In the California pot market, a blurred line between legal and not

This photo provided by a marijuana grower on condition of anonymity shows the tops of cannabis plants in Northern California on November 24, 2021. As California enters its fifth year of wide legal marijuana sales, an unwelcome trend emerges in the troubled market.  Industry experts say a growing number of licensees are also operating in the illegal market covertly – working on both sides of the economy to make ends meet.  (AP Photo)

This photo provided by a marijuana grower on condition of anonymity shows the tops of cannabis plants in Northern California on November 24, 2021. As California enters its fifth year of wide legal marijuana sales, an unwelcome trend emerges in the troubled market. Industry experts say a growing number of licensees are also operating in the illegal market covertly – working on both sides of the economy to make ends meet. (AP Photo)

PA

On an isolated farm, greenhouses stand in regimental form, sheltered by a fringe of trees. Inside are hundreds of head-high cannabis plants in precise rows, each growing out of a pot fed by coils of irrigation tubing. Lights powerful enough to turn night into day blazing above your head.

In the five years since California voters approved a large legal market for marijuana, thousands of greenhouses have sprung up across the state. But these, under their plastic canopies, hide a secret.

The grower operating the crop north of Sacramento holds a coveted state-issued license, allowing the company to produce and sell its plants. But it’s been nearly impossible for the grower to make a profit in a struggling legal industry where wholesale cannabis bud prices are down 70% from a year ago, taxes are approaching 50% in some regions and customers are finding much better deals in the thriving underground market.

The company therefore has two identities, one legal, the other illicit.

“We basically subsidize our white market with our black market,” said the grower, who agreed to speak to The Associated Press only on condition of anonymity to avoid possible lawsuits.

Industry insiders say the practice of working in legal and illicit markets simultaneously is all too common, a financial reality brought on by the difficulties and costs of doing business with a product they call the most heavily regulated in America. .

For the California grower, stealth illegal sales happen informally, often with a friend within the tight-knit cannabis community calling in to make a purchase. The state requires legal companies to declare what they grow and ship, and it has entered into a vast computerized tracking system – known as “seed-to-sale” monitoring – that is far from complete. hermetic.

“It’s not too difficult” to operate outside the railings of the tracking system, the producer said. Factories can vary widely in what each produces, which leaves some leeway in what is reported, while there are few on-site inspections to verify record keeping. The system is so loose that some legal farms send up to 90% of their product to the illicit market, the producer added.

The passage of Proposition 64 in 2016 was seen as a watershed moment in the drive to legitimize and tax California’s multi-billion dollar marijuana industry. In 2018, when outlets were able to open, California became the world’s largest legal market and another stepping stone in what advocates hoped would be a path to federal legalization, after groundbreaking laws were enacted in Colorado. and Washington State in 2012.

Today, most Americans live in states with at least some access to legal legal marijuana – 18 states have wide legal sales for ages 21 and older, similar to liquor laws, while more two-thirds of states provide access through medical programs.

Kristi Knoblich Palmer, co-founder of edibles brand KIVA Confections, lamented that companies’ migration to the illegal market is undermining efforts to establish a stable, consumer-friendly market.

“Having this system that now seems to be failing, getting people back to the old way…it’s not helping us achieve our goal of professionalizing cannabis and normalizing cannabis,” she said. declared.

In California, no one disputes that the vast illegal market continues to eclipse the legal market, even though the 2016 law boldly declared that it would “neutralize the black market”. Democratic Gov. Gavin Newsom, who was lieutenant governor when the law was approved, called it a “game changer.”

But California’s legalization push has faced challenges from the start. The state’s illegal market had thrived for decades, rooted in the fabled “Emerald Triangle” at the northern end of the state. Not since the end of Prohibition in 1933 had there been an attempt to turn such a vast illegal economy into a legal one.

In October, California law enforcement officials announced the destruction of more than a million illegal plants statewide, but said they were uncovering larger illicit cultivation operations. In the cannabis heartland of Humboldt County, many illegal growers move indoors to avoid detection. Investigators are making arrests and issuing search warrants every week, but with so many underground grows, “we may never root out the illegal grow,” Sheriff William Honsal said in an email to the PA.

California’s illegal market is estimated at $8 billion, said Tom Adams, chief executive of research firm Global Go Analytics. This is roughly double the amount of legal sales, although some estimates are even higher.

In September, a cannabis company sued government regulators in Orange County state court, alleging that so-called burner distributors were using shadowy “straw men” to obtain licenses to buy cannabis online. wholesale and then sold it on the illegal market to avoid taxes.

No state claims to have eliminated illegal operators. U.S. Representative Earl Blumenauer, a Democrat from Oregon who co-chairs the Congressional Cannabis Caucus, said he sees little prospect of undermining illegal markets without federal legalization, which has been stalled in Congress despite Democrats controlling Congress and the White House.

The thriving illegal markets in California, Oregon and elsewhere are “a product of dysfunction, lack of resources and the fact that we don’t have a regulated national market,” he said.

Like the California grower, many companies transact in the illicit market to make ends meet, but others have abandoned the legal economy or never bothered to enter it.

While California’s legal market tightly controls how and where pot is sold, the illegal industry is easy to access and provides a gateway to a large and profitable national market.

“The dismissed players are the good guys. Yet we never feel like we’re treated like we’re on the right side of history,” Knoblich Palmer said.

California’s efforts to establish itself as the preeminent player in the legal cannabis economy have never felt more in jeopardy, and there is talk of a Boston Tea Party-style rebellion against state policies. In a December letter to Newsom, about two dozen industry executives said the state was crippling the marijuana economy.

“California’s cannabis system is a national mockery, a public policy lesson in what not to do,” the business leaders wrote. Newsom has signaled that he is open to change.

The anonymous producer said the burden of competition in the regulated economy just doesn’t make sense for many long-time operators who came into the market before Proposition 64. There is a state of widespread mind – “Why bother?” – when the illegal economy is booming and there is little law enforcement to fear.

In Los Angeles, for example, opening a retail operation can cost $1 million or more with licensing fees, real estate fees, attorneys, and inspections — if you can get a license at all. . Promises of social equity programs that would help companies run by people of color targeted during the war on drugs have gotten off to an uneven start.

For the struggling legal market, “when quality, price and convenience are working against you, that’s a challenge,” said Adams, the cannabis analyst. “The illicit market has all three.”

The irony of the legal market is that wholesale prices have plummeted, shaking up the supply chain. A year ago, a grower could get around $1,000 a pound wholesale. Now that has dropped to $300 as the market is saturated.

Knock $150 crop tax on a $300 pound, and that’s an astonishing 50% rate.

Part of the problem for the industry is that about two-thirds of California cities don’t allow legal sales or growth — local governments control when or whether to create legal markets, and many have banned it or don’t. have not established rules. Even in places that do, cities have been slow to allow storefronts to sell legal products, with fewer than 1,000 physical stores in a state of nearly 40 million people.

Meanwhile, the wholesale prices for buds in the basement are significantly higher. The legal market, with limited outlets to sell it, is awash with pot from company-wide growers.

Few know the industry as well as dispensary owner Jerred Kiloh, who also heads the United Cannabis Business Association, a Los Angeles-based trade group.

“Nobody is making money anywhere in the (legal) supply chain,” he said, noting that his own sales have plummeted. Kiloh sees few bright spots in the law that established California’s legal market, beyond a testing program that protects quality and programs to expunge past marijuana criminal records.

With Proposition 64, “we did everything wrong,” he said.

This story was originally published January 16, 2022 9:49 a.m.

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