In California, Many Growers Will Stay Underground

Real Talk: Some Growers Will Remain Illicit

He’s not an illicit grower, but he understands their dilemma: Hezekiah Allen works to create an easier pathway into the legal industry as a lobbyist for the California Growers Association. (James Tensuan for Leafly)

Editor’s note: This week (June 19, 2017), Leafly launches a four-part series on California cannabis farming by Paul Roberts, author of “The End of Food.” Roberts examines the choices California cannabis growers face as the state enters the legal era: Scale up, build a craft brand, join a cooperative, or go deeper underground. Today: What happens to those who choose to go deeper underground?

Here’s an unhappy fact about California’s newly legalized cannabis market that reform advocates don’t talk much about: Most of the state’s existing cannabis farmers probably won’t be going legal.

There are an estimated 50,000 growers in California. Not all will go legal.

In some cases that decision will be an act of rebellion. After decades defying prohibition and dodging arrest, some long-time growers have no interest in submitting to a world of regulations, testing, and taxes.

But for other farmers, skipping the legal market will be more an act of desperation: these farmers will try to make the transition to licensed production—either by scaling up, going the craft route, or joining a co-op—only to be thwarted by the tough new realities of farming in a time of rising regulation and ever-thinner margins.

Whatever the cause, with the arrival of a state-licensed medical and adult use market in 2018, these frustrated farmers will likely to do one of two things.

Many will probably retire from farming, or perhaps shift to other, non-farming roles in the new legal cannabis sector. But a not-insignificant number of them will probably keep growing for the illegal market. And while some of that off-the-books weed may stay in California, most will enter the national black market.

Just how many of the state’s current population of farmers, estimated at between 50,000 to 80,000  by the California Department of Food and Agriculture, will opt for the black market is impossible to know. But anecdotal accounts, by law enforcement officials, industry consultants and many farmers themselves, suggest that the number could be quite high.

And if that’s the case, it could create serious headaches for everyone from law enforcement officials to, especially, advocates for national legalization efforts, for whom California was supposed to be a shining example of legalization success. If the state’s cannabis goes “all over the country,” warns Hezekiah Allen, a cannabis farmer-turned-lobbyist for the California Growers Association, “the DEA and Jeff Sessions will rightfully start putting the pieces together.”

California Grows More Than It Consumes

Seat of Power: The California State Capitol in Sacramento, where lawmakers will set the regulations that shape the legal cannabis industry. (James Tensuan for Leafly)

In some respects, the export scenario was inevitable, given that California has always produced more cannabis than state residents can legally consume. For every pound of cannabis that California growers produce and sell legally, another four pounds are produced for the black market, according a February analysis by the University of California Agricultural Issues Center for the California Bureau of Marijuana Control. Much of that surplus currently goes out of state.

One-fifth of existing cannabis farms could meet the entire state's market demand.

And, paradoxically, legalization will only worsen that over-supply dynamic. As those California farmers who now export try to go legal and sell their product at home, the state’s already well-supplied legal market will become even more saturated. That will drive wholesale prices even further below the break-even point for small farmers, and lead even more of them to consider staying in the black market.

Of course, there are factors that could disrupt this self-feeding death spiral. Legalization will spur more consumer demand, which will absorb some of that oversupply. But judging by the experience from other adult-use states, that post-legalization demand growth simply won’t be sufficient to absorb all the cannabis that will be coming from older farms as well as the new mega-scale factory farms.

The implications are significant. Allen, the California Growers Association lobbyist, estimates that when legalization has been fully implemented in California, the state’s legal market could be supplied by perhaps 8,000 smallish farms. That’s perhaps one-fifth of the number thought to be operating today. “Best case, seventy percent of my community goes out of business,” says Allen.

The ramifications of that kind of reduction haven’t gone unnoticed by California’s political establishment. Lawmakers and regulators are deeply worried by the prospect of massive unemployment. Small-scale cannabis farmers employ as many as 250,000 full- and part-time workers, according to the California Growers Association. An investigation by Leafly News earlier this year estimated that California’s current medical cannabis industry (which does not include the illicit market) supports more than 43,000 full-time equivalent jobs.

But, again, the real downside may be how California’s continued exports tilt the legalization debate in other states and at the federal level. As Lauren Michaels, a cannabis policy expert with California Police Chiefs Association, puts it, “when you have other states, and a nation as a whole, that are still skeptical of legal cannabis,” a huge amount of oversupply from California doesn’t create the “best optics” for national reform.

Coaxing Growers to Go Legal

Hezekiah Allen’s lapel pin hints at his cause: Growing a legal industry with room for legacy growers. (James Tensuan for Leafly)

So, that’s the bad news about the fourth pathway for California’s existing cannabis farmers. The good news is that this dire scenario has led lawmakers in Sacramento to consider measures to help small farmers go legal—or at least slow the process of attrition so that existing farmers can make less problematic exits.

Last fall, for example, the state created a “cottage farm” license for smaller growers. The license is cheaper and easier to get. Because it caps production at 2,500 square feet of greenhouse space or 25 mature plants (half the scale of the next-biggest license type), the cottage license may help allay the anxieties that many local governments have about larger cannabis farms—anxieties that have delayed licenses and frustrated small farmers.

The cottage law “sent a signal to local governments,” says Max Mikalonis, a former legislative staffer who helped draft the state’s medical cannabis law for California Assemblyman Tom Bonta. (Mikalonis now lobbies for cannabis firms at K Street Consulting in Sacramento.) “A county that might not be comfortable with having, say 50 plants on a one-acre lot, might be more comfortable with 25 plants or less.”

Another bit of state help: A so-called appellation law will protect the brand value of geographic locations by prohibiting cannabis producers from using place names in their marketing unless the products actually come from those locations.

These sorts of regulatory moves can help ensure that the regulated marketplace provides opportunities for existent growers. But ultimately, says Allen, state lawmakers must embrace the idea that California’s legal cannabis market has room for producers of all scales and business models. Such a marketplace, he says, will provide more jobs and offer more diverse and higher-quality products.

But to make that happen, Allen says, lawmakers, regulators and other stakeholders can’t get carried away by the idea that scaling-up is the only path to survival. “There is no reason why a price crash is inevitable,” Allen says. “These well-capitalized [cannabis producers] have every incentive to pretend it’s inevitable, but that’s actually just [a reflection] of their agenda.”

The agenda of the state and the public, Allen argues, is very different: a diverse, unconsolidated cannabis marketplace with room for all scales and production models. “Commoditization, quantity over quality—it is not an inevitability, nor is it a desired outcome,” Allen says. “Except for the people who stand to benefit from that kind of consolidation.”