Californian growers and retailers brace for cannabis competition
As the state prepares to fully legalise marijuana, established players are wary of new generation of start-ups
When he was a child, John Casali used to listen out for federal helicopters hunting the hippie marijuana growers who had migrated to a remote patch of the northern California coast which became known as the Emerald Triangle.
“It was kind of disturbing as a kid,” he says, shielded by huge redwoods that surround the small family farm he still runs in the area. That was not his only brush with the law: as a 22-year-old, he was jailed for eight years in 1992 for growing cannabis.
But in the surprising second act of a life shaped by changing official attitudes to marijuana, the convicted criminal today is a member of his local chamber of commerce; he holds a county permit to grow medicinal cannabis on the same farm; and he is wading through paperwork for a full state licence, which will finally be issued in the new year.
California has long been a cannabis pioneer. The state became a hub for the drug-induced counterculture of “turn on, tune in, drop out” of the 1960s, from hash-smoking hippies of Haight-Ashbury in San Francisco to Cheech & Chong driving around the streets of Los Angeles in a van made from weed. California was both the first state to criminalise pot in 1913 and then the first to legalise medical marijuana in 1996.
From the start of January, California is set to become the latest — and by far the largest — state to fully legalise recreational use of marijuana by adults. The decision completes a cultural and political shift all along the west coast of the US where the drug has been gradually decriminalised, offering people like Mr Casali a route out of an illegal industry and into a legitimate business.
Full legalisation should be a vindication for Mr Casali and other members of the old-school cannabis industry that long battled with the authorities and made the case for new rules. A potential cannabis market worth an estimated $5bn a year, according to to Vivian Azer, an analyst at Cowen investment bank, is about to open up in the state with the biggest economy.
But instead, many are anxious about the potential threat from another symbol of California — venture capital-backed start-ups. A new generation of businesses has emerged in the state intent on smartening up marijuana’s image and professionalising operations. As getting high becomes more mainstream, tall glass bongs and rolled cannabis cigarettes are being replaced by discrete, high-tech vaporisers. At the same time, big agricultural producers are looking to grow cannabis at scale.
Many of the old-school entrepreneurs feel the state has botched the new rules for the sector, leaving a loophole that could allow large farms to dominate small cultivators and imposing business procedures so stringent that unconventional businesses — some of which have never kept formal accounts — are bound to slip up.
With final regulations released only weeks before they were due to come into effect, cannabis operators are scrambling to prepare. They are also trying to navigate the tensions between state and federal drug policy, which will become ever sharper when a state the size of California officially legalises the substance. At the national level, marijuana remains in the same criminal classification as heroin and LSD. This means that legal cannabis operators cannot bank with nationwide financial institutions and are often left dealing with cash.
To add to the uncertainty, US attorney-general Jeff Sessions has made his hostility towards legalisation clear. Saying he does not believe marijuana has medical uses, Mr Sessions has threatened to axe the single paragraph of federal law which prevents the national government from prosecuting medical marijuana users and growers.
“States can pass whatever laws they choose, but I’m not sure we’re going to be a better, healthier nation if we have marijuana being sold at every corner grocery store,” he said this year.
That means many in the industry will still be looking over their shoulder once legalisation becomes a reality. “Just because it’s legal with the state, doesn’t mean it’s legal with the Feds [Federal Bureau of Investigation],” said Mr Casali. “We’re in this little grey area.” If the federal government raided his farm like they did in 1992, he would have enough plants to get life in prison. He knows the costs all too well. During his eight years in a federal facility, Mr Casali’s mother and stepfather died in a commercial fishing accident.
As marijuana prepares to go fully mainstream in California, many of the new entrants believe the first step needs to be a rebranding exercise to present cannabis as a social lubricant in the same light as alcohol. “I think we’ve all had enough of the stereotypical stoner,” says Evan Eneman, managing partner at Casa Verde, a venture capital company that invests in cannabis tech. (The rapper and entrepreneur Snoop Dogg is also a partner). Mr Eneman says that if weed is going to be widely accepted, it needs to appeal to professionals like him.
In San Francisco, bright blue billboards trumpet cannabis’s benefits to the city’s highly strung technology workers. “Hello marijuana, goodbye anxiety”, says one advert from Eaze.com, a cannabis delivery start-up. Driven by $51.5m of funding from investors including the Winklevoss twins and DCM Ventures, Eaze wants to be an Uber for pot.
Whether these VC-backed companies will be able to prosper in what is a low-margin business remains unclear. But they are already undercutting the old-school incumbents.
Kevin Reed, proprietor of the Green Cross dispensary and a fixture of San Francisco’s cannabis scene, is closing the delivery service on which he originally founded his company, saying he can no longer afford to compete with upstarts like Eaze. His revenues this year, normally between $15m-$18m a year, are down 37 per cent.
In a meeting room cum packaging station above his dispensary, where black walls are decorated with artwork by Dr Seuss, Alabama-born Mr Reed rolls a joint and tries to be cheerful about the imminent legalisation. But he is struggling to be upbeat because the fees and taxes which come with it threaten to double his prices.
With a combination of state and municipal sales and excise taxes that could exceed 45 per cent, some in the industry warn that legal operators will be unable to compete with the black market — and some who have tried to play by the rules, such as Mr Reed, feel betrayed.
“Now that our industry is being forced into profit, a lot of the compassion is going to be sucked up in fees and taxes,” Mr Reed says. He has been on the California State Legalization Task Force for two years, but concludes “they didn’t take a whole lot of our f***ing advice”.
Mr Casali, the grower from northern California, says new taxes would eat away at his profits. “I can only produce a very little amount of cannabis,” he says Mr Casali. “Big Ag can drive that price down . . . we’re all seeing the prices plummet right now.” In the late 1980s he could charge $5,500 a pound. Now, he says, it’s $600-700.
A last-minute change made to California’s cannabis regulations lifted the limit on the number of permits a single operator can own. This has left small-scale farmers worried that the new laws have made them even more vulnerable to consolidation from big commercial operations, which are now free to buy up as much land and as many permits as they want, potentially creating large-scale commercial farms whose increasing output might lower prices further.
The revision “rolls out the red carpet for large corporations to crush the livelihood of small family farmers who should be given a fair chance to succeed in a regulated market”, wrote California senator Mike McGuire and assembly member Jim Wood in a letter to California’s licensing authority.
But officials have defended the plans, saying that the regulations will foster a balanced commercial cannabis sector with room for both big and small businesses, with boutique enterprises able to attract higher prices through organic, farm-to-table style branding.
Lori Ajax, chief of the state’s Bureau of Cannabis Control, disputes the idea that the new regime will fuel a black market as growers try to evade the new taxes. “People are looking to be able to go to a legal store, buy it, ask questions, know that it’s tested and safe,” she says, adding that licensing fees are scaled according to business size.
Her agency is one of three dealing with cannabis — the public health department is regulating manufacturers, while the food and agriculture department is regulating cultivators. With many cannabis operators growing, manufacturing and selling their own product, they have a host of different applications to complete — and that’s after they’ve gone through a completely separate process to secure permits at the county level.
Within days of its system opening, Ms Ajax’s Bureau already had 1,300 applicants. She expects a festive season tied to her desk in Sacramento: the final regulations were not submitted until November, giving businesses scant time to get lengthy applications together before the new year.
“We don’t expect everyone to have a state licence come January 1,” says Ms Ajax. She says operators will be given a fair chance to get legal: “If we want to minimise the black market, I think we have to give time for people to transition.”
The new regulations are painstaking. In a system called track and trace, the state of California aims to account for the whereabouts of the produce of every single cannabis plant — from the seed being planted all the way to a small amount of dried weed in a hash brownie — in real time.
“These burdens are higher than I’ve ever seen in any industry,” says Ben Curren, chief executive of Green Bits, a software system that aims to streamline compliance for cannabis businesses.
“Most small businesses have trouble doing payroll and taxes,” he says. “You now have to run like [US chain] Target or something, where you know where every single thing in your store is every single moment of the time.”
But Ms Ajax is optimistic that regulation will foster a commercial cannabis economy that resembles California’s alcohol industry — which she previously oversaw — where consumption is in part driven by branding.
Consumers are “going to want to know about who the cultivator is, a lot more branding and whatnot”, she says. “I think you’re going to find a savvy consumer market who is going to want to go to those stores.”
Some companies are trying to make a virtue of their small scale in their branding. Mr Casali works with Flow Kana, a farm-to-table cannabis brand that uses the premium language of winemaking — describing different growing regions as “appellations”. It emphasises its growers’ relationship to the land and their organic, sustainable farming practices.
For Mr Casali, although the regulations may not be perfect, any rules are an improvement on life as an outlaw. “I feel so much better having gone through this process [of securing permits],” he says. “I don’t feel scared every day I wake up.”