The backers of Prop. 64, the 2016 Adult Use of Marijuana Act, sold California voters on the promise that small and medium businesses would be the engine powering the state’s $7 billion legal cannabis market.
CalGrowers estimates that only around 700 of the state's 68,000 farmers have obtained state licenses so far.
So far, that’s not happening. According to a report released today by the California Growers Association, a small-farmers advocacy group, fewer than 1% of California’s estimated 68,150 cannabis growers have secured state licenses to continue their businesses legally.
The CalGrowers report estimates that 80% to 90% of growers who did business with the state’s legal storefront dispensaries prior to January 1—when new licensing requirements went into effect—“are being pushed to the black market.”
The report confirms what many have already observed. Rather than regulate local cannabis companies, prohibition-minded lawmakers in marijuana-producing regions have banned them altogether. Other popular brands, including some owned by women, have gone into “hiatus” for want for a prohibitively expensive permit, or zoning requirements, or some combination thereof.
“[F]rom Oakland to Humboldt, from Los Angeles to Gold Country, from cultivation to delivery service, many of the hardworking pioneers of our cannabis marketplace are being left behind, primarily because they are unable to afford one time costs of regulation,” said Hezekiah Allen, executive director of the California Growers Association.
Barriers to Entry Are Too High
Allen’s group is calling for state lawmakers to review the state’s regulations and relax certain requirements. The growers group would like to see the state lower the entry barrier to allow for more existing cannabis producers to join the legitimate market.
Forcing longtime farmers out of the business could have far-reaching economic effects on rural California counties.
If they do not, “legalization will look a lot like prohibition,” Allen said, but worse: Economic “depression is the best case outcome,” according to the report. “Economic collapse is the worst case.”
As of Feb. 18, fewer than 2,700 licenses for commercial cannabis activity had been issued throughout the state, according to a review of records. A total of 1,220 licenses had been issued to marijuana storefront retailers, delivery services, and distributors, according to the Bureau of Cannabis Control.
Separately, through Feb. 18, the state’s Department of Food and Agriculture had issued 1,483 licenses to cannabis cultivators, out of an estimated 50,000 or more marijuana-growing operations throughout the state. Most licensees hold multiple licenses.
One entity, Central Coast Farmers Management, in Santa Barbara County north of Los Angeles, has acquired 81 licenses, according to records, most of them small outdoor licenses. According to CalGrowers, fewer than 540 distinct entities hold a cultivation permit.
15 Companies Hold 10% of All Licenses
CalGrowers believes that “between 1 and 3 percent” of growers interested in a license have been able to obtain one.
That development seems to confirm earlier warnings from CalGrowers, echoed by state lawmakers from the Emerald Triangle and from San Francisco, that a loophole in the state’s cultivation rules—meant to prohibit cannabis cultivation operations larger than one acre until 2023, consistent with rules passed by state lawmakers prior to AUMA’s approval at the ballot—is being abused to allow for marijuana megafarms.
There are ample signs of consolidation in California’s cannabis industry, as well as some bottlenecks in the supply chain. Through mid-January, 15 companies had secured 10 percent of the licenses, according to a review from New Cannabis Ventures, a cannabis business blog.
Further, according to CalGrowers, most of the “microbusiness” licenses, intended for small operators, have been used as cover for “well-capitalized” operations to become vertically integrated, with “small and rural” boutique cultivators left out. Current California law prohibits cannabis “farmer’s markets” or other opportunities for a consumer to purchase directly from a producer similar to farm-to-table community-sustained agriculture programs, or CSAs.
70% of Distributor Licenses Gone to Larger Operators
Licenses for distributors, a mandatory step in the supply chain from seed to purchaser, have gone mostly to “retailers or large manufacturers,” the CalGrowers report says. Of the 200 distribution permits, only 59 had been acquired by a business that “appear[s]” to be for distribution only.
Cannabis operators say a bureaucratic maze is hurting participation. At least seven state agencies and more local entities are involved in the permitting process, forcing would-be permit holders to wade through hundreds of pages of regulations, according to CalGrowers.
Small businesses also say the tax burden is too high—a complaint shared with consumers, who have seen retail prices rise by 40 percent or more, depending on the county. According to CalGrowers, California has the highest effective tax rate on cannabis in the United States. In some areas, when local taxes are added, cannabis is taxed at a rate of 60 percent.
County Bans Hurting Small Farmers
But at least part of the blame for such low participation is due to prohibitive county governments. Only 13 counties have issued permits for cannabis cultivation. Of California’s 58 counties, 25 have already passed outright bans.
And in the permitted counties, only 47 percent of growers are located in areas zoned for cultivation and thus eligible for permits, according to CalGrowers. Supposedly permissive areas like Trinity County have accepted only 500 applications, out of 4,000 or more known cultivators.
Other cannabis-friendly counties like Sonoma have forbidden marijuana cultivation in “rural residential” and “rural agricultural” zones, forcing another 3,000 existing cultivators to the black market, according to CalGrowers.
County Bans Inflate Real Estate Prices
This artificial limit on cannabis growing is sparking a real estate rush, with cannabis-eligible properties fetching 25 percent to 50 percent over market rate, according to CalGrowers.
Urban retailers as well as rural cultivators have been shunted to the black market. Only 55 marijuana delivery licenses have been issued through February, over half of which are in the Bay Area. Meanwhile, hundreds of delivery services continue to operate.
Under Prop. 64, adults 21 and over are allowed to possess up to an ounce of marijuana anywhere in the state and cultivate six plants. But beyond that, cities and counties are given wide discretion to regulate commercial activity—or ban it outright. Some jurisdictions have also strictly regulated personal cultivation, in some cases requiring people wishing to grow six plants to register with police. At least one city, Fontana in San Bernardino County, has rules so onerous that it’s been sued by the American Civil Liberties Union.