http://uk.reuters.com/article/idUSTRE66M1YH20100723

Special Report: High finance and corporate pot, California style

By Peter Henderson

SAN FRANCISCO | Fri Jul 23, 2010 1:17pm BST

SAN FRANCISCO (Reuters) - Jeff Wilcox, a middle-aged, clean-cut man who dresses in the Bay Area casual business attire of clean jeans, collared shirt and running shoes, may be the face of Marijuana, Inc, the corporatization of cannabis.

He has just persuaded Oakland to legalize industrial-sized marijuana farms, touting a study that promised millions in city taxes and hundreds of high-paying union jobs.

The long-struggling city, which has failed spectacularly to capitalize on the high-tech boom, could be the Silicon Valley of pot, Wilcox told the City Council this week before its historic vote to grant four permits for urban, industrial-size marijuana farms.

But as Wilcox points out, his business model -- a nonprofit -- will be less Google or Apple and more Trader Joe's, a California cut rate gourmet grocery chain. The store's best-known product is $2 per bottle Charles Shaw wine, known affectionately as Two Buck Chuck and considered a great glass of wine for the price.

"The new Two Buck Chuck will be $40 an ounce pot," Wilcox said in an interview, looking forward to a day of full legalization. Boutique growers could produce the high-end stuff in their "gardens," he explained, while he supplied the masses with a clean, controlled, great-value product.

If California legalizes marijuana, the rest of the nation may well follow. One way or the other, cut rate, highly potent California weed is unlikely to stop at the state's borders.

The U.S. state that first allowed sales of medicinal marijuana, in 1996, may take away all restrictions on adult use of the drug in a November vote, giving local governments the option to regulate sales and growing of marijuana.

The magnitude of the experiment is difficult to fathom -- the world's eighth largest economy will tear down barriers to the most used illegal drug in the United States. The state that invented car culture will have open freeways to take the bounty to the rest of the nation, where higher prices -- and the risk of handcuffs -- beckon.

Even the cops who most hate it see legal California marijuana as a different breed of drug -- and a game changer for the country. "The stuff we are getting in California is fricking leading the world," said Los Angeles County Sheriff's Department Senior Narcotics Detective Glenn Walsh. "We already send marijuana all over the States, presumably all over the world."

A drug of hippies and cartels, marijuana has become a cultural touchstone. To advocates, it symbolizes counterculture freedom and alternative medicine; to detractors, it is a drug that saps the resolve of hardworking Americans, draws children down a path to other more dangerous drugs and enriches ruthless Mexican cartels.

Economists see a different picture -- a multibillion dollar market about to be unfettered with little sense of how consumers will react. Two rules they expect to apply: competition will lower prices and expand the market; businesses will look for ways to get ahead of the pack.

One recent study predicted California marijuana would underprice high-quality Mexican imports in virtually every city in the United States, even including the costs of smuggling and state taxes.

The reaction of drug cartels behind vast imports into the United States is anybody's guess, from abandoning the field to doubling down in a legal market where they can plow profits into political campaigns for legitimate allies.

But fear of the effects of legal California 'bud' already has made its way to the streets of Tijuana, the Mexican sister city to San Diego and a major gateway of drugs into the United States. "We're screwed," said Juan V., a street dealer in the grimy border city of around 2 million people. "They are going to want us to lower prices," he said. "We'll just have to sell more here."

IT'S THE ECONOMY

California's climate is perfect for growing almost anything, but the best marijuana 'grow' is a private world completely divorced from nature that produces a drug with 10 or 15 times the punch as your hippie grandparents' weed.

Mexican drug cartels grow good quality product in California national and state parks, which are the target of frequent police raids and less frequent arrests. Well-heeled consumers buy marijuana "medicine" grown indoors in an environment often devoid of dirt, sun or bugs. In about 10 weeks, a cutting from a mother plant can be grown into a bush of buds, harvested, and sealed in a turkey basting bag, known for its ability to contain the pungent smell of pot.

Big medical marijuana dispensaries offer dozens of types of marijuana, with a spectrum of colors from deep purple to tangerine orange and different tastes to boot. Years and decades of breeding marijuana has produced superior pot, growers say, and once they get a strain right, they stick with it, making cuttings of the perfect bush and then teasing them to the brink of horticultural bliss.

"What you are dealing with is frustrated sex for plants," says Wilcox, explaining how the goal is to grow female plants to the point they are yearning for fertilization, producing a sticky substance full of mind-bending chemical THC.

The process typically begins in a musky smelling basement dripping with tropical heat from high-powered grow lights, which have contributed greatly to fires in Oakland, city officials say. Clippings from the perfect mother plant, known as clones, are brushed in rooting compound. They are then set in a pot of rock wool in a tub that is regularly flooded with nutrient-enriched water.

Some growers pursue a Sea of Green strategy, raising an ocean of small plants, while others try to produce a few monsters. Farmers also may aim for a continuous harvest, putting plants of different maturity in different rooms or locations so that every week or so they can harvest a crop. Young pot plants start off with two weeks under grow lights shining 18 to 24 hours a day, helping the plants vegetate. When it's time to start flowering, lights are turned to 12-hour cycles for six weeks.

When the flowers are at peak maturity and look snowy, the plants are cut down. Leaves are stripped and turned into hash. Buds are dried and then put in mason jars and 'burped' -- given occasional breaths of fresh air -- in a regime that cures the pot, turning it sticky and stinky. Then it is put in the turkey basting bag and brought to a dispensary for sale.

The costs are minimal, falling as low as 20 cents in electricity and plant supplies for established growers whose pot would retail for as much as $20 a gram, a Los Angeles area law enforcement source estimated. That would take the cost of producing a pound of weed to under $100. The Rand Corporation puts the price a few times that, still offering plenty of room to drastically cut retail prices.

Wilcox's plan includes a 7-acre site with a 100,000-square-foot growing space, a bakery, a testing lab, job training and growing equipment production at the site -- which would need to win one of the four Oakland permits to go into business. If it did, it would produce 58 pounds of cannabis a day at wholesale prices of $2,500 to $3,000 per pound and send the city more than $2 million per year in taxes if a 3 percent growers' tax were initiated.

But Oakland could complicate his math. The city is considering an 8 percent tax on cannabis farms, more than double the top rate in Wilcox's economic analysis.

MARKET FORCES

The drive to legalize marijuana is based in the hardscrabble reality of California finances, and voters want to get paid. The invisible hand of the market also may act more like a fist on the price of marijuana. Once the Golden State, California is now the poster child for political dysfunction, tied for the lowest credit rating among the 50 states.

The prospect of a sin tax on a culturally acceptable drug has been gaining advocates for years. A bill in the state legislature would legalize pot, charge $50 an ounce tax and, according to state accountants, bring in $1.4 billion per year.

A more likely path to legalization, though, is Proposition 19, the brainchild of the Tax Cannabis movement, which would let local governments decide whether and how to regulate sales and cultivation of marijuana and would let anyone in the state 21 years or older use it.

A just-released study by the independent state Legislative Analyst's Office says that Proposition 19 could raise hundreds of millions of dollars over time.

California may be overly optimistic, according to a new Rand Corporation study. By the time taxes are high enough to produce the billions that California wants, they will have created a thriving black market. "So now you have the dual evils, lower prices and still a black market to deal with," researcher Rosalie Liccardo Pacula said, referring to the $50 an ounce charge.

If marijuana were legalized, Rand projects the price of high-quality marijuana to fall to as little as a tenth of current levels and says that usage could more than double as consumers respond to cheaper prices. A single joint, which at today's potency is enough to get a single person high a couple of times, would cost $1.50, even taxed at $50 per ounce.

More than half of that cost would be the tax, though, and as the novelty of legalized pot wore off, consumers who at first found a $1.50 joint a rock-bottom deal, might start to see it as a rip-off. The same joint could be had, untaxed, for half price on a street corner. "As time goes on, the black market prices will look more appealing," said Pacula.

But there is one way, Rand found, for California to boost tax revenue substantially: exports. "California could actually make a lot of money from taxing marijuana and then exporting it to other states," said study author Beau Kilmer.

Using publicly available prices of marijuana throughout the United States, researchers imputed the costs of smuggling and calculated that high-quality California marijuana, even at taxed prices, could undercut current prices of comparable pot in 42 of 48 continental U.S. states, even with the $50 per ounce tax that Pacula calculates would create a black market. Six times as many marijuana users are outside California as in the state, Rand quoted federal studies as showing.

One industry source, who is still involved in illicit drug circles and requested to remain anonymous, said he recalls prices falling in Los Angeles as medical marijuana dispensaries exploded there. Early on in his career, high quality marijuana went for $6,000 to $7,000 a pound. "Now you are getting $3,500. What's going to happen when you legalize? You are going to take it a couple of states (east)," he said. Growers and vendors with expensive taste would not be able to continue to lead the high life at legal prices, he said.

Also, not everyone buys the theory that California will become a rogue drug state that can undermine national efforts to put a lid on marijuana. The free market is pitting different cities eager for marijuana revenues against one another, and small growers at the Oakland council meeting threatened to leave the city if taxes were too high.

U.S. drug czar Gil Kerlikowske, director of the Office of National Drug Control Policy, in an interview cast cold water on California export potential. "I quite frankly don't see that," he said. "I just don't see it as being something that suddenly people in Kentucky say, 'Ah now marijuana can be shipped in from California.'"

MEXICANS AND MORALITY

The response of Mexican cartels could be the most significant issue for California, which hopes to drive illegal drug operators out of business. The drug industry source from Los Angeles sees organized crime throughout the marijuana trade in southern California. They grow in the mountains, but they also search the cities for independents. "Once they find out who you are, they will tax you," said the source, miming putting a gun to a head. He was skeptical that legalization would change the industry.

If done poorly, legalization may simply invite them to put down roots, say law enforcement personnel, who fear the Mexican mafia will take the hit to profits, go legitimate and start supporting political candidates who back their causes.

"The cartels already have the supply lines. They already have the business, they already have the product. The only thing you are going to do is give the cartels a legal drug to sell," said LA Sheriff's Department's Walsh.

Despite the money at play, Californians may decide the issue on the basis of morals, just like many of the creators of the Tax Cannabis movement.

"My big thing is ending prohibition, getting people out of prison who shouldn't be there, stop the violence, get better police protection, return respect for laws and law enforcement," said Richard Lee, the founder of Oaksterdam University in Oakland, a school which teaches marijuana growing.

He funded the signature drive that put Prop 19 on the ballot, which he says cost him his status as a millionaire. Civil rights, he said, was the name of the game. "That's what I got into this for. It isn't to protect the small grower, protect the big grower, make jobs here. Those are all ancillary things and I think the free market will take care of itself and the culture and different local jurisdictions will decide how they want to handle those issues."

Recently the California chapter of the National Association for the Advancement of Colored People came out in support of marijuana legalization. "This is not a drugs rights issue, this is a civil rights issue. It is time for them to stop using my community to populate the prison system on such minor offenses such as having a joint," said Alice Huffman, the NAACP California president.

Legal marijuana may not solve many of the problems associated now with the drug, but some proponents have an answer -- legalize harder drugs as well. NAACP and a group of cops who favor legalization, called Law Enforcement Against Prohibition, agree this is the first step. Legalizing heroin and cocaine is a much harder sell, but there is an answer to that too -- start with legalization for medical reasons -- just like marijuana did.

"This is the beginning, the tip of the iceberg on drug reform. I think like some countries where heroin is treated more medically than criminally, we have to look at that. I think we have to try and get all of the underground black market drug stuff out of the way so that law enforcement can focus on the real issues," Huffman said.

HELLO AMSTERDAM

Two different paths for legalization have already been sketched out in Northern and Southern California with medical marijuana.

Oakland has limited itself to four dispensaries of medical marijuana to control its habit. Oaksterdam University appears to have helped turn around downtown. A doctor's referral service recently opened across the street from the school and a nearby coffee shop is modeled after Amsterdam -- a cramped cannabis bar in back of a shop that sells brownies and coffee in front. Nearby businesses are pleased with their neighbor and wheelchair-bound Richard Lee is treated as a hero when he rolls around the streets, stopping reluctantly to pose for pictures with passersby.

The undisputed king of the medical marijuana dispensary industry is located at a nearby marina. Harborside Health Center has blond wood counters, dozens of types of marijuana, and an attentive staff that offers free acupuncture and massages to patients seeking its medicine.

Los Angeles is a different story. Walsh estimates that detectives manage to shut down four or fewer dispensaries a month, a rate at which it will take years to winnow down the 600 to 1,000 sites to under 200, as the city council has ordered.

Two recent dispensary murders highlight the danger.

On Venice Beach, it's clear that medical marijuana has become a joke way to score some pot. A second-floor dispensary is just a man sitting in a small room with a computer and a security officer. Below, the Kush Doctor chain offers $150 marijuana evaluations to get the referral needed for legal medical marijuana.

A young woman in a tiger-print bikini bottom and tight white tee-shirt hawks medical 'referrals' to buy weed. "The doctor is in," she coos.

(Additional reporting by Lizbeth Diaz, additional research by Courtney Hoffman; editing by Jim Impoco and Claudia Parsons)