Inventory, Operations at Stake Under Washington Cultivation Limits

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.”

7 comments on “Inventory, Operations at Stake Under Washington Cultivation Limits
  1. kerry blasdel on

    This formula is a disaster. I am a landlord to the industry in Colorado, and if we had to deal with these artificially imposed restrictions, it would add yet another layer of uncertainty. I am thinking while reading this that I would have to partition my building in these arbitrary square footage categories just to allow the growers permission to submit a cultivation application to the state. So glad I am in Colorado!!!

    Reply
  2. Mr Pothead on

    This will not work. I suspect whoever came up with this plan was a bit stoned at the time.

    One big plus to legalization is removing criminal control over supply. If the state creates a supply and demand shortfall, someone will fill it. The issue of cartel controlling supply will not be addressed. In fact, a guaranteed market share will be allocated to them.

    Perhaps someone should go back and review this without raiding the staff room cookie jar first.

    Reply
  3. Shawn DeNae on

    No one wants a lawsuit; we want a workable system that provides a clear path for those that choose to move from the unregulated markets into the licensed and regulated market. That path is the only way to make a dent in the untaxed, illicit market that has thrived for decades.
    That means the current commercial MMJ stores and growers NEED A LICENSE to be somewhat protected while the recreational markets become established. Many medical business also want to have a recreational division and in WA that is not a defined path like it is in CO.
    The LCB rules are changing even during this short application time frame and that is both not surprising and frustrating. We are in new territory and flexibility by the LCB and the applicants is key to navigating this terrain.

    Reply
  4. the captain on

    It’s smart to reduce the canopy sizes to one license and 70% of the license applied for. For the system to work, there needs to be some restraint. If you let all the piggys feed at the trough until they’re full then what will be left remaining is a few big piggys..for the system to have any stability it needs to have as many growers participate as possible. This will create a healthy competitive market, not one controlled by the few largest growers. This means varried products, competitive pricing and a diverse group of buisnesses. One can not expect the “black market” to buy retail overnight. It will be a slow process that will play out in a healthy way. What no one ever tells you is that the Colorado market couldn’t start producing product for retail until Jan. 1st…so by my calculations those crops will not be ready for atleast 10-12wks. Expect to see the demand there filled shortly. Washington may or may not have the same problem…Growers large scale growing under the guise of medical, without a actual dispencery will be first to market with their product, overpriced, hit or miss quality, and confident of their position, will soon find their positions slipping as everyone else soon spools up. The worst part of it all is that patients will suffer without stand alone medical stores, prices for them will go up as they compete against retail buyers, products will move away from medically benefitial RSO oils to CO2 extracted propolene glycol added vapor pen friendly oils to meet the first time recreational market users demands, but one thing is for sure, the state will make money money, whether anyone else does or not.

    Reply
  5. Shawn DeNae on

    Yes, reducing licenses to 1 makes a lot of sense at this point. Now give us a medical license and we are good to go! Our 15 day ‘look the other way’ period will be filled by the medical and/or underground markets and then it’s a race to be among first to market. Hopefully, we in WA have enough retail stores to take all the weed that’s going to be grown!

    Reply
  6. the captain on

    No, I do not believe there will be enough stores anytime soon. One issue that retail as well as production will face is building and construction permiting. It’s never quick, and trust me when I say, no one’s going to help you get your permit though quick or easy. Everyone should be prepared for the bottom to fall out of pricing. No matter what slick snake oil salesman will attempt to sell the public, one thing is true people who smoke, they want to smoke the best for the least. This is the key to sucess, and oh yeah..keep the overhead low and have lots of money to burn, you’ll burn it for a while, and the bigest players will burn the most.

    Reply
  7. Miss Fit on

    Two things we know for sure; since it is one of the oldest cultivated plants; someone is going to smoke it and someone is going to make money for growing it.

    Who do we want to smoke it?

    Who do we want to grow it?

    Reply

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