Are West Coast Cannabis Farmers Too Big to Fail?

Are West Coast Cannabis Farmers Too Big to Fail?

Two new, complementary studies about legalization in Oregon and California paint the picture of just how absurd the conflict between federal prohibition and state laws has become. Oregon has a huge supply glut going into the fall harvest season, which is likely to force out a lot of small businesses that can’t survive the limited demand and low prices. California’s black market is thriving amid a similar supply glut, over-taxation, and complicated layers of regulation and bureaucracy. Both states' illegal markets are likely to be met by law enforcement.  

“It’s desperately important that we end federal prohibition, that we allow export. Northern California, like Southern Oregon, is deeply dependent on the fact that those small farms have supported thousands of families and whole communities,” Adam Smith of the Craft Cannabis Alliance warned in late 2017. “And there is a very good chance, in California in particular, that [regulations] just wipe that out. If the export market was available right now, those farms would have a chance through branding themselves nationally and internationally as ‘Real California Cannabis,’ which is a product of an authentic, generations-old Northern California cannabis culture.”

Informally, cannabis has been keeping small communities between Portland and San Francisco afloat for generations. The impending decline coming for this region exists in stark contrast with the billions of dollars of investment flowing through publicly traded Canadian corporations. If these communities fail, what happens to the state and national economies? Why aren’t American Main Street cannabis farmers being considered as Too Big to Fail?

Oregon’s Glut

The Oregon Retailers of Cannabis Association meets monthly in downtown Portland and is a great place to hear what Oregon’s farmers have on their mind. At the last meeting in late July, there was a lot of anxiety about the nearly 1 million pound surplus in the state supply, only slightly lower than it was when alarm bells started ringing in February. As the fall harvest season approaches, that number could swell, plunging already rock-bottom prices even lower and forcing small businesses to merge, get acquired, or drop out of the market.

In some Portland-area dispensaries, mid-grade dabs and hashes are down to anywhere between $10 to $20 a gram retail and down to $3 to $4 a gram for flower. Part of the problem is what Oregon did right. Unlike neighboring Washington and California, Oregon has a system with lower barriers to market entry, no market caps, and comparably low tax rates. According to MJBizDaily, Oregon has one cannabis producer license per 19 consumers and there is so much supply that wholesale rates of indoor flower are now as low as $300 a pound.

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With harvest around the corner, the state has imposed new complicated rules in an effort to preempt federal enforcement.

“Part of this is optics and that we need to make the system that we regulate as well-regulated as possible so that it withstands the scrutiny of federal authorities who are focused on this issue,” Oregon Liquor Control Commission spokesperson Mark Pettinger told Cannabis Business Times. “It’s our belief that if we focus as much as we can on tightening down and limiting the leaks from the legal market that we regulate, that will enable law enforcement to better concentrate and better focus on illegal activity or diversion.”

Of course, the glut is great for Oregon consumers, but the smallest businesses are the most vulnerable to unsustainable prices. In Oregon, other craft agricultural and community based businesses thrive and drive significant tourism to the region annually. Without the opportunity to export product, however, the market could increasingly become oligopolistic. It’s a pretty free market, but not a very fair one.

California’s Cannabis Cash Cow

California legalization has been seen as the biggest prize on the map for corporate speculators since the narrow failure of Proposition 19 in 2010. And, the market may prove to be incredibly lucrative for international investors who can lose money for a few years, but it may be devastating to communities in the Northern third of the state.

The rollout of legalization in California has been anything but smooth, and with layers of costly regulations heaped on the grower, the vast majority of California’s heritage farmers who make it to the legal market could drop out after this year’s harvest. Thanks to a combination of light deprivation farming and large scale outdoor natural light operations, the tsunami of bud that is about to hit the market is just starting to develop offshore.

Both state’s situations, of course, perpetuate a criminal element that is profitable to law enforcement and private prisons. Both state’s situations pave the way for small companies to fold into big ones with outside money. Both state’s situations may usher in a national economic crisis as a generations-deep industry is extracted away, legally.

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This year, Craft Cannabis Alliance executive director Adam Smith is ramping up the warning and pushing for interstate compacts that allow Oregon and California farmers to export to other states now, before the feds make a move. He sees this as agreements between exporter states and conservative medical states with restrictive cultivation programs that limit the market, and therefore quality medicine to patients.

“These states are in real trouble until they can export… It is a huge problem and there is no way any of this will stabilize. Everyone is complaining about overage and diversion [to the illegal market] here. You are not going to deal with that flow into the illicit market unless there is an incentive to get a license. The only thing to do about that is open up markets,” Smith says.

Smith, a native New Yorker, points to legislators in New York and New Jersey working to create in-state production industries “larger than Oregon’s, from scratch, next door to each other” to meet the sizable demand in both of these densely populated states. He says that from an industry standpoint, he doesn’t see a point in investing large amounts of money to create more production industries in places where it will not be competitive in a future national market.

“The only reason not to allow export between legal states is to maintain the friction of prohibition,” Smith says.

He says that maintaining the friction of prohibition could lead to “economic devastation” for in-state investors and small businesses that have “mortgaged houses, spent their life savings, and gone all in for this industry.”

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“We are in a position where the whole thing is on the verge of collapse and the only ones who will survive are those with deep pockets from outside the state,” he says. “All these [small Oregon and California] communities will have people suffering economic devastation. In any other industry we would have political leadership yelling and screaming about supporting this in a rational way. We have to address it. We cannot talk about oversupply or illicit markets or the economic potential of this industry or the economic collapse that could happen without talking about export. It changes the dynamics on all sides of this that is positive.”

Smith says that the locally owned industry is too big to sit back and watch fail and the solution is in creating market opportunities for farmers who are trying to be legal but can’t survive the in-state prices bottoming out.

“[The West Coast cannabis economy] should be too big for our political leaders to allow it to fail,” Smith concludes.