California Faces Potential Legal Marijuana Shortage
Industry insiders in San Francisco and Los Angeles are nervously eyeing local licensing delays for cultivators and processors and wondering how long the pre-2018 dispensary stockpiles will last.
California is the number one cannabis producer in North America — producing far more cannabis than it consumes. So some people might be shocked that the biggest problem facing its emerging legal adult-use system is on the supply side.
Attorney Marc Wasserman, half of the Los Angeles-based law firm Pot Brothers at Law, is not one of those people; he said that most industry insiders could see this problem coming for at least a year.
“It was the beginning of 2017 when [state regulators] said, ‘Yeah, we’ll be done with these regulations by November,’ and most of us laughed and said they were crazy — and they were,” he said. “Same with LA: Permit applications were supposed to come out in October, then before Christmas, then on Christmas, then the first of the year, then it was Wednesday and then it was only open to pre-ICOs [the 135 medical marijuana dispensaries operating in Los Angeles with city approval].”
Los Angeles created a legal framework for adult use cannabis sales in early December, but the city has fallen far behind when it comes to getting licenses approved. And while most headlines are focused on the city’s delay in getting its adult use dispensaries up and running, it is worth noting that the City of Los Angeles will only begin licensing indoor growers after they license their pre-ICO dispensaries — which could take awhile.
For small businesses trying to secure a spot in the legal market, these delays are critical.
The cost associated with getting a facility in a zoned area — including the drafting of architectural plans, environmental impact reports and all other required steps — routinely runs $50k to $100k, but all those efforts will amount to nothing if the city won’t grant them a temporary permit.
Wasserman said that, at this point, most of his clients are waiting in line.
In Los Angeles right now, Wasserman says there are “shops all over the place operating illegally until enforcement really starts to ramp up… but the licensed shops are gonna run out of product eventually, and they’re not gonna risk their state license by going to the black market.”
And when that happens, the adult-use system could start to buckle as dispensaries struggle to find legal ways to restock their shelves.
San Francisco, A Storm on the Horizon
In San Francisco, where a handful of medical dispensaries started recreational sales on Jan. 6, the picture is similarly bleak when it comes to cultivator licensing. According to one longtime San Francisco grower, who asked to remain anonymous because of concerns about their pending applications, the city had not issued a single cultivation license as of Jan. 11.
“We’re up against a city that didn’t think about this process and took too long to start it; they didn’t realize how much work and time it was going to take and how it would affect the people who need a local license to sell their products,” the grower said. “We’re at the mercy of the city right now… they’ve kind of told us to shut down our grow, but also kind of not. Either way, we can’t sell anything legally without local permits.”
This isn’t a matter of unqualified growers — the cultivator that Cannabis Now spoke with has already squared away their company’s state-level permits and had several visits from the fire department, which must sign off on all facilities before a temporary license is granted.
“It’s basically a wait and see situation,” they said. “At one facility, they told us to just add some exit signs and we’ll be good, the other we’re still waiting for word back, but in both cases no permit has been issued.”
Meanwhile, the retail end of the adult-use equation moves forward — for now.
Dispensaries may have their licenses, but they’re still reliant on licensed cultivators for their next batch of inventory. Because of the “grace period” carved out in the statewide emergency regulations, dispensaries have until July to sell off “undocumented” inventory purchased before the tracking requirements went into effect.
One dispensary employee who spoke on condition of anonymity said most dispensaries heavily overstocked in anticipation of this exact situation — and to take advantage of an enforcement blind-spot when it comes to taxes.
“Everybody stocked up, because nobody knew what would happen,” they said. “A lot of people bulked up to avoid the excise tax: Before Jan. 1 there was no way to track the cost paid for inventory, so people said they paid $1,000 for a pound instead of $2,300 so the excise tax is only a couple hundred.”
Seed to sale tracking is supposed to make this sort of thing impossible moving forward, but the system has still not launched and, like many crucial aspects of the adult-use roll-out, there are question marks surrounding its viability.
Banking on Chaos
Some dispensaries are taking advantage of the supply side chaos — and the relative inexperience of new adult use consumers — when it comes to pricing. A dispensary employee who wished to remain anonymous told Cannabis Now that said their personal connections allowed them insight into several examples.
“I know for a fact these dispensaries got an indoor strain from the same grower, but one place is charging $60 for an eighth, another place is charging $65 and then another is charging $60 for straight-up boof outdoor,” they said. “Some dispensaries have said outright they aren’t paying more than $2,200 for packs moving forward, so they’re just gonna keep buying greenhouse, light dep, outdoor and straight boof.”
Wasserman’s take on the situation?
“The whole state is screwed, and we’re not just talking about adult use — medical too, because it’s all the same regulatory scheme,” Wasserman said. “Of the 482 cities in California, less than one-third of them have local permitting options, so what’s happening is the majority of the state temporary licenses are being issued to retail shops or deliveries.”
He said unless this situation is resolved, a supply bottleneck is more or less inevitable, which will affect the entire state.
“We haven’t seen it yet, because the shops and everybody were able to flood their inventory by Jan. 1 and can sell all that outside of the track and trace system,” he said. “But come July, the licensed shops will only be able to get product from licensed manufacturers or facilities and those licenses are scarce compared to the number of shops licensed. So that’s going to be a problem until the state can catch up and get those licenses out.”
It remains to be seen how this issue will be resolved, but it’s certainly on the radar of regulators: In a pre-rollout interview with the LA Times, top cannabis regulator Lori Ajax voiced concerns about precisely this issue.
From the LA Times:
Ajax worries about whether California has “licensed enough people throughout the supply chain, and geographically across the state, so people can continue to do business,” which includes medical and recreational pot. “That’s something I think about all the time… If you don’t have enough distributors, if they are the only ones that can transport the cannabis, that would be an issue on Day One.”
Of course, it’s important to keep in mind that the emergency regulations governing California’s legal cannabis system are just that — emergency regulations. That means they could change slightly or drastically moving forward.
Wasserman said that, if California’s experiment with regulation is going to succeed, they’ll have to.
“It’s big time growing pains for regulation — and certainly overregulation,” he said.
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