Why is legal marijuana so expensive in Alaska?

Walk into a marijuana shop in Alaska and you'll find a newly renovated space, an array of products that have been tested and prepared in a highly regulated market and salespeople — called budtenders — ready to answer any questions you may have.

But be prepared to pay a premium for the experience.

Alaska's commercial marijuana market is grappling with elevated prices that some say have caused a split between those willing to buy legal, and those who still buy on the black market, where product is cheaper.

And as new retailers open, those high prices for legal pot may not be going down anytime soon.

"We've all been kind of surprised at the way it's gone so far … I really thought there would be more supply out there," said Leslea Nunley of Tanana Herb Co., a cultivation facility in Fairbanks.

By late April, 23 retailers were operating statewide, and 45 growers — both large and small — had gotten their final approval from the state, according to the Alcohol and Marijuana Control Office.

But not all of those growers have started producing. And marijuana takes a long time to grow. With so few cultivators, that means a lot of competition for the shops trying to edge their way into the market.

Tanana Herb Co.'s crop is spoken for "before we even plant it," Nunley said.

Wholesale, "top-shelf" commercial marijuana is going for $4,200 to $5,800 a pound, Nunley said.

Supply is so lacking right now that growers are naming their own price.

Leif Abel of Greatland Ganja says he charges $5,000 a pound, which includes packaging, taxes and delivery. He could charge more, and currently has 20 retailers lined up for his marijuana, he said.

"Unfortunately for them they have little bargaining power … we've simply had no reason to drop the price," Abel said.

By comparison, in Colorado, the average market rate was $1,471 per pound from May to October in 2016, according to the state's Office of Research and Analysis. Colorado was the first state to legalize recreational marijuana, and along with its developed medical system, the cannabis industry was far more established than Alaska last year. 

Retailers, as in any business, mark up the product they buy wholesale. So by the time it gets to consumers, it's up to $9,000 and $11,300 a pound.

For a consumer, 1 gram of bud or flower generally costs $20-$25. For an eighth of an ounce (3.5 grams), overall prices generally range from $60-$88.

Under Alaska law, people can buy up to an ounce at a time at a shop.

By contrast, black-market marijuana generally costs around $40 for an eighth of an ounce in Alaska's urban areas (prices in rural Alaska can be much higher), Abel said. And black-market marijuana costs between $2,000 and $3,600 a pound.

Supply is one factor in legal pot's elevated price. But commercial marijuana just comes with more costs, businesses say.

Among those costs: A state tax of $800 per pound of wholesale pot, lab testing for each 5-pound batch, child-resistant packaging, insurance. And some say the cost of business in Alaska is simply higher than other states.

"It gets eaten up quick," Abel said of his revenue.

Goodsinse, a retail store in Fairbanks, has some marijuana for sale that matches black-market prices. Co-owner Daniel Peters said that he has benefited from having his own cultivation facility tied to the store.

He wants to get an edge with customers, he said.

"I just choose not to take the maximum profit, that's all," Peters said.

The tax man

Alaska businesses look to the experiences of other states and anticipate lower prices, eventually. In the state of Washington, prices rapidly declined in the first few years of legalization as the market expanded and matured.

And for most states where marijuana is legalized, dropping prices mean dropping revenues. In Washington, Colorado and other places, taxes are tied to a percentage of the sale cost.

But Alaska's system is different. A flat rate of $50 an ounce, or $800 a pound, means that regardless of how much a pound sells for, the state will always bring in the same amount of money for the product.

Keith Humphreys, a Stanford University professor and drug policy expert, argued in The Washington Post that Alaska's flat tax is a good thing for the state, offering stable revenue regardless of price fluctuations.

Some businesses say they'd rather have the percentage tax. Lily Bosshart, co-owner of Dankorage, says a variable tax based on actual market value would make more sense.

"We've done the numbers, and the more you sell the more money you make," Bosshart said of a state percentage tax. "If the state would take that price cap off, then we could sell more."

The flat rate also means that the prices will never bottom out in the way that other states are seeing.

"We'll never have a 10-, 11-dollar really good gram," Bosshart said.

'You don't even have to pretend you like me'

As prices stay elevated, the black market — now called the "unregulated market" by some — continues to function.

"It's absolutely thriving, because we are missing an entire segment of the market with our prices," Bosshart said.

Many people who come into the commercial shops tend to be in their 50s or older, business owners say. And those people have different reasons for coming to a marijuana shop than those buying marijuana on the black market. Maybe they didn't want to buy illegally. Or maybe they want advice on what's best.

"My target market really appreciates the quality, tested product," said Loren Dreyer, owner of Alaskan Leaf, a growing facility and Anchorage retail shop.

Peters, with Goodsinse, said the shops provide an ease for customers that the black market — with its under-the-table deals and discreet meet-ups — just can't provide.

"You don't even have to pretend you like me, you just like my weed," Peters said.

Crystal ball

Some expect prices to dip at the end of the summer, once outdoor growers harvest their crop and bump up supply. But many think it won't last long, and that prices will remain elevated through the summer of 2018, until the third round of outdoor growers get their crops to market.

Part of the delay is due to the lengthy regulatory process.

During the past two Marijuana Control Board meetings, growers pleaded with the board to hold an additional meeting in May, so that they could get approved in time to plant crops this summer. The board agreed, and will now hold a meeting May 15 in Anchorage.

Both Nunley and Abel spoke of using the next few years to become more streamlined and produce more marijuana at lower costs. Both anticipate dropping prices, eventually.

Even though the high prices benefit growers right now, Abel said he'd prefer a more balanced, consistent market.

"This industry is not going to be looked on as real and grown up … until we produce more revenue," Abel said. "That's what I want to be part of."