The short answer on why marijuana futures will fail: If the market determined marijuana was sufficiently interchangeable to be a commodity, we would still face the legality issues that plague virtually all aspects of the cannabis industry. The long answer:
Let’s say that I’m tied in with the corn industry, specifically the financial side. I could follow corn prices on the Chicago Board of Trade, The Tokyo Grain Exchange, and Euronext. I could use those markets to hedge my risk in big transactions. If I am a corn producer and I want to hedge against the risk of falling corn prices, I could buy corn put options or I could short corn futures. If I am a buyer, I could hedge in the opposite direction with call options or by purchasing corn futures. Or, I could just speculate on the market from the outside. If I think that the price of corn is going to increase, I could buy up corn futures and sell them on the date they come due.
But I’m not in the corn industry. My clients work in the marijuana industry, and it seems that we’re still a ways off from seeing marijuana futures traded in Chicago. Still, it’s worth thinking about what a marijuana futures market would look like. Especially since we have heard of multiple people (primarily outside finance types who looking for a new industry niche) start down the path of exploring establishment of an independent commodities exchange market in the marijuana industry.
Do Marijuana Futures Make Sense?
So, does a commodities market make sense for pot? Most of our cannabis grower clients would probably say no. The basic definition of a commodity is that it is a good used in commerce that is interchangeable with other commodities of the same type. If I am buying bulk amounts of corn, rice, salt, coffee, copper, iron, etc., I largely don’t care between any two distinct units of those products which one I get. Sure, there are big pretty corn cobs and small misshapen corn cobs, but in the aggregate, it’s not worth anyone’s time to assign different prices to different specific units. Marijuana cultivators on the other hand tend to assign far greater variability to the quality levels of marijuana currently on the market. They view their product as more of a “craft” product and less of a commodity, which would render commodities markets less useful. With craft products, the price of someone else’s units is not a strong indicator of the value of my units.
If the market determined marijuana was sufficiently interchangeable to be a commodity, we would still face the legality issues that plague virtually all aspects of the cannabis industry. The corn commodities market doesn’t work with futures contracts for a few pounds of corn. Futures contracts are priced for every 5,000 bushels. That’s about 140 tons of corn. The reason commodity producers and buyers need the futures market for hedging purposes is because they work at such tight margins. Small fluctuations in price can turn a great deal into something that will bankrupt a business if the price risk isn’t properly hedged. With marijuana, state regulation reduces the number of market actors and market supply. All state regulation is, to a large extent, a huge subsidy to those either skilled or lucky enough to have a cannabis state license. Industry actors in marijuana, then, have far more wiggle room on price variance where producers and retailers can still make a profit.
So, the short term need for a marijuana futures market may not be there. But what about speculators? Is there a way for people to make money betting for or against parts of the marijuana industry? It’s complicated. Publicly traded marijuana companies are risky, as many of them seem to rise and fall based more on their ability to put out press releases than on any relationship to how well they are doing. And individual company investment is an indirect way of making bets on overall market prices of marijuana. One way that could work would be to use a simple prediction market. Right now, when you buy corn futures on the Chicago market, you actually are investing in actual contracts to move actual corn. For the majority of the players, however, the value of the market is in its ability to move money. The fact that it allows movement of corn is what gives some grounding value. But there are plenty of predictions markets that focus entirely on predicting events. It’s not that hard to imagine predicit.org, or a competitor, having multiple betting contracts saying things like, “The average retail price of marijuana sold in Colorado will be higher than $10.00 per gram on January 1.” Betting for or against that could be a form of hedging. That said, it doesn’t look like any online predictions markets are showing any interest in hosting marijuana price contracts.
In the end, commodities futures trading is one of the many things for which the legal marijuana market is still just not ready. Give it a few years, though, and we all may be taking long positions on marijuana futures.