California Marijuana Notebook: How illicit market competition, industry divisiveness hound the state’s legal cannabis market

(This is a regular column that delves into the 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 written about the cannabis industry since joining MJBizDaily in 2014.)

It’s an open secret in the California marijuana industry that since the state launched licensed adult-use sales in 2018, many – if not most – legal operators have done business illegally to some degree.

And that’s still the case, according to Chris Coulombe, CEO of Sonoma-based distributor Pacific Expeditors.

“I have to imagine that 60% of the market overall is probably playing in parallel markets, but I don’t think they enjoy that. It’s truly a decision of necessity,” Coulombe told Marijuana Business Daily.

“You have a lot of retailers that are selling knockoff products … and you have cultivators that are selling product out the backdoor so they can keep their business alive.”

As one source told MJBizDaily in early 2019: “Anybody who’s profitable still has at least one foot in the black market.”

Here’s a breakdown of the situation:

  • California law enforcement and state regulators have yet to address much of the rampant illicit-market activity.
  • Too many instances of illegal-market activity exist for short-handed authorities to investigate.
  • There remains a glut of illegal growers across the state.
  • California has long produced far more cannabis than is consumed there, and as a result, the state has served as an exporter supplying illegal markets across the country. As long as that demand remains, some growers will break the law to turn a profit.

“For every one (marijuana farmer) that’s licensed, there are four or five that aren’t,” Hezekiah Allen, board chair of cannabis farmer cooperative Emerald Grown, said in January when asked to estimate how many farmers still operate in the illicit market.

To date, there’s not enough incentive for illegal farmers to join the legal market, Allen and other cannabis industry insiders said.

And because there are not enough retailers in the state to handle all the current production, it’s anyone’s guess when the legal market will supplant the illegal one.

That results in a one-foot-in, one-foot-out approach that will continue for the foreseeable future – at least until California figures out how to make its legal market more attractive to consumers through lower-priced products that are more competitive with illicit businesses.

This means executives such as Coulombe – who said he does business only with those who are 100% legal – will continue to have a hard time finding companies to partner with that won’t expose them to legal difficulties.

Industry fragmentation

A basic problem facing the California industry is that it’s arguably its own worst enemy.

That’s because the state is so large and diverse that political unification has eluded it.

Disparate camps evolved leading up to the vote on Proposition 64, which was on the 2016 ballot to legalize recreational cannabis in the state.

Many in the industry voted against Prop 64 for various reasons, and still today there’s a host of trade organizations across California that often have different messages for elected officials and regulators.

That fragmentation is a key hurdle to any type of progress in the political arena, many insiders acknowledged, because it makes it difficult to centralize funding for any one lobbying effort, ballot measure or legal proposal.

“The divisiveness among the industry is a really difficult component and one that (the California Cannabis Industry Association) is absolutely committed to working on in 2020. We’re sending a ton of olive branches,” CCIA Executive Director Lindsay Robinson said in January.

Multiple marijuana legalization ballot measures were filed leading up to the 2016 election, and ultimately, much of the industry coalesced behind Proposition 64 because billionaire Sean Parker decided to throw millions of dollars behind it.

That kind of funding was nowhere to be seen for any of the competing initiatives, and no similar wealthy backer has yet emerged to back any significant push to fix the current system – either by funding lobbying efforts, more local ballot initiatives or another statewide ballot question.

“There is enough money in the California cannabis industry to put whatever we want on the ballot,” said Andrew DeAngelo, co-founder of Oakland retailer Harborside. “There’s just not enough willingness and unity to get it done.”

DeAngelo said the California industry is a “circular firing squad” that needs to “get its political house in order” before any serious systemic changes will be able to pass the Legislature or voters.

Ongoing manufacturing, testing issues

California marijuana producers are still dealing with systemic problems in the lab testing process, said Kenny Morrison, the president of the California Cannabis Manufacturers Association.

One hurdle, he said, is that the Bureau of Cannabis Control doesn’t have predetermined qualifications for new testing labs to ensure that the facilities will produce accurate results, and if a lab refuses to retest, there’s currently no avenue for manufacturers to get a second test.

For instance, Morrison said, a batch of infused beverages from his company, VCC Brands, was found by one lab in early 2019 to contain zero THC.

Some of Morrison’s employees sampled the beverages to see if the lab was right, but the staffers said they felt the same effects they would from a normal batch of infused products containing THC.

That meant the lab was wrong, but there was nothing Morrison could do about it.

“According to the regulations, I wasn’t allowed to go test the products again,” Morrison said. “We ended up destroying the batch.”

That speaks to a broader concern of Morrison’s: basic quality control and the potential for incorrect potency to end up on product labels.

“Do you see how dangerous that is? I could have relabeled (the beverages) to match the (test results), that it contained no THC, but I would have been putting consumers at risk,” Morrison said. “That would ruin my brand.”

The bigger issue, he said, is state regulators are more focused on catching producers that inflate THC potency than they are on accurate testing results.

Several other manufacturing issues remain unresolved, Morrison said, though they could be fixed via legislation, including:

  • Increasing the allowance for potency testing variances from 10% to 12%.
  • Allowing manufacturers to arrange for testing instead of requiring distributors to do so.
  • Permitting labs to test products before they’re packaged for retail sales.

(Click here to read the previous installment of this ongoing column.)

John Schroyer can be reached at [email protected]

5 comments on “California Marijuana Notebook: How illicit market competition, industry divisiveness hound the state’s legal cannabis market
  1. Rod Gass on

    Very well reported, John Schroyer.

    If California’s Cannabis Culture, which has existed for at least 200 years, decides to reject the politics of the current $64 crowd, it’s because $64 is no good. When we combine the abhorrent laboratory operations, it becomes rotten to the core.

    Of course 4 out of 5 cultivators are still outside of and opposed to, the State of California being installed as the middleman between producers and consumers. The CBCC is pushing immoral treatment of mankind’s trusted medication. Consumers want what California’s cultivators have reliably produced … not what the taxman wants.

    It’s time to begin the recall of $64. It’s a gaping wound that needs to be disinfected.

    Reply
  2. david on

    The State has made an imperfect law (prop 64), into a calculated disaster. The consumer will always set the marketplace. The BCC’s onerous regulations have created an unstable market. Instability creates a void needing to be filled. Consumers are seeing this disconnect between the voters will, and the politicians attempts at profiting, as just another new attempt at a war on drugs.
    We need to address this as just that, a new war on cannabis.
    So let’s just get in on! The con is over. Cannabis was not legalized, it just has a new overlord.

    “To the victors belong the spoils.”
    Andrew Jackson quotes (American 7th US President, 1767-1845)

    Reply
  3. george on

    If the unions truly are involved to be advocates of cannabis workers, they need to exit the BCC Board, and work to ensure a new just cannabis regulatory scheme. Their first step should be to sue the BCC for violating Ca Code 26014. Nothing is going to change until the rules for this plant are realistic to comply with. Until then, this NEW war on cannabis can only crash and burn. The BCC version of Prop 64 is an unjust law!

    On the Just Law vs. the Unjust Law:
    “One may well ask: ‘How can you advocate breaking some laws and obeying others?’ The answer lies in the fact that there are two types of laws: just and unjust. I would be the first to advocate obeying just laws. One has not only a legal but a moral responsibility to obey just laws. Conversely, one has a moral responsibility to disobey unjust laws. I would agree with St. Augustine that ‘an unjust law is no law at all.’
    [ Martin Luther King, Jr., “Letter from a Birmingham Jail,” April 16, 1963. African Studies Center, University of Pennsylvania.]

    If 60% of the legal supply market is serving the black market and 80% overall are black market, something is serious wrong with the law!

    Reply

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