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The Marijuana Problem That Few People Are Talking About

By Sean Williams – Aug 16, 2015 at 11:41AM

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The marijuana industry is facing a long list of obstacles, but this major one has flown under the radar of consumers and investors until recently.

Source: National Drug Abuse Research Centre.

Marijuana looks as if it'll be an important topic of discussion in the 2016 presidential election -- and who can blame voters after witnessing a dramatic shift in both public and state opinion over the past 10 years?

Marijuana's give and take
Roughly a decade ago, according to research company Gallup, just a third of American respondents favored the idea of legalizing marijuana. Today, Gallup, along with the General Social Survey and Pew Research Center, show that respondents favor legalizing marijuana between 51% and 53% of the time (with a slight margin for error, of course). This shift in favorability toward marijuana has allowed more states than ever to experiment with the idea of legalization.

Today, there are 23 states (and Washington, D.C.) that have legalized medical marijuana, and four states -- Oregon, Washington, Colorado, and Alaska (plus Washington, D.C.) -- that have legalized the drug across the board. For some consumers, marijuana offers to alleviate their chronic or terminal symptoms, while for states, it's an avenue to generate more tax revenue that can be used to fund education, create or retain jobs, or help close budget gaps.

But, on the flip side of the seemingly unstoppable marijuana movement are a mountain-high series of obstacles. Marijuana's schedule 1 status (schedule 1 drugs are deemed to not have any medical benefits), an apathetic current administration that would rather focus on other issues, an unfavorable U.S. tax code that doesn't allow deductions for the sale of federally illegal drugs, and the industry's inability to utilize basic banking functions all make the long-term future for marijuana-based businesses appear cloudy.

Source: Colorado Marijuana Enforcement Division.

The marijuana problem few people are talking about
Today, though, we're going to add yet one more hurdle to the list -- one that could really put a clamp on growers -- a concern very few people are currently talking about. I'm talking about the adverse effects marijuana's expansion could be having on the environment and individual ecosystems.

Consumers and investors probably have a simplistic view of the marijuana industry. Growers grow the product, processors handle the processing, and retailers finally sell the product. However, growing marijuana is a very resource-consuming process, and it very well could draw the ire of individual states, or the federally funded Environmental Protection Agency.

Growers have two means by which to cultivate their product. It can be grown indoors, or it can be planted outdoors.

In an outdoor setting (used by large commercial farmers), large plots of land might need to be cleared of trees, and pesticides may need to be used to keep rodents from destroying the crop. Unfortunately, changes to the ecosystem and the use of pesticides can kill other animals unintentionally, and the pesticides can work their way into adjacent water supplies or the soil, contaminating them.

Source: Flickr user Mark.

In indoor settings, which are typically used by smaller growers or even illegal growers, the bigger concern is energy usage. The lights used to regulate the environment to stimulate marijuana plant growth are similar to those used in hospitals, and the air is changed out 60 times more often than in an ordinary home.

Additionally, water constraints can be a problem in either setting. Like most crops, marijuana plants require a lot of water -- and water is a tough commodity to come by in drought-prone regions such as California. Dr. Short Gianotti, a co-author of a recent commentary piece in the journal BioScience that calls for added focus on the environmental regulations of the marijuana industry, suggests that $120 million would need to be earmarked per year in California for the next five years to tighten industry regulations, improve enforcement, and restore damaged landscape. In 2014, California Gov. Jerry Brown approved just $3.3 million for the regulation and enforcement of the environmental laws that govern how marijuana is grown.

In other words, it would appear that marijuana growers and state and federal environmental regulators could be butting heads at some point in the not-so-distant future.

What this could mean for the marijuana industry
What could this meeting of the minds between the marijuana industry and environmental regulators lead to? On the surface, it's tough to say, but one thing is likely: Marijuana prices could rise.

Source: National Institute on Drug Abuse.

With marijuana legal for recreational use in four states, the price of the product is on the decline. Marijuana, just like any product, follows the rules of supply and demand. As supply of the product has increased in legal states, the demand for it is no longer substantially outweighed. Translation: Prices have fallen. In fact, in Washington state growers produced 3.5 tons of marijuana flowers that didn't get purchased over the first 12-month retail selling period. This overproduction caused marijuana prices to plunge from the prior year, and it's made life more difficult for growers, processors, and even retailers who were counting on those higher prices to drive juicy profit margins.

Tougher environmental regulations could prove to be a double-edged sword for the industry.

On one side, tougher regulations and beefed-up enforcement (assuming state and federal regulators can afford it) could wind up reducing the number of growers and/or making the grow process more cost-intensive. Initially, for growers at least, this process wouldn't be pleasant, and tougher regulations could put some growers out of business.

On the other hand, presumed tighter supply from tougher regulations and enforcement should help buoy marijuana prices, which would be good news at the retail level for legal shop owners. However, it may not be such great news for consumers in the aforementioned four recreational-legal states, which have probably enjoyed the falling prices.

Ultimately, environmental concerns add just one more piece to the puzzle of why investing in marijuana might not be such a hot idea this early in the game. I believe that in order for marijuana to become a viable investment opportunity, it'll need definitive changes at the federal level. Unfortunately, it doesn't look as if those changes are going to happen anytime soon (if ever).

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy

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