California Marijuana Notebook: More industry shrinkage may be on the way

(This is the first installment of a new regular column delving into the widely varied and complicated issues surrounding California’s immense cannabis market from the vantage point of Marijuana Business Daily Senior Reporter John Schroyer. Based in Sacramento, he’s been writing about the cannabis industry since joining MJBizDaily in 2014.)

Anyone who’s actively involved in the California marijuana space can tell you the one overriding theme of 2018 thus far has been confusion.

There are far more questions than answers at nearly every level of the supply chain – from growers to retailers to ancillary businesses and everyone in between.

Annual permits and regulatory confusion

One of the major regulatory issues that will hit every licensed company in the California supply chain will be when the state’s Metrc traceability program is implemented. And that will be triggered by the issuance of full annual business permits that will replace the temporary licenses that every fully legal business has been operating under.

But there’s still no firm date for that to happen, or even for when full annual licenses will be awarded by any of the three state agencies that oversee the industry. The closest estimates I’ve heard are some time in the next two months.

As of Aug. 2:

  • The Bureau of Cannabis Control had received 841 annual license applications.
  • The Department of Public Health had received 283 annual license applications.
  • The Department of Food and Agriculture had received 1,740 annual applications.

This adds up to a grand total of 2,864.

That’s in contrast to the roughly 2,700 individual businesses that had received temporary licenses as of early July, according to an analysis by Marijuana Business Daily. And most – if not all – of those 2,700 hold multiple licenses (such as retailers that also have transport-only distribution licenses, or licensed grow operations that hold multiple permits).

So far, there’s been no mandated statewide inventory tracking system, and each company is supposed to have been keeping its own inventory records. Many insiders are dubious that every company has kept solid records, but that’s another story.

Once Metrc is operational, each annual licensee will then be somehow responsible for uploading its own inventory data into the system.

But there are unanswered logistical hurdles that have been posed to me by a number of industry sources. For instance:

  • Many temporary licenses are still good until November, so what will happen when one business with an annual license tries to finalize a business transaction with a temporary licensee that doesn’t have Metrc access yet? Will that company be able to do business?
  • What will happen if a company for some reason isn’t able to upload all its inventory records since January? Will it be fined or penalized in some way? Will it have to shut down temporarily?
  • What will happen if a state audit is performed and inventory discrepancies are found? More penalties? If so, how severe?

There are probably plenty of other questions from operators, but what this underlines is the widespread industry confusion about how various regulations are supposed to work.

Only the wealthy?

Perhaps more significantly, the start of annual licenses will almost certainly lead to another round of market contraction, even if it’s a temporary one.

I count the first as New Year’s Day 2018, when the fully legal market launched and licensed companies were forbidden from doing business with anyone who didn’t have a state permit. The situation squeezed out tens of thousands of unlicensed growers, edibles makers, retailers, etc.

I’m expecting further contraction because annual licenses are going to be a much more difficult threshold for companies to cross, as opposed to the temporary licenses.

For instance, one consultant recently told me she’d visited multiple indoor grows that don’t have sprinkler systems to fight fires. That is a direct violation of local fire codes, she said, and it means those companies will either face a delay in getting their annual permits or they’ll have to spend a lot more money to come into full compliance. Or both.

It may be that all existing licensees do wind up getting annual permits; but many companies have yet to make it back to the market after the July 1 transition just a few weeks ago.

That was when new packaging, labeling and testing requirements kicked in, and the result was a massive exodus of various brands from retail shelves because many companies found themselves either out of compliance or unable to find testing labs to provide them with a passing grade quickly enough to stay on those shelves.

Some brands have yet to make a comeback, although several of my sources said they believe many businesses will be back after they regroup.

My guess is the same thing is going to happen with annual licenses. But it’s probably going to be even more extreme, or lengthier waits at least, before a lot of companies are able to make their way back to market.

So, the legal market is likely to get even smaller this year, which leads me back to a conclusion that many others have been predicting for a long time: “Only the big, big money is going to be able to do this,” an unlicensed delivery operator told me last month.

Los Angeles attorney Steve Meister recently expressed a similar concern about his city because of how long L.A. is taking to issue business licenses. The city  was supposed to begin its second round of licensing in April, but that deadline got pushed back to August, which has cost plenty of operators plenty of lost revenue.

That automatically reduces the pool of potential business owners to only those that can afford to blow through large amounts of capital while awaiting business permits.

“I’m concerned about the possibility that the ultimate effect of all of this across the state will be to create an industry that will forever be known as Big Weed, just like Big Pharma,” Meister said.

To others, though, that situation has already happened.

“Regulation has significantly encouraged a massive consolidation of the California cannabis industry, and it’s being consolidated by large, well-funded groups, many from outside California,” said Morgan Paxhia, co-founder of San Francisco-based Poseidon Asset Management.

John Schroyer can be reached at [email protected]

8 comments on “California Marijuana Notebook: More industry shrinkage may be on the way
  1. Brett Roper on

    Some of this ‘presence shrinkage’ may be related to existing businesses (many good operators) not being able to meet the no tolerance testing requirements as well as restrictions on pesticides and other filing elements. The example noting no sprinkler systems being present can on rare occasion be allowable under local variance as well as agricultural use and application. We have seen this variance in other states and would certainly expect the various planning and permit arms within county and city elements to ‘do their own thing’ relative to granting such variances. In the end without a well organized oversight element, California will continue to suffer the same growing pains many other states have suffered in the past including Colorado.

    Good fortune to all those that stay the course and are able to make these compliance hurtles successfully.

    Reply
  2. This guy on

    Temporary licenses can do commerce with annual license holders, and with the completion of the annual app the temporary gets approved so there any lag time unless your not up to code with your local municipality, because they will shut you don as highlighted with the indoor grow….

    Reply
  3. Eric Geisterfer on

    The notion that thousands of unlicensed growers, edible makers etc were squeezed out of the market on 1/1/18 is not quite true. They just started supplying all the illegal dispensaries which still number in the hundreds.

    Reply
    • Pat on

      That’s right Eric. It’s the bone the state cannabis regulator’s tossed at the Police Chief’s Assoc. and others like them to keep them happy/at bay. The state had to have known ( as the Police Chief’s ) that the black market was going to go bonkers w/their scheme. The cops will now “have something to do again..” And for what? And for how much ( in tax dollars )? And for what societal gain? The state doesn’t give a f**k about the vast majority of the citizenry esp. those in the cultivation ranks.

      Reply
  4. Hastings RH on

    regulation is political speak for let’s put the little guy out of business. 90% of investors will lose money. The state would haul in a fortune in taxes if not for the unaffordable cumbersome regulatory and burdensome compliance issues.. Forbes estimated the Cali pot crop at 74 billion back in 2002 so at the current 50% tax rate that’s 37 billion but whatever the black market is thriving and politicians are still stupid or corrupt.. gotta love “legalization”

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  5. Jef Feltman on

    They have put all of the mom and pop growers out of business by the cost of license. We are only intrested in making 100k a year so 120k for licensing is not helping us. We are not looking to go black market again. We do not want to triple the size of our operation to make enough money to get licensed. Most of us do not have the resources to enlarge our operation and get cash for licensing. Before it was me and my wife helped as needed. Now i would need to hire people the help me which means even more cash is needed up front.
    About 2 million in cash is needed to even think about starting up now. I started with 600 watt hps bulb, won a cannabis cup, and grew to 400k a year with 3 employees, we worked with profit sharing. None of this is possible now. Even my county requires 20 acres to grow on now.
    Yes, the state has put us out of business. I taught others to grow and let them move to opening up their own grow. I was happy making enough to support my family and not interested in creating a large operation. Now i can only grow for my personal stash. I have yet to be hired by another company as they tell me we do not age discriminate then hire someone in their 20’s.

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  6. Pat on

    This is all ( not ) very amusing. That even as the state grapples with all of these so called “unanticipated pop-up problems” that the rich and connected still get to participate ( while breaking the rules AND staying permitted and the state giving them a pass ) and move forward with their operations and further entrenching themselves in the market place at the expense of the small operator whom with each and every passing day loses untold opportunity costs that that unfair advantage placed upon that group: the 99%. However, if any of these 99% disenfranchised operators dares to compete with the former ( whom are clearly breaking the rules with the states’ eyes wide open ) OMG: This group is subject to all kinds of really bad stuff. Really bad. To the point of taking away their freedom and everything else in between.

    The state legislature was well aware of the vast majority of problems that are occurring now. The many small operators whom came to the state capitol to state their concerns and to ask relevant questions that touch upon the “confusion” that the state is having now…were summarily ignored or not given a reasonable opportunity to speak out. The state and their “friends” already knew what they wanted and what they were going to do. The state was just going through the bare minimum motions and pretending to be democratic about the process that has placed this situation where it is now.

    Reply
  7. George Bianchini on

    This is a total success for the BCC. Let the market fail by enacting onerous and unattainable regulations and then turn it over to the big money companies . The ones nobody ever heard of while the rest of us built, bled for and were terrorized by the (system) Gavin Newsom needs to clean house after his landslide win for California Governor in November. We need to petition him to start by firing all BCC Board Members that have histories of working in industries that kill people, this includes tobacco and alcohol executives. Also the two union board members need to be on the other side of the table. They need to represent the workers of the industry not the destroyers of the industries. Let the unions hold weekly workshops with industry stakeholders to make a regulatory process that deals with this beneficial plant that has never harmed anyone that doesn’t abuse it. About 5 or 6 pages of do’s and don’ts.
    If the state refuses to comply with prop 64, I think it’s time for the next public initiative. This time we include the rules, regulations, and board members and not let Sacramento kill us off slowly.
    Gavin, this could be your do or die on the federal level. Please help us.

    Reply

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