By Andy Hecht, Editor, Trade Hunter
Dear Sovereign Investor,
In 1965, Neil Simon brought The Odd Couple to Broadway. The play was a smash hit about two mismatched roommates, Felix “The Neat Freak” Unger and Oscar “The Slob” Madison.
The characters were portrayed by acting legends Jack Lemmon and Walter Matthau, who later starred in the 1968 film version of the play. In the 1970s, Tony Randall and Jack Klugman reprised the roles of Felix and Oscar in the hit TV show.
Forty years later, on June 23, 2011, The Odd Couple debuted in Congress…
Ron “The Libertarian” Paul and Barney “Big Brother” Frank are the latest iteration of Felix and Oscar. And, they are perhaps the oddest couple of them all!
These two well-known Congressmen have announced that they are co-authoring the Frank/Paul Marijuana Legalization Bill, or H.R. 2306. This piece of legislation, if passed, will repeal federal penalties for production, distribution and possession of marijuana.
The Ending Federal Marijuana Prohibition Act of 2011 is consciously modeled after the repeal of the 18th Amendment, which allowed states to establish their own rules governing alcohol. This is the first time such a bill has been introduced.
It will leave states free to address the issue as they see fit. The federal government’s role would be limited to preventing the importation of marijuana into states that continue to ban it.
Barney Frank said, “The bill has no chance of passing” in the near future. But it is “a first step.”
The legislation is consistent with the political ideology of Representative Ron Paul, a committed Libertarian. But I am a bit confused by the stance Barney Frank is taking on this issue.
I can only believe that Frank’s motivation is driven by some Orwellian-Huxleyan fantasy of Big Brother feeding a type of soma to the American masses. This could just be Frank’s attempt to numb the public as he continues to push through Big Brother-type legislation like his namesake, the Dodd-Frank bill that imposes the meddlesome hand of government on the financial markets.
Two politicians with two totally different agendas – an “odd couple,” to say the least…
So folks, as a person who will probably support Ron Paul in the next election, I am in favor of this legislation. The amount of money required to keep marijuana illegal is staggering. Think of the governmental costs in terms of law enforcement and prison expenses. Think about the potential tax revenue that this “commodity” could bring into the coffers of state and federal government.
As a sovereign individual, I also believe that prosecuting responsible adults who choose to use marijuana interferes with personal freedom. After all, we can already choose to drink alcohol or smoke cigarettes. The prohibition of marijuana just does not make sense from a practical, financial and moral point of view.
What Would a Country that Has
Lifted the Pot-Ban Look Like?
Well, I was recently in Venice Beach, California. When you walk along the beach in Venice every other store either sells marijuana paraphernalia or medical marijuana itself, or offers medical exams for a “license” to purchase the drug.
I was approached by a young man in dreadlocks who asked if I was interested in procuring this license. I don’t think he was a physician. I told him that I did not have any current medical problems that would qualify me for one.
He told me not to worry… “Do you have a hang-nail? Do you have $40 bucks in your pocket?”
Apparently, $40 bucks is all it costs to purchase a marijuana license in California!
Now, I don’t think legalizing pot will lead to “reefer madness,” as many fear… not even close. A lot of Americans already smoke pot and will continue to do so whether it is legalized or not.
It is possible that demand for corn chips and snacks will increase dramatically to satiate a munched-out American populous.
But seriously, I expect the biggest impact to be on the commodity markets.
Marijuana: The New Cash Crop
America is the breadbasket to the world. The U.S. feeds itself and many other countries that import our corn, wheat, oats and soybeans.
Farmers always decide which crops to plant based on the relative economics of each commodity. We have seen crop substitution cause dramatic price movements in these commodities over the past few years.
Higher oil prices led farmers to plant more corn for ethanol production. As farmers planted corn in lieu of other crops such as cotton, soybeans and wheat, these other commodities appreciated dramatically in value.
The supply and demand equation tilted towards deficit in the production of the crops not selected for planting. In fact, we saw cotton prices rally over 500% in 2009-2010 when farmers planted corn and wheat instead of cotton in 2008.
Pot won’t be cheap, at least initially, if it is legalized. U.S. farmers will be tempted to grow marijuana in lieu of other crops. They will profit many times more from growing weed than they would from growing corn, soybeans, wheat, cotton, rice, rapeseed, oats or any other grain.
The bottom line is that the legalization of marijuana would cause shortages in traditional crops and huge price rallies for the grain complex. Fertile land is finite and farmers will make choices based on economics.
Cashing in on the Pot Bonanza
Companies like Archer Daniels Midland (ADM), Bunge (BG) and Monsanto (MON), as well as other agricultural processors and even cigarette manufacturers, would all look to profit from this newly legalized crop. They have a responsibility to their shareholders to do so – these companies are in business to make money.
Where there is demand for a commodity, there will be companies looking to supply and maximize the yield of that commodity. The U.S. could very well go from the breadbasket of the world to the smoke shop of the world.
Not to worry… in the long run demand is rationed by price, and over-supply will depress the price of a commodity. As the U.S. gets used to growing this new, profitable crop, prices will adjust to reflect supply and demand fundamentals.
However, initially, the legalization of marijuana will cause the prices for all agricultural commodities to skyrocket as farmers look to cash in on the initial marijuana bonanza!
Marijuana will be traded on exchanges just like any other raw agricultural commodity so that farmers and consumers can hedge their price risk. (I told Sovereign Investor readers recently how they can make money from the increased volatility created by producers and consumers trading in these markets.)
I believe that Rep. Ron Paul is well intentioned with this piece of legislation. It all comes down to sovereign rights for this principled politician. On the other hand, I believe that Rep. Barney Frank is either banking on pot as the new soma, or buying some farmland to cash in on the bonanza that he wishes to create.
The Broadway version of The Odd Couple won a Tony award. Neil Simon was nominated for an Oscar for the screenplay. The TV version of the show won several Emmy awards. I wonder if the Congressional version has any awards in its future…
Happy Trade Hunting…
Editor, Trade Hunter
Blog: Commodity Options Outlook