Inventory, Operations at Stake Under Washington Cultivation Limits

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by Fred Dreier

Washington State’s cap on recreational marijuana production could create a variety of consequences for the state’s cannabis industry, from price hikes and inventory shortages to an unprofitable system for growers.

In 2013 the state’s Liquor Control Board established a 2 million square foot canopy cap on the area used for recreational cannabis production. The canopy measurement equates to 46 acres of total area that can be used to grow plants; but the measurement does not include a specific plant count.

According to the board’s estimates, a 2 million square canopy can produce approximately 40 metric tons of “usable cannabis” and 40 metric tons of production for concentrates.

But a recent study conducted by the RAND Corporation pegged Washington State’s total cannabis consumption in 2013 at 175 metric tons, which included medical and black market purchases.

So with production capped at approximately a quarter of what Washingtonians already consume, many fear that the industry will be unable to meet the demands of the recreational market.

And growers who are applying for cultivation licenses worry that the state may shrink their production size.

“The question becomes what exactly happens when [the industry] meets the two million limit – and they are going to meet it,” said Hilary Bricken, an attorney in Seattle who represents cannabis clients. “What seemed like a workable system could turn into a disaster.”

Impact on Inventory

If Washington State’s recreational market behaves anything like the market in Colorado, the industry is likely to see a sizable uptick in customers once legalization rolls out – and the state will miss out on the opportunity to bring transactions from the black market to legitimate, licensed tax-paying businesses.

Ryan Agnew, a Seattle attorney who has worked closely on legalization efforts, said lawmakers anticipated the gap in supply and demand, because they assume that the majority of customers will continue to purchase from the black market and existing medical marijuana dispensaries.

“The board believes the black market will continue,” Agnew said. “There is this thought that 25% of the entire market is the realistic target [for recreational marijuana].”

The rules were drafted before the state saw what happened in Colorado: long lines, inventory shortages and price hikes during the opening month of Colorado’s recreational industry.

Nobody knows what percentage of the state’s total cannabis sales comes from the legal recreational market. But one retail owner said he had seen a 300% increase in recreational revenue over his revenues from medical marijuana.

If that trend continues in Washington, the recreational market could simply run out of inventory.

Bricken believes lawmakers adopted a conservative approach to the cultivation size because they did not want a surplus of cannabis sitting in the state.

“I think they were more willing to let the system run out,” Bricken said. “So in the beginning it will be just like what we saw in Denver.”

Growers Left Unsure

Cultivators also worry that the canopy limits could force the state to reduce their allotted growing acreage. Washington State did not establish a cap for the number of licensed growers, and more than 2,600 growers applied for licenses.

Bill Wagenseller, a Seattle-based cultivator, said if the state forces him to downsize his grow, he would be left with few options.

“That becomes a lawsuit in my book,” he said.

The Liquor Control Board is currently vetting the applications, and it will eventually distribute production licenses in three tiers based on square footage. Tier 1 is for less than 2,000 square feet, Tier 2 is from 2,000 to 10,000 and Tier 3 is from 10,000 to 30,000.

Growers can apply for up to three licenses, and some ambitious growers have applied for the maximum of three Tier-3 licenses.

“I don’t think they can afford to give 90,000 square feet to anybody, if you do the math then that is only 22 growers,” Wagenseller said. “I suspect they’ll start sizing people down to allow everyone who qualifies into the system.”

Wagenseller says this is unfair to cultivators who have crafted their respective business models on their allotted square footage. He has applied for a Tier 2 license.

Bricken said many of her clients are simply applying for the maximum allotment of square footage, and then praying that regulators deny most of the applicants.

“They will figure out the logistics afterward,” she said. “That’s no way to plan your business.”