As of Jan. 1, adult-use cannabis is legal in California, which brings to mind a million questions. The passage of Proposition 64 was contentious to say the least. Some welcomed legalization, while others detested the very thought of it-and still do. It has been reported that many growers in California have not filed for legal status of any kind and have no intentions of doing so. That said, I have to ask: What will happen to the California cannabis industry of the past and future?
I have heard that in Seattle, Wash., when the state was transitioning its medical businesses into the adult-use regulatory framework, regulators formulated a geographical map in conjunction with Google Earth. That map was covered in red and green dots. Green dots represented grows that had taken the required steps to become compliant under the adult-use program. Red dots denoted those that had not yet done so. After the deadline to become compliant, those red dots would represent illegal activity. In a sea of red and green dots, how will your company weather the storm?
After Jan. 1 in California, you will either file a legal state application, or you won’t. Either way, in the end you will be deemed a theoretical colored dot, be it red or green. This classification will be used by both regulators and law enforcement in ways yet to be determined. For instance, how will non-compliant (i.e., illegal) reds dots be treated?
In Fresno, Calif., there has long been a ban on cannabis cultivation. If a grower is caught, the city can issue a $1,000 fine per plant. Fines can be disputed with the city council; however, if the dispute is denied, the grower must pay the complete fine within 30 days. If the grower fails to do so, a 10-percent penalty is compounded monthly per plant. So, if a person was caught with 100 plants (even clones), he or she would be fined $100,000 and would be looking at an additional $10,000 per month if the initial fine is not paid within 30 days.
Other California cities and counties can and will create their own interpretations of the law in regard to what they will and won’t allow. They all have that legal right under Prop. 64. So, what happens to the red dots, and the green dots, when other cities and counties adopt the same or similar practices?Red and Green Dots’ Role in the Industry
As I see it, positives and negatives exist for both dots. Many red dot growers are already finding it harder to sell their products. As time progresses, this will force many of them to stop growing. For those who continue, they will have to sell their product for next to nothing, making the market even more competitive.
Red dots built the industry into what it is today; pre-legalization, all cannabis businesses were red dots. Now, green dots will capitalize on that-many of those green dots were former red dots, while others will be new (and often well-funded) entrants into the industry. I hear many say that large-scale producers will only produce mid-grade products. For some, that may be true. But it makes no sense for a producer (with millions invested) to knowingly produce anything other than superior products for a competitive price. I don’t believe they will survive producing mid-grade cannabis, nor will they be content doing so. I believe many will work, learn and strive to produce products they are proud of, and there will always be a market for that.
Recently, I was asked to inspect a potential greenhouse site. After touring most of the property, the owners asked if I wanted to see their “experiment,” which was four 20 x 60 hoop-type greenhouses with black plastic floors covered in mud and dead cannabis leaves. The temperature in the greenhouse was 85 degrees. At the roof, the humidity was around 80 percent. There were hundreds of 4-foot yellowing plants, two and four weeks into flowering in the last week of October, which is a very late finish for those plants. I suspect it was massively infected with powdery mildew when it did finish, given the cultivation environment. The owner, expecting me to be impressed at the time, turned to me and half-jokingly asked, ”Would you like to buy 200 pounds of Gorilla Glue?”
This is an example of how red dots can inhibit the industry from raising its bar for standard, quality product. Green dot producers will have to compete in an open market, where red dot producers have overproduced and destabilized the market.
(Over)Supply in Question
The Los Angeles Times recently published an article which stated the amount of cannabis California growers had produced far exceeded demand. Some questioned the math and figures with respect to the inability to compile factual documented production figures in a “gray market.” Regardless of the actual number, it is apparent that the market value of cannabis is continuing to drop. With legalization-regulation and large-scale production on the horizon, the market is about to become even more volatile. That does not take into account that in 2023 in California, the production cap will be lifted and unlimited production can begin, meaning any farmer will be legally permitted to grow as much cannabis as he or she desires.
I don’t expect an instant return on investment for green dots either. In a flooded market, most consumers will not initially purchase their products from green dots or legal dispensaries (primarily because of increased cost due to taxation). Green dots will have to endure a few years for market stabilization, which, by the end, will mean no more red dots, I suspect. Where will red dots legally sell their products after January? Nowhere. It will be illegal for red dots to sell to the public, and to any green dot or dispensary. Green dots will become vertically integrated, and it will be in their best financial interests to purchase their own products (and not products from the red dot (now-illegal) entities.
After January, even larger differences will exist between the red and green dots, and the implications are many. Green dots will pay legal taxes on products produced and sold, yet most red dots will choose not to. Therefore, I predict that California will not initially receive three quarters of the potential revenue of the total cannabis sold/produced in the state.
Red dots will not have to have their products tested, thus there is a possibility of contaminated products being sold to the public (a reality that exists now). Initially, red dots will continue to produce and sell products for less than green dots, and they will continue to flood the market while some will also choose not to comply with rules and regulations at the risk of environmental damage. So, again, I have to ask how regulators and law enforcement will deal with red dots.
What may happen is that city or county employees will search Google Earth for red dots, travel to the property, fly a drone over it and record the offending property without a search warrant or a legal need for one. Once the video is reviewed and a plant count taken (outdoors), a citation will be placed in a mailbox, on a gate or at an entrance. The property owner can then choose to pay the fines or forfeit the property, as they have now been deemed a public nuisance. Authorities could also legally seize and resell the property if they wanted, which eliminates both the problem and nuisance. Others will continue to be arrested for illegally transporting and shipping their products to more profitable geographic locations.
I’m starting to think things will not be so wonderful for either dot in the beginning. Red dots will continue to be arrested and will find it harder and harder to survive. Green dots will find it difficult to survive the downfall of the red dots until the market reaches a profitable equilibrium. Red dots will be forced to adopt and comply, or retire from commercial production. Green dots will be forced to endure lean sales still filtering into the market by red dots-for a while anyway.
To be clear, I am not condoning any of the illegal behavior mentioned. I’m simply stating one scenario and various complications. Both dots must consider implications moving forward. Continue business as usual, and risk loss of freedom and property, or spend lots of money to build a legal business that may not break even as quickly as investors would prefer.
Both prospects are daunting, especially as regulations continue to change and as pressure on small farms continues. We will see what happens.