By John Schroyer
By some measures, the Arizona cannabis market is riding high.
The state reported $112 million in sales in 2014, making it one of the largest MMJ industries in the country. That number is set to get even bigger this year, and Arizona is one of the states in the spotlight to legalize recreational sales of marijuana to adults in 2016.
Overshadowing those positive indicators are regulatory questions, concerns of over-supply in the market, and fractious debates within the cannabis community regarding the terms and language of the proposed recreational legalization.
All of which leaves current and prospective marijuana entrepreneurs in a state of flux.
New MMJ Entrepreneurs in Holding Pattern
The original timeline for allowing more businesses to apply for dispensary licenses was set for May 18 to June 1 this year. However, Gov. Doug Ducey ordered a moratorium on rulemaking for state agencies as one of his first official acts after his January inauguration. That order impacted the state Department of Health Services (ADHS), which oversees the MMJ program.
As a result, the department has pushed back the application process to “late 2015,” according to the department’s site.
However, Jeff Bloomberg, the manager of the ADHS Division for Planning and Operations, stated in a letter to industry consultants representing the cannabis industry that the department “does not believe it is possible to accept and process dispensary registration certificate applications until the rulemaking is completed and effective. At this time, it is not possible to estimate when (that will be).”
Add to the mix the departure of the head of the state’s medical marijuana program early this year.
The upshot of the uncertainty: Businesses that had begun planning their financial models around the initial application timeline are now forced to sit on their hands and wait for news.
“These are very costly delays,” said industry consultant Pamela Epstein, referring to real estate, legal and other expenses required to maintain a holding pattern. “There’s only so much money in the pot to go around.”
Market Saturation Coming?
Real estate broker Roy Grinnell started looking into possible sites for MMJ cultivation companies last year, prompted by client interest in the industry. He thought it best to do his homework and figure out how he could help customers who were looking to start growing.
What he found was eye-opening.
“We just learned that the trajectory of these cultivations is pretty advanced,” Grinnell said. “There’s groups out there that are trying to make big plays and do massive cultivations on a massive scale… They’re buying large buildings, large pieces of property, permitting these things, and there’s over a million square feet now that’s been permitted and is located on over 26 million square feet of land.”
That could lead to over-production in the state, Grinnell said. His concerns are backed up by numbers released by the Benchmark Commercial Real Estate (BMCRE) in Arizona.
The data points to the possibility that cultivators in the state could produce between 150,000 pounds and 200,000 pounds of MMJ once all the permitted grows get up and running, which is 10 times the consumption of the legal MMJ market in Arizona last year.
And Grinnell admitted that’s a conservative estimate. If Grinnell’s numbers are accurate, the actual production capacity could be upwards of 2.6 million pounds per year.
Such supply levels could lead to cuthroat price wars, possible diversion to the black market, and cultivators going under because not all of them will be able to find buyers for what they grow, Grinnell suggested.
“It’d be kind of crazy at this point to even do a cultivation just because there’s going to be so much supply,” Grinnell said. “They may already be losing money in some cases or barely breaking even. And if there comes a price war, and those margins decrease, it’ll be hard for them to keep their doors open.”
Political Infighting on Recreational Initiative
There are also signs of a rift developing in Arizona’s marijuana community over recreational legalization language that’s being prepared for the 2016 ballot.
Specifically, some patient advocates are accusing Marijuana Policy Project of removing home grow rights from the measure, so that the only widespread legal source of cannabis would be dispensaries and rec shops. That didn’t sit well with a lot of MMJ patients and other stakeholders, particularly because home cultivation is already limited to only MMJ patients who live at least 25 miles from a dispensary.
Safer Arizona, a marijuana political action committee, went public about the disagreement.
“We told MPP that if they didn’t get (home grow) language back in the initiative, then groups like Safer Arizona and some of the other groups we’re associated with would not be able to support their initiative,” said Robert Clark, co-chair of Safer Arizona and a MMJ patient himself.
Clark accused MPP of bowing to the dispensary operators and prospective recreational shop owners who don’t want to sacrifice possible income to home cultivators, and who are likely key targets for MPP’s fundraising efforts in the state.
“Some of the dispensaries in the state did not want home grow in the language, and they threw a fit,” Clark said. “They’ve got the biggest amount of money in the game, so MPP yanked home grow. That kind of upset the cannabis community.”
Clark did say that Safer Arizona had been involved in negotiations with MPP, and he was hopeful that home grow rights would be ultimately included in the ballot language proposed for 2016.
Mason Tvert, communications director at MPP, emphasized that “nothing is final” yet on the ballot measure’s terms, and that fundraising in the state has not even begun. But he and others are still trying to figure out how to bring together a workable political coalition that can unify both philosophically and financially behind a recreational ballot initiative campaign to get legalization approved.
“Nobody wants to allow home grow more than we do,” Tvert said. “But would we rather… replace prohibition with a system where marijuana is legal and being treated similarly to alcohol, and then allow for adults to be able to grow? Or would we rather lose? Right now, we’re still trying to determine what is the best way forward.”
John Schroyer can be reached at [email protected]