Episode 456: Marijuana Arbitrage

May 8, 2013
Originally published on May 7, 2013 9:12 pm

Nearly 20 states have legalized marijuana to some degree. As it turns out, this has profound economic consequences for dealers all across the country.

On today's show, we meet a wholesaler who moves weed across the country, a California weed dealer seeking higher profits in New York, and a special agent who may be inadvertently helping the dealer out by trying to put him in jail.

For More: See The Weed Trail, from WNYC

Music: Kid Cudi's "Marijuana." Find us: Twitter/ Facebook/ Spotify/ Tumblr. Download the Planet Money iPhone App.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.

MARIANNE MCCUNE, HOST:

Before I forget, tell me what we're doing.

JIM: Well, right now, we're making rounds, picking up money that's owed to me, basically.

MCCUNE: So I was driving around the Northeast recently with this marijuana dealer.

Do you, like, make a big effort not to speed? Because you're kind of pulling past cars while we talk.

JIM: Am I? Am I speeding? It's hard not to go fast in such a fast car.

MCCUNE: No drug dealer wants to get pulled over for speeding, right? But he says he always drives a fast car just in case he needs to get away, like this one time he had drugs with him and a cop tried to pull him over.

JIM: We let him get behind us. We wait for the guy to open the door. The second he opened the door and put his foot down and got by the front tire, I hit the gas. I get go. I went down. I hit a U-turn, and that was it. They stopped chasing me.

(SOUNDBITE OF CELLPHONE RINGING)

MCCUNE: So do we have any drugs in the car with us?

JIM: No, not right now, no. We will later, though.

Hello?

MCCUNE: So the reason that this guy is actually interesting - besides the intrigue and the car chases and all that stuff - the reason he's interesting is his business model. He moves hundreds of pounds of weed from the West to the East Coast every year. And he has a very secret, special way of getting it across the country, which I'm not allowed to reveal. But he has his people, and they move it for him. And whenever he needs more, he gets another shipment, has it delivered to the retailers he sells to. And all that driving he does is mostly to collect the cash he's owed. This is all something he got into before he even turned 20.

JIM: Coming from the East Coast and growing up here my whole life, when you wanted to get bud, it was always an adventure, basically. And when I went out to California, not only was it not a problem to find bud, you could find the best bud you've ever seen in your life for cheaper than the normal stuff you used to get back home. And it was like you'd have to be an idiot to not see the opportunity in the business. It costed, like, $250 an ounce, $225. And I could take it back to the East Coast and sell it for $450 fast. Like, it clicked.

MCCUNE: We're calling this kid Jim, by the way. He started his wholesale business almost a decade ago, and he's only in his mid-20s now.

So are you operating a small business or a big business?

JIM: If you think about how many people I deal with then no. It'd be a small business. But if you think about my margin of cash and my profit, I would say it would be a bigger business, I guess.

MCCUNE: So what is that margin?

JIM: Like, last year I did, like, 300K.

MCCUNE: What do you do with the money?

JIM: I bury it in the woods. And I remember where I buried it. Hope I don't forget. (Laughter).

(SOUNDBITE OF SONG, "MARIJUANA")

KID CUDI: (Singing) Pre, pre, pretty green bud all in my blunt.

MCCUNE: Hello, and welcome to PLANET MONEY. I'm Marianne McCune. I am visiting the PLANET MONEY team from WNYC.

ADAM DAVIDSON, HOST:

And I'm Adam Davidson. And today, Marianne, finally we have your deep dive into the pot business. You've been coming to work sometimes a little bit late, telling us you've been studying every aspect of the marijuana industry. I notice sometimes you have these little Doritos stains on your...

MCCUNE: (Laughter).

DAVIDSON: ...Pants. And you've been telling us fascinating lessons about the marijuana business people you've met along the way. And for me it's been particularly interesting how this illegal market, at least here in New York, this illegal market has so many lessons for just regular, legitimate industries as well.

MCCUNE: Yeah. I mean, take that guy, Jim, that we were just hearing from. He's a classic young entrepreneur. He realized that importing marijuana from California, that was a great way to provide a superior product to East Coasters. He did a lot of voluntary market research back in his teens, and he says that back then most of the stuff he encountered was from Mexico.

JIM: It was, like, you'd get this stuff and it would all be flat, and it would be seedy and moldy because it, you know, was squished down and Saran-wrapped into kilos, whatever. And then you have this stuff coming from California that when you smoke it, it tastes good, it doesn't make you burn your throat. If you'd hit it like three, four times, you'd be toasted, done. You didn't need anymore.

(SOUNDBITE OF CELLPHONE RINGING)

JIM: Hello?

UNIDENTIFIED WOMAN: Why'd you bring her to the house?

JIM: Babe...

UNIDENTIFIED WOMAN: Why did you bring her to the house?

DAVIDSON: Who's that?

MCCUNE: That is his wife on the phone. She was actually totally furious at him for bringing me to their house that morning. She was not at all on board with the idea that he was talking to a reporter.

Anyway, Jim says that when he started finding ways to get that high-grade stuff from California across the country, he became the most popular guy on the East Coast. This was, like, the mid-2000s now.

JIM: That's when selling bud was so easy. There was no competition. It was, like, people would come see this stuff, it wasn't how much they wanted, it was how much money they had in their pocket 'cause they were going to spend it all 'cause they knew they'd never seen this [expletive] before.

MCCUNE: So a lot of people are picking up on Jim's business model now, and there's this strange-seeming thing driving it.

DAVIDSON: So you just did this great story for WNYC. We worked on it here at Planet Money. It's actually going to air on ALL THINGS CONSIDERED next week. So podcast listeners get a sneak preview here. And it's all about the economics of this strange moment in American history. You know, not that long ago, the entire United States was basically one marijuana market. It was illegal everywhere. And now, I did not realize, 18 states have legalized pot to some degree or another.

MCCUNE: Plus the District of Columbia.

DAVIDSON: Plus D.C. Yet of course, that means 32 states have not legalized it. So what happens to the economy when you have this sudden shock when one giant market becomes these two bifurcated markets? It's a fascinating story, and we're going to meet a different California weed dealer who's finding this arbitrage opportunity. We're also going to meet the special agent who has devoted his life to putting people like this weed dealer in prison and find out why surprisingly that special agent, that policeman, might actually not be so bad for the pot dealers.

MCCUNE: All right. Here we go.

CHUCK: Greetings from the front lines of the assaults on sobriety.

MCCUNE: This is Chuck. That's what he wants to be called. He's a San Francisco pot dealer.

CHUCK: Welcome to the war on drugs.

MCCUNE: But we're going to make him sound like this.

CHUCK: I'm happy to report that drugs is winning.

MCCUNE: Maybe more like this.

CHUCK: You're tuned to WNYC, bourgeois assimilationists.

MCCUNE: OK. The point is we've agreed to change this guy's voice, and here's where we've settled.

CHUCK: Hi. We're helping keeping people stoned on a Friday in New York City. There's my phone ringing.

MCCUNE: Chuck came to New York from California to sell weed because here in New York where his trade is 100 percent illegal, he can make more money. He spends pretty much every day dealing what he calls farm-to-table marijuana. Right now we're in his dim New York apartment waiting to get started.

CHUCK: What do I need? What else do I need?

MCCUNE: To get ready, we step into the bedroom.

CHUCK: This is it - a pile of clothes, a pile of weed, a bed to sleep on.

MCCUNE: He puts the pile of weed into a backpack, and we head to the subway.

(SOUNDBITE OF DOOR SLAMMING)

MCCUNE: Hey. Before we go, can you tell me how much you're carrying?

CHUCK: I don't know, but I'm going to guess 6 ounces.

MCCUNE: Fifty or so generously filled 8-ounce plastic baggies. Each goes for around $60. So that's about 3,000 bucks' worth. If police could nail him for selling just what he has on him right now, he could go to prison. On the way down to the subway platform, we pass right by a cop.

CHUCK: I just stroll past nonchalantly.

MCCUNE: This danger of being caught and jailed, Chuck is choosing this risk. He left a state where he could have sold marijuana in a storefront and came to a state where he has to deal under the table. In this case, literally. Right here in a downtown diner, one of our first stops, he passes a baggie under the table to a client who folds his cash into the pages of a book and passes it back.

UNIDENTIFIED MAN #1: Be safe, brother.

MCCUNE: Welcome to the contradictory-seeming economics of the nation's fast-changing marijuana laws. The rise of medical marijuana in California is strangely enough what drove Chuck to New York. And here's why. Since the state of California made medical marijuana legal 17 years ago, hundreds of dispensaries have opened up. They're basically pharmacies that sell weed. And Chuck could join them and spend his days behind a cash register. But for all that work, he would make less money. Plus, that's not really him. Chuck sees himself as a counterculture guy.

CHUCK: I knew at an early age I was going to hang out with the freaks. All I had to do was find them.

MCCUNE: He stopped smoking a long time ago, but he kept dealing.

CHUCK: And now, you know, it's like I've been on the far side of the law for so long, it would be absolutely insane to actually cross back over the line.

MCCUNE: The problem is, with the rise of the dispensaries, illegal dealers like Chuck, they lose customers - too much competition. And it's competition with a serious edge. Not only can the dispensaries advertise and operate in broad daylight, their customers don't have to break the law every time they score. And in California almost anyone can get a prescription.

CHUCK: People who retail weed the old-fashioned way like myself, I saw my business falling off. So my idea was, OK, why not move to New York where I would probably have success?

MCCUNE: Chuck said, I'll buy in California and I'll sell it to New Yorkers. A good plan because New Yorkers will pay $60 or more for an 8th ounce of the stuff he sells compared to $45 or much less in California. But then came the next challenge, how to get the weed from California to New York. How to get it past people like Special Agent Roy Giorgi.

ROY GIORGI: How can you not hear that? (Singing) At a truck stop diner just outside...

MCCUNE: I usually catch Giorgi on his cell driving through the foothills of the Sierras with the radio on.

GIORGI: Can you hear the music?

(SOUNDBITE OF SONG, "COLDER WEATHER")

ZAC BROWN BAND: (Singing) You ain't ever going to change.

MCCUNE: Giorgi is with the California Department of Justice, and he and the other guys on his taskforce spend their time trying to catch and arrest illegal growers and dealers.

GIORGI: The money. The money, Marianne. We're actually arresting people that are shipping it all over the country.

MCCUNE: One easy place to look? The FedEx or UPS in, say, Humboldt or Mendocino Counties, California's pot country. Giorgi and his guys will stop by and sort through all the outgoing packages looking for marijuana.

GIORGI: And we'll spend one hour out there and identify 30 parcels.

MCCUNE: And that's looking at how many parcels total?

GIORGI: I don't know the exact percentage, but about 1 out of every 15 going by is a good one...

MCCUNE: That's amazing.

GIORGI: It is. It really is. And it's an eye-opener. You know, I've got to put the phone down for one second. Hold on.

(SOUNDBITE OF SONG, "COLDER WEATHER")

ZAC BROWN BAND: (Singing) Well, it's a winding road...

MCCUNE: California weed has been flowing East for decades. What's new, Giorgi says, is all the would-be medical marijuana heading out of state. It's what Giorgi calls the white-boy ranch grows, thousands of small pot farmers with permits to grow legally for themselves and the dispensaries but who still choose to sell on the black market. The same economic forces that drove Chuck out of California are driving growers to ship their crops East as well.

GIORGI: That's a whole other side now. And that's where the eastern states are getting impacted.

MCCUNE: Think about it. Marijuana farmers up in Humboldt County could sell the dispensaries with full permission from the state of California, and Giorgi wouldn't bother them.

GIORGI: There's probably thousands and thousands of patients that, you know, marijuana works for them, eases the pain or gives them more of an appetite. And I'm very, very supportive of that. But we see the abuse side of it.

MCCUNE: So it's even people who are just saying they're growing it for themselves who are shipping it out?

GIORGI: Yeah. Yeah, a good portion of them.

MCCUNE: Because California's weed economy isn't as lucrative as it used to be, basically with the rise of medical marijuana came a rush of pot farmers. With the rush of pot farmers came a glut of supply. And with the glut of supply, wholesale prices plummeted. Some growers haven't been able to unload all their crops at the price they want on the local legal market. So why not send it out of state to where it's less a commodity and more of a brand with clout?

GIORGI: Right now, Northern California bud, that trademark, that stamp is really some of the best in the world.

CHUCK: You should smell this stuff.

MCCUNE: We're back with Chuck, and he opens a supposedly smell-proof bag.

CHUCK: It's very pungent.

MCCUNE: Yes, it is.

CHUCK: Really super-citrusy.

MCCUNE: With customers, Chuck can talk about marijuana like it's a fine California wine.

CHUCK: Tangerine.

MCCUNE: When he pours out the contents of his backpack to reveal the broad range of flavors that marijuana dispensaries have helped to popularize, his clients are wowed. A new strain called Girl Scout Cookies tastes like cotton candy, or an older favorite, AK-47 - hard hitting and floral.

CHUCK: It's all from California.

MCCUNE: He's even got medical marijuana chocolate bars and candies.

CHUCK: This is an example of the uneasy co-existence of the medical market and the black markets. I can't keep enough of them in stock, really.

MCCUNE: The combination of Chuck's old-school authenticity and boutique product, not to mention his dependable service, it's an alluring package to the class of New Yorkers he serves. At some of the Manhattan workplaces Chuck delivers to, people walk in on the deal, see his stash, hear him talk and become clients on the spot. One guy asks, are you a delivery service? Chuck explains he's more of a mom and pop shop.

UNIDENTIFIED MAN #2: That's even better, man. I'd love to become a client.

MCCUNE: Chuck's move to New York, his wager on a city with no marijuana dispensaries but a taste for California's finest, so far it's paying off. He says he's quadrupled his income since he moved here. And there's one more reason Chuck's business is doing so well. It's because the people who are working to stop him are at the same time giving his business a boost.

GIORGI: I may lose you. I'm going over some mountains here.

MCCUNE: That's, OK. You're loud and clear now.

Special Agent Roy Giorgi is now on his way back from a remote part of the mountains where he was lying quietly in a creek, spying on a couple farmers planting marijuana on public land.

So that's what you were doing this morning?

GIORGI: Yeah. Kind of a miserable, cold morning, but well worth it. We got some great footage.

MCCUNE: What did you see?

GIORGI: We had three Hispanic gentlemen, two were wearing camouflage...

MCCUNE: Giorgi and his taskforce, they work night and day to catch anyone growing or selling marijuana underground, whether it's Mexicans growing on public land, Asians growing hydroponically or the white-boy ranchers selling would-be medicine on the black market. But all that work Giorgi and law enforcement across the country do to catch the bad guys to disrupt the illegal flow of marijuana, if they don't manage to find Chuck, they're actually helping him because the harder they work to stop him, the riskier it is to do his job, and that means Chuck has fewer competitors. He can charge higher prices.

Here he is counting a fat wad of bills.

CHUCK: Sorry about this. In white Protestant culture, it's considered to be gauche to flash giant wads of money in front of guests, but we'll just do it anyway.

MCCUNE: There is one more advantage of working in an illegal market. The competitors Chuck does have are kind of hard for his customers to find.

CHUCK: There's plenty of weed in New York. There is just an illusion of scarcity, which is part of what I'm capitalizing on.

MCCUNE: What do you mean?

CHUCK: Because this is a black market business, there's insufficient information for customers.

MCCUNE: In economics, it's called information asymmetry. If weed were legal, Chuck's customers could comparison shop. They could look at menus and price lists and choose their vendor. As it is, once they find Chuck, they're likely to stick with him.

(SOUNDBITE OF ZAC BROWN BAND SONG, "COLDER WEATHER")

MCCUNE: So Special Agent Roy Giorgi and Chuck, on the surface, they're enemies. But in a way, these two guys can't succeed without each other. Giorgi is in some small part inflating Chuck's profits. Chuck, he's helping to keep Giorgi employed.

Why do you do what you do?

GIORGI: Wow. I think it's really the overall love for the job. You're doing what you're believing is good for society. If we weren't aggressive in working the level we were working, it would spread from what's going on in Mexico up into California. It's very (laughter) self-rewarding. It really is. And it kind of becomes your high.

(SOUNDBITE OF SONG, "COLDER WEATHER")

ZAC BROWN BAND: (Singing) Maybe tomorrow will be better. Can I call you then?

MCCUNE: OK. If every law enforcement agent across the country were as aggressive as Giorgi and his guys, if they could check every tractor trailer, every Greyhound bus, every suitcase and cardboard box, Chuck would be out of business. But as things stand, there's just enough law enforcement to weed out the competition and not enough to scare Chuck away.

How much law enforcement effort do you think there is to discover a guy like you?

CHUCK: I'm going to guess the law enforcement priorities - that I'm not near the top.

MCCUNE: Chuck makes dealing weed look so easy. Before I leave him to finish his deliveries on his own, he takes a risk he says he rarely does. He's about to meet up with a couple regular customers but he can't figure out where to do the deal. So he just does it right there on the street in plain view.

CHUCK: I guess here will have to do.

MCCUNE: They squat down on the low rail around a tree. A neighboring building super puts out the recycling and watches suspiciously from a few feet away.

CHUCK: You all right?

MCCUNE: And Chuck walks away with 400 more dollars. That's what he's here for.

CHUCK: All right (unintelligible).

DAVIDSON: Man, if it's that easy to - all you have to do is transport stuff across the country and you're willing to take the risk of maybe going to prison and probably not going to prison, I have to assume there are just tons of people who are doing this business.

MCCUNE: Yeah. It's impossible to say how many for obvious reasons. But from the reporting I've done, I would say that Chuck is definitely part of some kind of pattern. I mean, Special Agent Roy Giorgi in California, he told me that law enforcement agents from across the country call him to say that the weed that they're seizing in their districts is coming from California. And already since this story aired on WNYC, we've had people respond in the comments saying they know other people like Chuck. And there's one guy - or maybe it's a woman. We don't know - who said that he or she is another Chuck living in North Jersey. And Chuck himself has had other California wholesalers approach him to try to sell their California weed to him.

DAVIDSON: You know, this is a special case 'cause we're talking about an illegal market. But we're a bit T-shirt crazy. And maybe - we see T-shirts everywhere. But this did remind me of the early days of global trade in T-shirts, which isn't that long ago - 10, 20 years ago. Twenty years ago, most of the T-shirts worn in America were made in America. And, yes, there were poor people in other countries that might have been willing to sew T-shirts for America, but there was no real way to do that arbitrage. And then in a very short period of time, shipping costs fell, tariffs fell. And suddenly you had this ability to get cheap T-shirts in China or Honduras, bring them to the United States and sell them for much, much cheaper.

MCCUNE: It's that same story of a shock to the system.

DAVIDSON: Exactly, a sudden shock to the system. And you see very similar responses. You have wholesalers who are just competing on price, trying to sell as cheaply as possible. You have people like Chuck, who become real specialists. I mean, I love his connoisseurship of pot. And then I have to assume you're going to eventually have the price falling to the point where people just leave the market altogether.

MCCUNE: Yeah. And that brings us right back to Jim, that young entrepreneur we were talking to at the beginning. He actually told me that he's considering getting out of this business already because the profit margins for California weed, even here on the East Coast, he says now they're shrinking and there are just too many people doing what he's doing now.

JIM: It's, like, flooded. It's too much competition. I mean, I used to deal with something where I'd buy it for, like, $2,000 and be able to sell it for $4,000 in a heartbeat, no problem. But now I'll do the same amount of work and come here and only be able to sell it for $3,200. It's like you have to take more risks to make the same amount of money.

MCCUNE: Jim actually talks about trying to get a legitimate loan from a bank to start some kind of regular business. He wants a franchise of some kind.

JIM: Everybody and their brother knows somebody that made a bunch of money selling weed, you know? Like, so you just lost your job, you live in Michigan, you've got some family in Northern California. What are you going to do? Go out there and grow some weed.

DAVIDSON: Yeah. It makes me think, like, do these pot dealers actually want marijuana to be legalized everywhere?

MCCUNE: Well, as consumers - or at least Jim is still a consumer - he does want it to be legal. And they both think on principle that it should be legal, but as business people, no. No way.

(SOUNDBITE OF SONG, "MARIJUANA")

KID CUDI: (Singing) Pre - pre - pretty green bud in my blunt. Oh, I need it. We can take off now. Oh, marijuana. Yeah.

DAVIDSON: Before we sign off, I want to remind listeners we are still in the middle of our Kickstarter Planet Money T-shirt campaign. It is going unbelievably well.

MCCUNE: Seven more days.

DAVIDSON: And it is so exciting. The response has been unbelievable, so much more than we expected. We are very grateful. And it also is a market signal, in Planet Money style. It's a market signal that this is a great product. So if you have not ordered one yet, please go to planetmoney.com. You'll find an easy link to the Kickstarter page.

MCCUNE: And don't forget this is a T-shirt that tells its own story.

DAVIDSON: We're going to be sending the Planet Money team to Bangladesh, to Colombia, to Indonesia, all over the world to tell the story of the T-shirt. You're going to meet the people who actually sewed your T-shirt.

MCCUNE: As always, tell us what you think of the show. You can send feedback to planetmoney@npr.org.

DAVIDSON: We're also as always on Facebook, Twitter.

MCCUNE: You can also find WNYC's series on marijuana at wync.org/weed.

DAVIDSON: I'm Adam Davidson.

MCCUNE: I'm Marianne McCune. Thank you for listening.

(SOUNDBITE OF SONG, " MARIJUANA")

KID CUDI: (Singing) Oh, marijuana, smoke. Marijuana, yeah. Marijuana, yeah. I know you want to smoke. Transcript provided by NPR, Copyright NPR.