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High-tech marijuana: The science & profit of cannabis composition

John Hudak

How potent is pot? This seemingly basic question is a serious one for state marijuana industries and the agencies that regulate them. Last week, the Colorado Department of Revenue—the state’s marijuana regulatory agency—released a report on equivalency, potency, and dosing that offered important answers to that question. In the process, the study also engaged another critical aspect of marijuana products: equivalency in composition. That is, how much marijuana does it take to produce the items demanded at market: flower, edibles, concentrates, tinctures, etc.

The report was funded by the Colorado Department of Revenue (via a legislative mandate: Colorado HB 14-1361) and penned by the University of Colorado, the Marijuana Policy Group, and a Denver-based consulting firm. Over the course of a few dozen pages, the authors tackle the issue by examining industry activity, regulatory demands, technological innovation, and medical literature.

Marijuana potency versus equivalency

It is important to start with some technical terminology to understand what the report offers. However, before diving into definitions, the technical nature of the language used to discuss the topic in the report suggests something important about marijuana and the burgeoning legal industry that has sprung up around it. Legal marijuana operations are high-tech, advanced, innovative, scientific, steeped in R&D, and staffed by knowledgeable professionals. It is increasingly a mature market that looks less like the stereotypical basement hothouse and more like corporate production in the agriculture, pharmaceutical, and manufacturing sectors of the American economy. That economic and industrial maturation comes not just from the store fronts and the grow operations, but from the investment, expertise, research, and entrepreneurial rigor that exists behind these enterprises. Like it or not, support it or oppose it, embrace it or wish it away, the marijuana industry is exactly that: an industry—driven by market actors and subject to market forces.

Now for some lingo from the report. The report distinguishes two important terms critical for consumers, industry, and regulators to understand: potency and equivalency. Potency is fairly basic, and its most common use involves the strength of THC in the marijuana product.

Equivalency is different. It focuses on inputs and outputs and varies depending on the type of equivalency under analysis. One type is “physical equivalency.” Physical equivalency measures how much raw marijuana is required to produce a given output: flower, concentrate for vaporization, concentrate for producing edibles, other tinctures, oils, etc. This varies dramatically depending on the consumer product and the uptake method (method of use/consumption). The other type is “pharmacological equivalency.” Pharmacological equivalency measures the relationship between THC content in an input (and other psychoactive substances derived from marijuana) and the given product (output). Pharmacological equivalency matters considerably for use, dosing, pricing, and regulation. The report goes on to tie each equivalency for given types of products to their pricing, as a means of seeing whether the price is proportionally responsive to production inputs—physical mass or THC content.

I will not lay out the findings in this blog post, but the report offers substantial detail on production processes, extraction techniques, and uptake methods and what each means for the value and use of marijuana in Colorado’s legal market. However, beyond Colorado, the report offers critical information and/or research methods for analysts in other state agencies and industries asking similar questions.

The marijuana market works just like other markets

One important finding from the report focuses on whether marijuana production and pricing efficiently reflects differences in inputs. That is, does more potent marijuana cost more? Does marijuana that is more manufacturing-intensive or subject to greater production losses cost more? In a basic market sense, these answers should be easy. In most product markets across the US, producers have answers to those questions. For the marijuana industry, those answers have been in question for a variety of reasons. First, the industry is new from a legal perspective, having previously operated in the shadows of the black market. Second, because marijuana is such a diverse product and research into the plant has been stymied by state and federal laws, the knowledge base–and the capacity to build that knowledge base–has been quite limited. Third, skepticism about the maturity of the industry, its actors, and the operation of individual enterprises abounds, as the marijuana industry tries to distinguish itself from pre-existing stereotypes that predate legalization.

Market pricing, particularly in new markets with incomplete information and limited research and development, can be a tremendous challenge. In fact, pricing in any market can be a challenge. However, this report suggests that the marijuana industry has done a remarkable job in ensuring that their prices well reflect manufacturing processes and inputs. That is, production and pharmacological values also maintain proportional price equivalencies. Although the industry is regulated in a unique way, produces a controversial product, and operates in a bizarre legal environment that turns federalism on its head, marijuana businesses are not unique. Despite the challenges marijuana businesses face, they largely operate like any other business or industry.

The importance of seed-to-sale tracking

Colorado uses software and hardware from a company called METRC to track and monitor inventory and production process. This monitoring system is often called “seed-to-sale tracking” as it makes every effort to track product from the moment it is planted to the moment it leaves the shelf in a consumer’s hand. The system and processes behind it operate on a basic radio frequency system, but offers a complex and comprehensive means of keeping track of the inventory supply chain in ways that help prevent diversion. I have previously called this system the backbone of the regulatory model in Colorado.

The equivalency report, however, shows even additional added value from Colorado’s seed-to-sale tracking system. Because of the level of detail and types of data that state regulators required be collected, the system—and its associated database—allow researchers the capacity to analyze myriad questions, including product equivalencies. Researchers were able to examine product, trace the lineage of that product back to the plant-level. At the same time, the system maintains data on the specific production processes plants and products are subject to, such that researchers were able to consider how specific plants, plant types, strains, producers, manufacturing processes and production methods factored into the relative quantities sold at market.

The seed-to-sale tracking system shows itself to do more than simply help regulators, prevent diversion, and keep US Attorneys at bay by satisfying some of the requirements of the Cole Memo. The system is a researcher’s dream, and allows the state to address existing needs, answer critical policy questions, and broaden the conversation about how to administer, manage, and run a heavily regulated industry. Moreover, the findings from research based on seed-to-sale data have interstate benefits. States facing challenges with their own marijuana regulatory systems or operators facing questions about their industry can employ Colorado data to help address those needs. States looking to set up a new system or activists interested in drafting ballot initiatives or legislation can use the seed-to-sale system to understand how the market functions and how production processes operate. Finally, the data are also useful for conversations emerging from opponents of legalization, concerned about some of the implications of the new product. Industry and regulatory data in itself can help engage such concerns and can be paired with health and safety data to understand more clearly the impact of legal marijuana on the state and its residents.

My colleague, Philip Wallach, explained the policy benefits Washington state’s legal marijuana system would accrue because of legal requirements for research and data analysis on its own system. Seed-to-sale tracking in Colorado allows similar benefits as it opens doors for expansive research.

Researchers in Colorado are taking advantage of an old product being sold in a new market in ways that advance our understanding of marijuana. Because so few states have legalized the product and there have been and continue to be institutional barriers that hinder research into all aspects of the product, successful research endeavors emerge as cutting edge. Don’t be fooled by a milquetoast name, the Colorado Department of Revenue’s report, “Marijuana Equivalency in Portion and Dosage” is well-researched, contributing to our understanding of marijuana production and the methods and tools that can be used to engage empirical questions that emerge from this new legal industry.

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