high-end. "I just put an 18-wheeler's worth of soil in the ground," he adds, which amounted to about $12,000. There's a lot of spray and fertilizer. "The plants are pretty water-hungry," he explains.

Harvest party
At harvest time, which starts in October, he hires trimmers to cut the buds off plants for $200 a pound. "Somehow I tapped into this endless lesbian crew. They come out from North Carolina or Idaho, jumping trains the whole way," he says. "One year I had a CPA from Paris." He hires a cook to feed them and provides music, wine, and, of course, plenty to smoke. "It's a party," he says, bouncing up and down and making Edward Scissorhands motions with his fingers. His plots are scattered around the forest along with a collection of greenhouses that are visible from overhead but, he hopes, aren't numerous enough to invite a raid.

Jason says he clears $150,000 to $200,000 a year in profit from the land surrounding his house, depending on how good the crop is. He earns more from other plots he owns nearby. He doesn't pay taxes on the income because he doesn't file a return ("I don't lie about it. That's when you get in trouble"). Spending all that cash in the middle of nowhere can be a challenge. He and his wife eat all-organic, and he's got a few trucks to play with as well as a $28,000 Kubota backhoe. Some of the money is "seasoned" slowly into a bank account, so as not to draw attention.

Inside one of Jason's greenhouses, eight 10-foot-tall plants salute the sky, like big, smelly Christmas trees. Each is encased by a metal hoop of the sort used to grow tomatoes, and hoses snake along the floor to provide water and nutrients. He says the big strains this year are called "Chemdog" and "Green Crack." Jason is also working on his own concoction, called "Triple X." "Here, squeeze this," he says, indicating one of the spongy buds, about the size of a golf ball. It leaves a sticky, pungent residue. "Ha! You can't go back to New York with that!" he smirks.

The conditions surrounding Jason's industry may be about to change dramatically, but he's determined not to worry about it until it actually happens. For now, life is almost too easy. Occasionally he even feels nostalgic for the bad old days, when the feds were focused on crushing the domestic pot trade, before they decided to spend most of their energy on crystal meth instead. Back then, the choppers were always roaring overhead. Sometimes he had to dive into the mud with a rifle. "It used to be sexy," Jason says, half joking. "Now it's just boring."

Copyright © 2012 Bloomberg L.P.All rights reserved.

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