What Is A Commodity Clearinghouse?

For centuries commodities have been sold and distributed via auction or clearinghouse. The tuna auctions in Tokyo and the tulip auctions in Holland still exist in their purest form. The New York Stock Exchange and the Chicago Mercantile Exchange, not surprisingly, evolved to become much more… but have the very same roots.

What does this have to do with our upcoming cannabis industry? Just about everything, if you are one that believes learning from past is more productive than reinventing the wheel.

As the potential centerpiece of Washington’s Marijuana Industry, an exchange solves many of the problems rule makers face in order to establish this new industry in a way that meets the expectations of voters, without handing the keys to the kingdom over to just a few big players.

Benefits of An Exchange Process For Cannabis

First of all, an exchange acts as a gateway for product to enter the marketplace. A place where lab reports can be scrutinized to allow for “bad” product to be identified and destroyed, where tracking can begin, and where the industry as a whole can be studied and scrutinized.

It also allows for a specific moment in time when taxes are due at the first tier (between the Producer and Processor) making accurate, honest and transparent tax collection possible, even without bank access. Tax collection is key, and if these large (cash) transactions take place behind closed doors, there will be no way to judge compliance.

It takes an open and transparent transaction to achieve those ends, but even more important is the role an exchange can play in curbing the black market.

There are 4 factors that must be managed in order to compete, and win, against the black market. Those are: price, convenience, selection and access.

As essentially an auction house, the exchange allows for prices to simply be controlled by supply and demand. The bidders, professional buyers (licensed as processors or distributors), will be able to adjust their offers based on current wholesale prices while taking into account the taxes that will be applied down the line.

This will lower the cost for medical marijuana as well, since growers will no longer be able to dictate their own prices – which is still a current remnant of the black-market-only era of marijuana use.

Producers will quickly learn that, as a legal business, they will no longer get paid the premium for risk that the illegal and gray-area operations historically charge, and the profitability of a production facility will eventually resemble that of any other specialty farm. If they want to garner top dollar, they will need to produce top quality product and let the market forces of supply and demand take over.

An exchange also provides the greatest access to the “second tier” for producers of any size.

Providing producer licenses a to smaller scale producers eliminates the chance that those who strive to be above-board are not forced into the black market. This also allows for unemployed, underemployed, and retired Washingtonians to make a go at earning some extra income, since compliance (taxes, tracking and lab reports) and sales and marketing (the ability to sell and compete based on quality and availability, as opposed to relationships or advertising) would be pre-built into the system.

Finally, convenience and selection to the end-user is achievable via a vibrant retail sector, supplied by processors and distributors who each have equal access to the entire range of product available statewide. This eliminates the potential problem of tier one and tier two licensees directing the best product to only a few preferred retail outlets, thereby hampering the required convenience and selection necessary to successfully diminish the viability of the black market.

More Flexibility For a New Enterprise

Even with the ability to mitigate the black market, monitor and enforce compliance, and provide a transparent method of accurate tax collection, perhaps the greatest benefit of the exchange system is its ability to roll with the unexpected bumps and obstacles that accompany all new endeavors.

For example, an exchange provides a market for all grades and forms of marijuana to be sold, from top-quality flowers and leaf clippings, to stalks sold for hemp fiber. As these individual markets mature, each will eventually require their own standards and rules… and the exchange is where it all gets worked out –faster and with better results than is possible via further legislation.

Lastly, an exchange that focuses on quality and transparency would be destined to gain worldwide notoriety. Not only becoming a tourist attraction where spectators from around the globe will be drawn to watch such unique commerce take place, but it will also position Washington as the center of the legal cannabis industry, even as other states and countries start to allow for recreational use. Just like the tuna in Tokyo and tulips in Holland.

(Al Harrison is President of Washington Cannabis Exchange. He and his governmental affairs consultant are discussing the possibility of an “exchange” or clearinghouse type of process here in Washington State. Al Harrison is at harrison@greenbuddy.com)

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