Year 1 brought grow­ing pains to pot in­dus­try

San Francisco Chronicle - - FRONT PAGE - By Peter Fim­rite

The le­gal mar­i­juana mar­ket, so long a twin­kle in the eye of the cannabis cognoscenti, has hit hard times in Cal­i­for­nia, where high prices, red tape and com­pe­ti­tion from the black mar­ket have cast a pall over what was sup­posed to be a tri­umphant first year of recre­ational sales.

The cost of le­gal­iza­tion was so high in 2018 that hun­dreds of grow­ers and re­tail­ers went out of busi­ness, the num­ber of avail­able prod­ucts spi­raled down, tax rev­enues from sales fell below pro­jec­tions and the black mar­ket revved up, ac­cord­ing to in­dus­try of­fi­cials and busi­ness rep­re­sen­ta­tives.

It was, said one in­sider, “death by a thou­sand cuts.” And the drip, drip con­tin­ued this month

with the re­call of thou­sands of pounds of mar­i­juana, ex­tracts and prod­ucts after a Sacra­mento lab­o­ra­tory was caught fak­ing test re­sults for 22 pes­ti­cides over a four-month pe­riod.

“The re­al­ity is, this isn't work­ing out the way that any­one hoped,” said Hezekiah Allen, the chair­man of Emer­ald Grown, a co-op made up of about 100 li­censed grow­ers mostly north of San Fran­cisco. “It’s look­ing like some of the worst fears of the (cannabis) busi­ness com­mu­nity are be­ing re­al­ized.”

Le­gal sales of recre­ational cannabis started with great hoopla on Jan. 1 as the state at­tempted to trans­form the semi-reg­u­lated med­i­cal mar­i­juana mar­ket into a multi­bil­lion-dol­lar in­dus­try. But the costs of set­ting up, li­cens­ing, test­ing and pack­ag­ing re­quire­ments have proved a heavy bur­den, and rev­enues haven’t flowed in as ex­pected.

The year-end tax rev­enues haven’t been tab­u­lated, but third-quar­ter fig­ures show Cal­i­for­nia fall­ing well short of the $630 mil­lion from recre­ational mar­i­juana sales that Gov. Jerry Brown pre­dicted in bud­get doc­u­ments. As of Novem­ber, $234.2 mil­lion in taxes had been paid to the state in cul­ti­va­tion, excise and sales taxes, ac­cord­ing to the Cal­i­for­nia De­part­ment of Tax and Fee Ad­min­is­tra­tion.

There is rea­son for some op­ti­mism. Tax rev­enue from sales has im­proved over the year, jump­ing from $60.9 mil­lion in the first three months of the year to $80.2 mil­lion in the se­cond quar­ter and $93.1 mil­lion in the third quar­ter. But, over­all, cannabis sales have been lack­lus­ter.

It’s a prob­lem for the state be­cause the tax rev­enues are used to pay for cannabis re­search, ad­dic­tion pre­ven­tion and law en­force­ment, in­clud­ing the hoped-for erad­i­ca­tion of the il­le­gal mar­ket that is si­phon­ing away money.

Many grow­ers, re­tail­ers and con­sumers around the state be­lieve it is a sys­temic prob­lem, start­ing with the 15 per­cent excise tax and snow­balling as cities and coun­ties tack on charges.

When all the charges are added up, in­clud­ing cul­ti­va­tion taxes, they amount to about 40 per­cent of the cost of the goods, mer­chants say. Mean­while, the whole­sale price for mar­i­juana has dropped over the past year, from around $2,000 a pound to about $500, fur­ther re­duc­ing prof­its.

Steve DeAn­gelo, a co-founder of Oak­land’s Har­bor­side mar­i­juana dis­pen­sary, said as many as 90 per­cent of the 500 grow­ers he did busi­ness with last year and a dozen “legacy” dis­pen­saries — long­time op­er­a­tors that formed the foun­da­tion of the med­i­cal mar­i­juana in­dus­try — have gone out of busi­ness.

“I look back on this year and think of it as the agony and the ec­stasy,” DeAn­gelo said. “On the one hand, it’s the cul­mi­na­tion of my life’s work, but on the other hand we’ve seen the destruc­tion of a very spe­cial, unique, eclec­tic and col­or­ful cul­ture.”

The fo­cus now seems to be on mak­ing the recre­ational mar­ket vi­able, but ef­forts to ease the tax bur­den, in­clud­ing pro­pos­als to cut excise taxes from 15 per­cent to 11 per­cent, have got­ten lit­tle traction.

Mean­while, grow­ers say, the cost of be­ing in the busi­ness is as­tro­nom­i­cal. Busi­ness li­censes cost any­where from $1,205 for a per­mit to grow 25 out­door plants to $77,905 for a 22,000-square-foot in­door plan­ta­tion. Grow­ers and man­u­fac­tur­ers also have to pay for lab test­ing to as­sure reg­u­la­tors that the mar­i­juana is free of pes­ti­cides, chem­i­cals and tox­ins.

Pack­ag­ing is an­other big ex­pense. All smok­able and ed­i­ble cannabis must be in child-re­sis­tant con­tain­ers and af­fixed with la­bels that out­line po­tency and dosage amounts. There are also strict pro­to­cols on how to trans­port, dis­trib­ute and dis­pose of ex­cess or de­fec­tive mar­i­juana.

“Ev­ery farmer I know is strug­gling,” said Nikki Las­treto, who with her hus­band, Swami Chai­tanya, grows their sig­na­ture brand Swami Select on a re­mote farm near Lay­tonville (Men­do­cino County). “I’m re­ally proud to say we are still in this game be­cause it’s been tough.”

Mak­ing mat­ters worse is a statewide back­log in pro­cess­ing li­censes. In­dus­try of­fi­cials es­ti­mate that only about 10 per­cent of grow­ers who have ap­plied for li­censes have got­ten them. This has led to a short­age in the num­ber and va­ri­ety of prod­ucts on store shelves.

“I don't know any con­sumers who are sat­is­fied with the prices or prod­ucts com­pared to how it was a year ago,” said Dale Gieringer, the di­rec­tor of the Cal­i­for­nia branch of the Na­tional Or­ga­ni­za­tion for the Re­form of Mar­i­juana Laws, or NORML.

It doesn’t help that al­most all trans­ac­tions have to be done in cash be­cause most banks won’t take on a busi­ness that is still con­sid­ered il­le­gal by the fed­eral gov­ern­ment.

To avoid the has­sle, as many as two-thirds of Cal­i­for­nia com­mu­ni­ties have pro­hib­ited the cul­ti­va­tion, distri­bu­tion and sale of the herb. Most of the 110 cities and coun­ties in the Bay Area, in­clud­ing San Fran­cisco, are in the busi­ness, but lib­eral Marin County joined their more con­ser­va­tive brethren and re­jected store­front sales.

While the le­gal mar­ket con­tracts, the sale of boot­leg mar­i­juana is go­ing strong, es­pe­cially

around Men­do­cino, Hum­boldt and Trin­ity coun­ties, known as the Emer­ald Tri­an­gle, where as much as 80 per­cent of the il­le­gal pot sold in other states is pro­duced.

“Un­for­tu­nately, and con­trary to the wishes of Cal­i­for­nia, the un­rolling of le­gal adult-use cannabis has rein­vig­o­rated the un­der­ground mar­ket rather than cur­tailed it,” DeAn­gelo said.

Law en­force­ment agen­cies have been try­ing to crack down on the il­le­gal pot trade, but there are not enough re­sources in the state to track and bust ev­ery law­breaker.

“It’s an in­creas­ing prob­lem,” said Ruthann Ziegler, a Sacra­mento lawyer and mem­ber of the Cannabis Reg­u­la­tory Com­mit­tee of the League of Cal­i­for­nia Cities. “The de­gree of en­force­ment varies from ju­ris­dic­tion to ju­ris­dic­tion.”

Com­pli­cat­ing mat­ters are on­line ser­vices like Weedmaps.com, which pro­vide in­for­ma­tion about mar­i­juana dis­pen­saries and call-in or­der and de­liv­ery ser­vices, many of which are un­li­censed. Lawyers for Weedmaps have so far thwarted ef­forts by the state Bureau of Cannabis Con­trol to stop the web­site from pro­mot­ing il­le­gal re­tail­ers. They ar­gue that the web­site has a First Amend­ment right to op­er­ate and that the state can­not reg­u­late a web­site it doesn’t li­cense.

The shake­out in the in­dus­try may not be all bad, say some stake­hold­ers.

Lau­ren Fraser, the ex­ec­u­tive di­rec­tor with the Cannabis Distri­bu­tion As­so­ci­a­tion, said the re­cent clo­sure of Sacra­mento’s Se­quoia An­a­lyt­i­cal

Labs for fal­si­fy­ing pes­ti­cide tests was an im­por­tant sig­nal to op­er­a­tors that they need to play fair.

“There have been a lot of grow­ing pains this year, but these are the kinds of sit­u­a­tions that need to be ad­dressed,” Fraser said.

And even as small farm­ers are strug­gling, cannabis com­merce as a whole is show­ing signs of pick­ing up. To­bacco, al­co­hol and phar­ma­ceu­ti­cal com­pa­nies have bought into or in­vested in mar­i­juana prod­ucts and busi­nesses and are threat­en­ing to re­place the old hip­pie tie-dye with white col­lars and tie clips.

The re­cently passed U.S. Farm Bill per­mits the in­dus­trial pro­duc­tion of cannabis hemp, po­ten­tially open­ing up an en­tirely new mar­ket­place for mar­i­juana grow­ers.

Erich Pear­son, the founder of the San Fran­cisco Pa­tient and Re­source Cen­ter, or SPARC, the largest cannabis re­tail shop in the city, be­lieves cannabis com­merce will even­tu­ally reach equi­lib­rium and be­gin to look more like the beer and wine in­dus­tries.

“If you look at al­co­hol, you see there is still an ap­pre­ci­a­tion for small-batch prod­ucts, so I think you’ll see that,” said Pear­son, who also runs an or­ganic pot farm in Sonoma County. “Un­for­tu­nately right now the reg­u­la­tions are just too much for the smaller busi­nesses. A lot of them will have to go away and come back later.”

“We’ve seen the destruc­tion of a very spe­cial, unique, eclec­tic and col­or­ful cul­ture.” Steve DeAn­gelo, co-founder of Oak­land’s Har­bor­side dis­pen­sary

Amy Os­borne / Spe­cial to The Chron­i­cle

Oak­land dis­pen­sary co-founder Steve DeAn­gelo cuts a rib­bon on the first day of recre­ational pot sales. A year later, he says 90 per­cent of 500 grow­ers he worked with are out of busi­ness.

The Chron­i­cle 2017

Mar­i­juana farm­ers such as Men­do­cino County’s Swami Chai­tanya are be­ing hurt by taxes and reg­u­la­tions.

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