The California Cannabis Supply Chain is About to Break
It has been widely reported that California’s legal cannabis industry is on life support, diseased by sky high taxes and overbearing regulation with a disappointing dash of government corruption and incompetence.
Prop 64, or the Adult Use of Marijuana Act (AUMA), was predicted to rake in a billion dollars in sales in its first full year on the books, but when only roughly a third of that actually occurred, the finger pointing began and headlines sprouted up everywhere blaming the big, bad, black market for crippling the legal, licensed market.
Of course, there is plenty of truth to that – the unregulated secondary market is thriving in the wake of legalization but the reasons why that is happening were homegrown in the state capital.
The biggest problem is lag.
The state stopped issuing temporary licenses on the final day of 2018, and they are all due to expire by July of this year. The idea was that in that six month period, the state would work its way through the stack of over 10,000 annual license applications for supply chain links of cultivation, processing, manufacturing, distributing, testing, and retailing.
Of course, they are way behind schedule particularly on cultivation licenses. Now thousands of California cannabis growers who have jumped through all the hoops and slashed through all the red tape to get their operation licensed are watching their temporary paperwork expire and are being given little or no indication as to when their annual license may be approved.
We are in prime planting season for a fall harvest and many farms are in legal limbo having dumped their entire life savings into a lucrative 2019 crop only to be left with a decision of shutting the whole thing down to remain compliant with the law, or to ride that Fisker’s edge of farmer versus outlaw to keep the op going until the state grants them an official greenlight.
The problem there is, once they are approved, how will they explain plants in the ground that have clearly been growing during the gap in licensing? The state has every right at that point to pull the license application from consideration and even fine the farmer up to 3x the original fee for growing out of compliance. Additionally, the farmer could potentially be blacklisted by the state and never be eligible to work in the legal market again.
Are we really wondering why the black market is booming?
Here’s some disturbing math (don’t worry, we did it all for you).
At the rate that cultivation licenses are currently expiring, experts predict that the state will be left with roughly 1,250 approved annual cannabis cultivation licenses by the end of this year.
Due to size limits placed on each license, only 22,000 square feet can be built out under each one. Remember though, a lot of big money operations were allowed to “stack” licenses to create even larger canopies, but the total square footage remains the same.
Data analysts tell us that the total annual demand for legal weed in Cali is somewhere between 2-2.5 MILLION POUNDS.
So those 1,250ish cultivation licenses will equate to about 27.5 million square feet of canopy.
But according to a 2018 Energy Report from New Frontier Data, that amount of growth will only produce about 1,758,000 pounds of bud – leaving a shortfall of anywhere between 700k – 1.2M pounds.
That’s the thing about demand, it will always find a supply.
There is no way that the state could have honestly believed that it could handle the insurmountable pile of applications it had in front of it at the end of 2018 in just six short months. Nobody forced the regulatory agencies to set such an arbitrary and unrealistic drop dead date for issuing temp licenses.
While they take their sweet time, legacy operators who did just fine for decades without government oversight are watching their funds run out just as quickly as their temp license.
Not only are some of California’s best cannabis growers either washing out of the legal system or just choosing not to participate, but some of the most prized genetics, guarded for years or decades, are at risk of being permanently uprooted with no legal dirt to put them in.
The growers are quite literally at the root of the supply chain and this bottleneck on licensing is having major repercussions all the way up the supply chain.
Some indoor growers were able to bust out one harvest under their temp license and get it up the chain to a distributor. Now those distributors are facing scrutiny from the state if they are holding onto product from a farmer with an expired temp license, in some cases making the product subject to recall and unable to sell at the retail level.
Who pays for that?
Who pays for the electricity bill, and the nutes, and the labor to bring that crop to harvest?
Who reimburses the distributor for the extraordinary amount of packaging required by the state on all cannabis products? Who picks up the lab testing bills for multiple R&D and compliance tests?
Some of these same outside analysts are predicting that as many as 75% of the hard working, talented people who apply to enter the legal cannabis industry and actually get in will be rejected within a year either by regulatory traps, a lack of interest from consumers in the legal market, or by simply running out of money before they can make any.
Maybe they’ll give the numbskull politicians in Sacramento the benefit of the doubt.
Maybe their moral compass will guide them away from the thriving black market that they’ve known for years, even though the legal one chewed them up and spit them out.