The past 12 months have been a rough ride for the California marijuana industry, and many business owners are hoping for a comparatively dull 2019 to get back to some sense of normalcy.
But there’s more turmoil on the way, according to K Street Consulting’s Jackie McGowan, whose Sacramento-based firm recently produced a report for clients that included a white paper outlining anticipated “extinction events” in the California cannabis industry.
The paper identified six potentially major hurdles still facing the California marijuana sector:
- A possible shortage of disposable vaporizer cartridges stemming from lead contamination.
- A lack of local industry ordinances that help businesses comply with the California Environmental Quality Act (CEQA).
- Ongoing market consolidation.
- Upcoming financial and tax audits by state regulators despite “hundreds” of licensed businesses not having yet paid state taxes.
- Testing-related issues, such as lengthy wait times, faulty equipment and a general lack of labs.
- Expected problems with both the rollout and maintenance of the state’s inventory track-and-trace system.
“Extinction events” is a pretty dramatic phrase. What does that mean in the context of this analysis?
I absolutely believe this marketplace will not look the same – it will not have the same set of players, it won’t have the same set of rules – a year from now.
The July 1 deadline of last year was probably our most visible extinction event, and I believe that term was coined a little after we realized how severe that impact was.
The backlog of testing facilities was one that many smaller manufacturers were not able to endure. We probably experienced that jam for five weeks, and we’re sure that put a lot of small operators out of business.
Do you have any educated guess as to how much the market contracted this past July and how much more the market could contract this year due to these red flags that you’re warning about?
We believe that the extinction rate will be 90% in the next year.
You seem to be suggesting in the paper that California’s legal market may not have access to any disposable vape cartridges that would pass Phase 3 testing.
I have a client who has independently tested, I believe it’s up to 10 manufacturers now. That client is using a third-party (agriculture) lab instead of a cannabis lab, because we’re just testing hardware.
So far, nine out of 10 have come back with very actionable levels of lead, and this is within the components being broken down.
Our advice to our clients right now is to have the glass tested, have the springs tested, have the internal coils tested.
Break this product down into as many pieces as possible to figure out where the lead is coming from, so then, upon assembly, you can figure out if you can contain the lead outside of the glass.
The problem is that most cannabis (oil) has two very acidic terpenes in it that are causing the leaching and the erosion from inside.
I have no way of knowing if that’s a harmful product once that has lead in it. There are obviously no studies done on this. But I just know that there is clean oil going into these cartridges and it’s coming out dirty, and this is a problem.
Given that we have that Dec. 31 loophole of when a product could be harvested or manufactured, it only needs to be compliant with Phase 2 testing and not heavy metals, so when this problem is actually going to affect the marketplace is open to interpretation.
How much supply did we actually have in 2018 to supply the 2019 market?
And how long that supply will last …
The state came out with another recent report on testing results on Jan. 22, but it goes all the way back to January 2018. There hasn’t been an obvious spike yet in heavy-metal failures for MJ products, but it sounds like you’re expecting that and it’s just a question of when.
Right. I don’t think there are more than three or four labs in the state that are doing Phase 3 testing, and only two of them are capable and willing to test the hardware.
So, now we’re starting to get labs online, but if they’re not able to solve where the problem is coming from, there’s not much they can do about it.
CEQA is another amazingly complex issue. What happens July 1, 2019, as you mention in the paper?
The state had given a grace period for CEQA compliance to the industry, and that expires July 1. What that means right now, we don’t have enough information from the state to say.
I’ve submitted a list of questions to the California Bureau of Cannabis Control’s attorneys to get some more clarification on this, because the questions I’m getting are coming from attorneys in major metro areas.
Are we supposed to be auditing those cities to find out if what they’ve submitted for CEQA compliance is enough or sufficient? I have no clue. So stay tuned for more information on that.
But local jurisdictions are going to need to pay for an environmental impact report, city- or county-wide, or they pass the burden off to the operator and require CEQA compliance to be conducted individually on a project-by-project basis.
We don’t really know the impacts of this one, but a friend of mine who’s a CEQA expert calls it the “silent killer” for a reason.
It’s a giant question at this point whether all of these jurisdictions that have been handing out permits have even been paying attention to that.
This interview has been edited for length and clarity.
John Schroyer can be reached at [email protected]