Downturn in California lab-tested marijuana batches adds to confusion over state’s supply chain

The number of marijuana product batches undergoing laboratory testing in California has dipped in recent months, sparking worries among some industry officials over the health of the state’s cannabis market and the possibility that product supply is dwindling.

But several insiders also were careful to note it’s too early to reach any conclusions based on the test results, saying the legal market may just be undergoing regular seasonal fluctuation.

According to a Marijuana Business Daily analysis of testing lab reports from the Bureau of Cannabis Control (BCC) – which began issuing the reports last October – the number of product batches tested has dropped by 20% between April and June.

In April, the number of product batches tested hit a 2019 high of 5,113. But in June, that dropped to just 4,111, not far above last October’s total of 3,417 batches tested.

As of July 5 – the latest date from which data was available – a total of 56,609 MJ product batches had been tested since January 2018, when adult-use sales began in the state.

The trend has many in the California industry scratching their heads over what’s happening, in part because there’s not much solid data with which to evaluate the legal market’s health.

But some, at least, are worried.

“Is that reasonable to expect from a booming market? I don’t think it is,” said Swetha Kaul, the chief scientific officer of Santa Ana-based testing lab Cannalysis.

“At best, if you look at it overall, it’s flat. But if you look at the last few months, it’s downward to a disturbing amount.”

No clear answer

The data is far from a solid indicator of what’s going on in the California market, Kaul and others quickly noted, and so businesses or investors might not need to worry just yet.

Moreover, industry insiders offered a wealth of possible explanations for the downturn in testing, indicating that more information is needed and it’s too early to jump to conclusions.

For instance, Kaul and others noted, the dip could just involve a regular seasonal downturn, which may reverse itself later this summer as more outdoor farmers begin harvesting crops.

“If I were to show you my testing volume over the past five years, it would track along with (the BCC’s data),” said Tony Daniel, chief revenue officer for Steep Hill, a longtime Bay Area marijuana testing lab.

“If we had three or four more months of decline, then there’s something going on. … (But) this is usually what it looks like. It’s premature for me to have a takeaway on what could be just a temporary dip.”

Several industry insiders also noted the number of product batches tested doesn’t directly translate into a specific amount of product, because the size of the batches can vary wildly.

The maximum legal marijuana flower batch that can be sent for testing, for instance, is 50 pounds. However, many growers have sent much smaller batches.

Kaul said the average flower batch her lab has seen is roughly 22 pounds, and Daniel said Steep Hill’s average is about the same.

But batches of manufactured products such as vaporizer cartridges can range from 1,000 units to the tens of thousands.

Meanwhile, growers and manufacturers have had to adapt repeatedly since January 2018, when lab testing first became mandatory in California and as new requirements – for pesticide testing and heavy metals – kicked in last July and then in January 2019.

Those same businesses could finally be getting confident enough in their product – and the testing labs – to send larger batches on a regular basis.

In other words, it’s possible the product volume in the supply chain is up, or at least steady, while the number of batches being tested has decreased.

The testing report numbers also don’t jibe with what industry tracking company Headset has seen from its retail contacts, from which it gets regular reports on revenues and sales.

“It’s difficult to come to a full conclusion without more data points,” said Liz Connors, director of analytics at Seattle-based Headset.

“The California market still appears to be growing, so if batches are getting smaller but the market is growing, we would have to then think that either batch sizes are increasing or less stuff is getting tested.

“But we definitely don’t see a revenue decline in California to correlate with (the testing batch downturn).”

Connors added that California is a “data-starved” market, which makes it all the more difficult to properly analyze the BCC’s testing lab reports.

Product shortage and price spikes?

The drop in batch testing also coincides with thousands of temporary business licenses – particularly cultivation permits – that have expired, a trend that began earlier this year.

That may mean the testing data indicates market contraction, fewer growers sending product to labs and a drop in legal MJ product in the overall supply chain.

“My first thought is there were like 8,500 temporary (cultivation) licenses that were originally issued, and now … the number is like 2,500,” said Graham Farrar, owner and CEO of Glass House Farms in Carpinteria. “You have to assume there’s some level of reduction in product that’s going into testing.”

Asked what he think that portends, Farrar said, “Prices are going to go up is what’s going to happen.”

Morgan Paxhia, co-founder of San Francisco-based Poseidon Asset Management, had a mixed reaction to the data.

Like Headset’s Connors, all the indicators Paxhia has seen are that the legal market is still growing and doing well.

But, he added, “What this tells me is there’s going to be a spike in prices this summer, because if this ties back to inventory, that means we have dwindling inventory. That would lead to product shortages, outages and potential volatility in pricing until this starts trending back up again.”

Paxhia and every other industry source who spoke with Marijuana Business Daily struggled to find an explanation for the trend, however, and the lack of consensus suggests there simply isn’t an answer to be had yet.

Steep Hill’s Daniel concluded, “If I let two months worth of bad data bug me, I would have shot myself a long time ago. Until it looks like it’s dire – I’m staying optimistic.”

John Schroyer can be reached at [email protected]

Maggie Cowee can be reached at [email protected]

10 comments on “Downturn in California lab-tested marijuana batches adds to confusion over state’s supply chain
  1. Pat on

    1. “Is that reasonable to expect from a booming market? I don’t think it is,” said Swetha Kaul, the chief scientific officer of Santa Ana-based testing lab Cannalysis.

    2. “It’s difficult to come to a full conclusion without more data points,” said Liz Connors, director of analytics at Seattle-based Headset.

    3. Asked what he think that portends, Farrar said, “Prices are going to go up is what’s going to happen.”

    Immediate questions that come to mind: 1 ) Why aren’t top state officials answering these questions? Why haven’t they anticipated these kinds of issues, now with state law 3 years old? 2 ) Why is this even happening at all?

    The “confusion” around this “law” in its entirety, seems to be deliberately propagated by the state itself. There is no real transparency around fundamental issues concerning the implementation of this scheme. It’s been this way the whole time.

    This particular issue obviously caught the attention of not just one investigative journalist, but two. And, it really does seem to be a credible concern. Those tightly coddled industry insiders interviewed for this piece that don’t see anything thing to be concerned about, are likely speaking from a very self-interested viewpoint, and not from one whom has concerns for the ca. citizen at large. Meaning, they’re probably not telling the truth.

    The state is ( safe to say at this point )/has screwed the pooch as it relates what they and their criminal puppeteers have done with the roll out of this program. Who couldn’t see it? Of course they did. They were just hoping to b.s. and smoke and mirror it for as long as they could. And so with this, they’ve lost all credibility.

    Fast forward exactly 80 yrs from the 1939 The Wizard of Oz ( The state and its criminally minded oligarchs ) has turned around in his booth of deception immediately after Toto pulled back the curtain, to find Dorothy ( F’d over licensees, prospective licensee’s that never stood a chance, the purchasers of state sanctioned product, and the ca. citizenry at large ) sternly looking at him squarely in the face in a double flip off pose. This, right before she kicked him in the b*lls.

    So, if prices are going up ( from an already artificially inflated price point; and with no real justification ) from here, what does that portend for the black marketeers future in general? What were the lobbyists, the legislature and the regulators thinking? They weren’t. They were just surmising: What can “I” get from all this…

    Reply
  2. Chris Cahill, JD MBA on

    The high cost and complexity related to each test and batch will undoubtedly lead cultivators and manufacturers to maximize the quantity per test. Huge testing cost difference per unit if you are running small lot sizes vs, the 150,000 limit allowed per § 5708. unfortunately, this greatly reduces the variety of SKUs on shelves and economically pinches the small, craft model that is so popular.

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    • Lefty on

      The problem in California is the black market is bigger than recreation and the prices are less. These cities have been allowed to put excise tax on gross reciepts on top of all the state and sales tax and the cost to grow indoors because of power consumption drives the price up in dispensaries. California needs to fix the taxes to allow marijuana companies to make money otherwise the black market will stay strong. The dip in industry is really based on pricing and taxes people arent buying. Growers are backdooring their crops which will drop in testing no taxes no testing.

      Reply
  3. Dan on

    Downturn is because of the licensing crisis in CA. Less grows for product, less labs to test that product, so there is less tested product on the market. Shouldn’t be a surprise, MJBiz wrote about the expected downturn in the months leading up to June back in February or so of this year. The supply of cannabis in CA is fine, the problem is that much of it is found in the black market (without testing or test results obviously). CA needs to focus on bringing clarity to the rules and easing up the extreme regulations which are obviously suffocating the legal industry and allowing the black market to continue to flourish.

    Reply
    • Nick on

      Dan, you provided a more clear and convincing explanation than anyone quoted in the article or the author of it.

      Remember folks, this is all based on data submitted to the BCC, and the data submitted to the BCC is incomplete.

      The state has been sluggish in issuing annual licensees, and the state has done virtually nothing to enforce the testing rules. As a result, most of the operators are still on temp licensees (soon expiring), meaning they aren’t in METRIC. The only enforcement of the testing rules comes from the retailers, most of whom file COAs internally but don’t know how to thoroughly read them. This opens the door for operators to under-test.

      I know first hand that most operators are still doing Phase II testing, or R&D testing, and passing that of as a compliance test without submitting it to the BCC. It saves them time and money and when they fail they have more options. The labs can’t stop them from doing this, and the retailers don’t know what to look for. Only the state can take action here, but the state isn’t doing anything about it because the state is preocupied just trying to get through the licensing backlog.

      Just look at the failure rates of the different products according to BCC records (I can’t believe this wasn’t mentioned in the article or by any of the lab people quoted). This is clearly not a representative sample set, not when the failure limits are so stringent. It should be obvious to anyone familiar with the dynamics of nascent legal cannabis markets that the BCC’s testing data is not representative of reality. It’s clear that most tests –pass or fail– are not being reported to the BCC and I’d wager that most of them aren’t even being tested to the full intent of the law.

      The solution here is the state needs to issue those annual licenses, get everyone in METRIC, and start enforcing the testing requirements. Hurry up, the world is watching.

      Reply
      • Pat on

        Nick, I hate ( not really ) being being so cynical/pessimistic around this; but how much time does one give this? Esp. with how it’s rolled out? The state’s intentions were/are there for every one to see, that’s paying attention and knows how people operate.

        Your suggested solutions are coming up a day late dollar short for everyone else that understands what’s happening here. The black market is only going to grow from here because the state is very corrupt around cannabis legislation/regulation.

        This black stallion busted out of the barn as soon as it realized that it was going to be slaughtered and sold on the Japanese market. And, he’s been out on the prairie mating and multiplying like crazy; in the hopes that he can some day lead his herd back to where his almost butcher lives and trample his property to smithereens.

        Reply
    • Pat on

      Dan, I think you’re right. But, Ca.’s rules are mostly made up ( to serve as barriers/trip wires ) so that what comes out at the end of the spigot is exactly what the state and original oligarch’s want to come out of it. It keeps the prices high/taxes high. This “law” was designed to serve them, primarily.

      If one brought clarity to the current rules, the states’ fraud would be even more exposed. It’s too late. The black marketeers, and others whom are familiar with how all of this has gone down , have enough dots on the graph to see how well things would bode for them should they attempt to “re-legalize/legalize.”

      The state is playing a game of poker with our tax dollars; against a growing group of people that are aren’t playing. That’s because the rules of the game don’t apply to the state. They’ll ( the state ) come up w/some bull sh*t to justify why their hand should beat yours. Every time. That’s because they can do it at gun point, extortion, and mugging; among other tactics. The town sheriff in that saloon is in their pocket. As corrupt as sh*t. This is all going to go back to pre-1996. And, it’s never coming back. The state’s entirely to blame. And, at this point, there’s plenty of evidence to support this notion.

      Reply
  4. Paul on

    Beyond the question of what causes fluctuating test volumes, the BCC Weekly Lab Test reports mentioned in your article prompt another question: why have there been so few lab tests for the entire 40 month period that the BCC reports cover? For the 40 weeks covered by the BCC report, there were 56,609 Certificates of Analysis, an average 37 tests per lab per week (based on most recent BCC license data for labs). That is counter-intuitive given all the stories about how inadequate lab capacity has resulted in long turnaround times for cannabis producers. Any lab can easily handle 37 tests day week, 8 tests a day. Any thoughts on this question?

    Reply
  5. Brett on

    As someone who owns and runs a licensed Distributorship, I can tell you why we test less…

    The market and margins are currently terrible, so we must ensure we don’t wastefully test, or take on excess product, as we did for much of 2018. For many months, optimism and disorganization both encouraged more R&D and smaller batches. Margin-hunting has lessened both.

    Reply

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