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© 2017 MERRY JANE. All Rights Reserved.

Here Is the Trouble With Legalized Cannabis

For the industry pioneers, it’s not that easy being green.

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The cannabis industry as we know it today was created on the shoulders of the pioneering hard work of many medical marijuana business owners. Yet, the demands of a rapidly changing recreational cannabis industry have many of the space’s pioneering producers wrestling with the threat of being pushed out of the ring entirely.

Medical cannabis is legal in half the country, recreational now in eight states. Producers in many states, especially those transitioning to recreational sales, are experiencing difficulties, particularly financially, navigating regulations and licensure. Some producers and dispensaries are ready to consider moving in a different direction because new testing and licensure requirements mean tens-of-thousands of dollars in upfront investment to adapt their businesses to new regulations.

“There are so many issues facing anyone in the cannabis industry right now, and managing them is even harder when you’re a small business with limited manpower and financial resources,” says Sally Alworth, co-founder of Oregon’s award-winning Luminous Botanicals. People across the state rely on Alworth’s topical and edible cannabis cure-all blends to mitigate symptoms of pain. Luminous has been winning top-honors since the company began selling its product line as part of Oregon’s medical marijuana program (OMMP).

The OMMP has existed since 1998, with the first retail dispensaries legally allowed to come online in 2014. Just a year later, voters legalized recreational sales. In less than two months, by Jan. 2017, recreational cannabis is supposed to be in full swing, but these transitions in Oregon have created a logistical kludge.

“The OLCC has only made it through a little less than 30 percent of the cannabis applications submitted so far, so we don’t know when we’ll be able to participate in the recreational market,” says Alworth. “It’s a lot of pieces to try to move forward all at once.”

Part of the new requirements to become a licensed recreational cannabis business means a transition from being regulated not only by Oregon’s Health Administration and the Oregon Department of Agriculture but now over to Oregon’s state liquor board, the OLCC or Oregon Liquor Control Commission, which also oversees all alcohol sales among stores, restaurants, distributors, and bars in the state. This means new packaging, testing, and licensing requirements as well as new building and land-use permits.

“New packaging requirements meant recycling all of our of our existing labels and paying for all new labels and boxes,” Alworth explains. “And we now have to test 20 samples per batch, which costs us as much as the wholesale value of the product. Then there are the challenges of renovation, given that every cannabis company in Portland has to apply to the city for a ‘change of use’ permit. It can take up to six weeks just to get plans reviewed, and then you have to address the changes they request.”

Between the logistical and financial aspects, the shifting regulatory climate has existing Oregon medical marijuana businesses questioning the integrity of new regulations.

“Regulators have created a system that elevates the labs to all-powerful gatekeepers controlling what enters the market,” says Dan Stoops, founder of the popular cannabis-infused caramel company Danodan Grassworks. “Imagine if Oregon’s breweries or wineries were required to have every single batch verified by a third-party. Imagine each batch of IPA or Pinot, etc. is held out of the market for weeks until the lab verifies alcohol levels. That’s what they’ve created for cannabis.”

While testing bottlenecks are keeping products from going to market, it’s also the overwhelming expense that has producers questioning the impact on their bottom line. A process called “Process Validation” is being implemented by regulatory agencies in multiple legal cannabis states. To ensure a producer’s process is one that’s free of pesticides and residual solvents, and yields a consistent potency result, a producer must now pay for and submit a large portion of their manufactured cannabis product for state sampling. Stoops says this process alone will cost him between $20,000 and $30,000 dollars in addition to operating costs and all other fees associated with the transition.

“What a great way to clear the market of the smaller outfits,” Stoops says. “And what a boost to the black market. Face it: All sorts of cannabis products will fail to see the light of a new recreational marketplace unless regulators come to terms with what they’ve created and make the necessary changes so testing is reasonable and affordable.”

It’s a problem for growers, too.

“Red tape is bleeding medical growers’ budgets dry and the lawyers are getting most of the money because they’re learning how to navigate the new system on their client’s money. Paying for champagne and getting PBR is how it feels,” says Kyle Bullock, founder of Stony Point Farms.

Like many medical growers, Bullock has been wrestling with the transition. So much so, he is leaning toward keeping his farm out of the recreational sector. “Without the deepest pockets or investors, even growers like me, with 50 lights, are struggling to bridge the gap and find a good place for a recreational license.”

While cultivators like Bullock work honorably to maintain a steady flow of medical cannabis to patients, it’s a financial gamble. Roughly one year ago, medical cannabis made up the entirety of the regulated marketplace in Oregon. Now, just a year after recreational legalization, medical cannabis consumers make up just 10 percent of total cannabis spending. Currently, the overwhelming majority of consumers are buying their cannabis recreationally. Medical producers who decide not to obtain, or simply can not afford recreational licensing, will not be able to access the majority of consumers. In legal states, rumors of medical marijuana programs ending completely hover over the small-business landscape.

“The only advantage I have right now is producing higher quality medicine,” says Bullock. “[It’s] my small indoor facility versus the 40,000 square foot recreational operations producing cannabis that most people don’t really want to buy.”

Elsewhere, in Colorado, where the intricacies to licensure and testing differ greatly, the challenges are similar. Medical cannabis had no testing requirements until this year, for example, while recreational testing requirements have been in place for years.

“Small artisanal and craft growers, bakeries, and dispensaries need to work together, and form groups, because the big guys are going to work to crush us little guys. We have to stick together,” says Danny Sloat, co-founder at AlpinStash, a Colorado cannabis farm. “The big guys can’t produce quality, and us ‘quality guys’ aren’t in direct competition with each other. Just like with craft breweries, if one opens up down the street from another, they drive up business for both because it informs the consumer and establishes the connoisseur market.”

Chris Abbott of BotanicaSEATTLE, a relatively large-scale Washington-based cannabis company that makes natural and handmade cannabis edibles and topicals, offers advice: “Get to know the lawmakers and people in charge at the regulatory agency governing your state. Rules often are borrowed from other industries and there are unintended consequences that spring up as the new recreational industry gets going. We’ve found lawmakers and regulators want to make the industry work and are very receptive to feedback.”

Yet for smaller producers, not only navigating shifting regulations, but also finding the time and resources to shape legislation, is difficult.

“The next killer is time,” Stoney Point’s Bullock affirms. Having to put up all the lease money on a building, and for the lawyers, and waiting as long as a year until anything happens, it’s ending many growers.”

Small producers, too.

With California passing legalization, the largest regulated cannabis economy in America is about to be put to the test. Rob Fess, Director of Marketing for Tradiv, a California web-startup touted as the “Amazon of  Cannabis,” adds his perspective on the state’s shifting climate: “It feels like many of the producers in the [California] marijuana industry, at least for the time being, will stick to the medical market—the space they know best. We want to keep in mind that Jan. 1, 2018—when adult-use licensing is scheduled to start—still appears to be pretty far down the road. Of course, there will be a more aggressive element of existing businesses that start heavily looking into and investing in adult use. There will also be the new entrants to the industry who will likely go straight for the adult-use market. It’s much like what we saw in Colorado.”

While 2018 is almost one year away and that seems like plenty of time, we’ve learned that shifting regulations in the new cannabis frontier tend to appear month over month, creating a difficult journey for business owners navigating complex financial and operations decisions. It’s a level of complexity unparalleled by any preexisting industry.

“The vast majority of [medical market] folks should be able to excel during this transitional period, ready to pivot, as they always have, at a moment’s notice,” says Fess. “They may even fare better than the new entrants to the industry, due to their hard-earned skills at being flexible, their familiarity with the legal and regulatory systems, and their more-than-traditional knowledge of cannabis business.”

But as we’re seeing with Oregon, rapidly and steadily changing regulations, some that completely ignore the budgetary concerns of independent craft producers, have medical industry frontrunners wondering how they’ll keep up.

With this election cycle, Massachusetts, Maine, Nevada, and California will join the transition to recreational cannabis. Brandy Keen, VP of Sales at Surna, a Boulder, Colo., technology company that supplies energy- and resource-efficient industrial solutions to commercial indoor cannabis cultivation facilities, offers guidance: “Licensed medical operations will want to explore the ways in which the new recreational market will impact their existing medical business. For instance, if a state doesn’t allow a producer to have two licenses, or if it requires a different license to produce and sell under a medical umbrella than it does under a recreational umbrella, this will raise competitive concerns for the existing licensed producers that need to be addressed. States like Nevada addressed this by allowing licensed medical operators the first opportunity to apply for recreational licenses.”

Licensing itself is just one small part. It takes a vast amount of financial resources, time, dexterity, and ingenuity to continually pivot in a climate where cannabis startups face constant waves of nearly insurmountable challenges.

Keen continues: “Despite the higher demand for [recreational] product, over the long-term this tends to drive down the retail price, which means that production costs must be addressed aggressively to stay competitive. This results in new focus on energy and operational efficiency as the landscape gets more competitive.”

Competition, state and local sales taxes, a consumer demand for affordable pricing, coupled with oftentimes unidentifiable costs for keeping up with regulatory changes, are just a few of the challenges cannabis businesses face today. Add the inability to deduct normal business expenses (280e), complexities with local and state legal boundaries, federal illegality—the recreational cannabis market is downright complex.

We need the pioneers of the medical marijuana to survive an industry they worked so hard to help create. Many of them are not just in it for themselves. Many are purpose-driven businesses with a mission to bring quality cannabis to the masses. These are businesses that have overcome incredible challenges in the name of helping others access real medicine and better quality of life.

If you have a favorite brand, especially one that’s been fighting in the trenches to help legitimize this plant and its industry, now is a better time than ever to support them. Buy their products, advocate on their behalf. Maybe even reach out to them and ask how you can help. Because, this new grow is going to require more care than ever before.