Insights Into the Evolving Cannabis Value Chain
Joseph Curtis, PhD
The assemblage of artisanal, craft, and heritage farmers across California’s North Coast have championed an integrated set of farming practices. Their artisanal practices combine environmental stewardship with their proficiency in designing sustainable cultivation systems, which enable them to consistently demonstrate cannabis breeding excellence.
The Emerald Triangle’s Cannabis (ETC) ecosystem is recognized worldwide for its ability to produce cannabis of the highest quality. The ETC is also recognized for its craftsman approach to innovation. These Craft and Heritage Farming Communities (CHFCs) provide a dynamic environment that expects experimentation, and translates these insights into cannabis product innovation.
There is value in CHFCs. Their collective body of knowledge is essential to the future success of the ETC ecosystem as a regional economy within the state of California. The current transitional period has created a distressing combination of challenges that are disproportionately affecting CHFCs as they struggle to transition into the new market beginning in July of 2018.
Regulatory and Business Model Harmonization is Key to Supplier Development and Mitigating the Effects of Oversupply across the Emerald Triangle Ecosystem
Essential to the functioning of the ETC ecosystem is the evolution of a set of harmonized business and regulatory models. In order to achieve and sustain regional economic success, these models must facilitate market access for all stakeholders across the state’s evolving Cannabis Value Chain. To that end, the state has provided cannabis businesses with more than a dozen licensing options that can be used to gain access to the state’s legal market. Four months after legalization, nearly 6,000 cannabis businesses have received temporary county and state licenses. And, with an estimated 400 acres of land committed to cannabis cultivation, many CHFCs feel that their calls to protect the ETC market from oversupply have gone unheard.
The economic impact of oversupply cannot be understated. For example, according to Marijuana Business Daily, Oregon’s wholesale prices for outdoor-grown trim dropped to $50 a pound. Similar impacts are being experienced by artisan entrepreneurs as they witness the rapid erosion of wholesale prices across the ETC ecosystem.
This experience has left some long-time craft cannabis businesses wondering if the state’s regulatory leadership fully appreciates the economics of craft cannabis farming.
By contrast, Canada our nearest neighbor, is carefully weighing their options on how to evolve and roll-out a system that maximizes the success of their supplier base across the globe. By their own estimates, the Canadian national market could be oversupplied by 600,000 kilograms by 2020. The anticipated impact on their supplier base will disproportionately affect smaller firms. Under this scenario, the vertically integrated suppliers are the ones well positioned to come out on top. However, as a part of Canada’s innovative approach to cannabis commerce, Canadian firms have the capability to export dried cannabis into international markets that have legalized medical marijuana. By taking advantage of this option, Canadian firms are incentivized to develop supplier strategies that align Canadian cannabis supply chains with evolving consumer markets across the globe.
With upwards of 15 million pounds of cannabis being produced in California, and with estimates as high as 12 million pounds leaving the state, counties across the ETC ecosystem should strongly consider harmonizing their strategy for generating tax revenue to adjust for market conditions. For example, the state could apply a floating tax rate that adjusts to market conditions. Under this scenario, cannabis entrepreneurs operating within the state’s CHFCs would not be forced out of business due to macroeconomic forces beyond their control.
Anyone seeking to understand the impact that oversupply has had on California’s tax revenues can review the findings provided by BDS Analytics. They found that the proceeds generated from Proposition 64 adult-use sales reported by California’s licensed retail dispensaries and delivery services in January and February averaged $169.5 million per month, or about 13 percent below prior projections.
Additionally, the first 88 California recreational dealers licensed under California’s Bureau of Cannabis Control made big price-cuts to generate large sales volumes as of January 1, 2018.
You don’t have to be an economist to understand that oversupply in an emerging market creates downward pressure, which contributed to an erosion of wholesale pricing that may persist throughout the interim licensing period, which ends in July of 2018. As of May, CHFCs have witnessed the collapse of their wholesale prices precipitating a race to the bottom as cannabis entrepreneur’s exit the regulated market before it’s officially begun.
Front-Loaded Transition Costs Jeopardize Participation, Inclusion and Social Entrepreneurship for CHFCs
The economic realities facing CHFCs seeking to become compliant with the state’s requirements are daunting. The problem is twofold.
For example, Prop 64 ushered in an excise tax on sales, and growers must pay a cultivation tax of $9.25 per ounce for flowers, and $2.75 per ounce for leaves. Additionally, California’s legal sellers and cultivators of recreational cannabis are also now required to pay the IRS a steep 35 percent federal income tax rate.
And that’s not all, in order for Humboldt County farms to become compliant, they will have to pay permit fees, planning department fees, water board fees, fish and game 1602 permit fees, legacy correction costs, third-party consulting fees, attorney’s fees, and a plethora of other costs. When it comes to the legacy correction fees assessed to cannabis cultivators to protect the watershed and environmentally sensitive areas, damaged by previous cycles of industrial contamination, the state should enter into a cost sharing agreement with the CHFCs. Why penalize CHFCs recognized the world over for their cannabis cultivation excellence?
The second problem is the access to capital and banking services. Several recently published articles have discussed this topic at length, but to the CHFCs at ground zero, little relief is in sight.
Many fear that needed assistance will not arrive in time to prevent the dissolution of the ETC ecosystem. These concerns are exacerbated by the absence of a harmonized permitting process across the Emerald Triangle. Of particular concern is the velocity of the process and its apparent variability and costs. When you combine the pricing collapse across the wholesale markets with the absence of financial products tailored to meet the needs of craft cannabis farmers, you have the ingredients for a perfect storm.
Anyone familiar with the state’s history of prohibition — including the Campaign Against Marijuana Planting (CAMP), and the efforts by former U.S. attorney Linda Haag to disrupt Northern California’s cannabis economy — must realize that to the survivors of this period, the current tax revenue program accompanied by the high cost to become compliant, represents the latest effort to dismantle CHFCs and clear the way for big agriculture.
In order to head-off this outcome, a public-private partnership could be established to facilitate the transition of CHFCs into the larger global cannabis market, thereby ensuring the success of northern California’s regional economy and promoting the ETC ecosystem as a global center for cannabis innovation.
In the near future, the greatest opportunity for the ETC ecosystem is to harmonize their regulatory, taxation, and business models, and behave like an integrated regional economy. This enables firms across California’s cannabis value chain to reduce the risks attributable to oversupply. It also promotes a coherent approach to the marketplace, and redistributes the risks across the state’s cannabis supply chain instead of concentrating it on cannabis producers.
Second, it provides firms with the opportunity to develop branding strategies that enable them to maintain a lasting presence in front of the global cannabis consumer. And third, it makes it easier for the ETC ecosystem to develop supplier agreements with cannabis ecosystems in other states to address expanding, global market opportunities.
The current tax assessment model, in combination with the collapse in wholesale pricing, is disadvantaging CHFCs. The impact of this has long term consequences, especially at this key junction in the formation of the national, and international, cannabis market. Legislators and county officials may not fully recognize the global opportunity before them.
The challenge to regulators across the national cannabis market is to harmonize their tax programs, and promote product diffusion across domestic and international markets. A great place to begin would be California. By effectively applying the tools of economic development and small business financing, the state acts as a partner to promote the success of CHFCs.
As agribusinesses operating within an integrated regional cannabis economy, the ETC ecosystem could continue as a global leader in craft cannabis and new product development. By facilitating harmonization and inter-state commerce, California could create a national model for supplier development that enables craft and heritage farmers to supply the most discerning consumers across the world.