In a farmland off Route 101 between San Francisco and Humboldt County lies a sun grown marijuana cultivation in Garberville that has spanned the course of over 40 years. What was once the source of illicit cannabis, is now home to medicinal product that is currently playing out for the worse. Johnny Casali, the owner of the long standing farm Huckleberry Hill Farms, can tell you how the legal cannabis industry has grown to terrible heights after discarding 55 pounds of his cash crop into a wood chipper.
“It doesn’t matter how good your product is; there’s so much supply in California that it’s a race to the bottom,” says Casali. While his farm produces over 500 pounds of craft marijuana in his two greenhouse facilities, Casali’s profits are running thin. “It feels like I’m a lettuce farmer right now – I’m working on the smallest of small margins.”
The Problem With Cannabis Regulation
The legalization of cannabis should have been an opportunity for those incarcerated for cannabis and “legacy” operators who have managed to stay under the radar until legalization. Additionally, hemp and marijuana legalization should have also created a legal environment by decriminalizing cannabis offenses while simultaneously establishing public business programs in favor of those negatively impacted by cannabis crimes. Instead, U.S. lawmakers has allowed their own greed and personal agendas to take reign of this now unsustainable market. From over-regulation, over taxation, and laws differentiating widely state-by-state, it is no wonder the cannabis industry is meeting a critical point before what feels like an epic failure.
About 95% of all California cannabis cultivators operated at a loss in 2021 according to Jonathan Rubin, CEO of New Leaf Data Services. Since 2017, the wholesale price of pot per pound has plummeted by 52%, making profits nearly impossible for those in the industry.
No Demand for Legal Weed
A main cause for these falling prices is due to the increase in supply for legal cannabis, but no increase in legal demand. First, the barriers to entry for creating a cannabis cultivation from permit to product is arguably easier than forming a cannabis dispensary. This problem makes cannabis dispensaries far outnumbered by cultivators. Second, in addition to only 1,000 California dispensaries existing (1 for every 40,000 people), the hurdles to get cultivated cannabis into shops is a highly regulated process. Although obtaining a permit to grow weed is more straightforward than receiving a dispensary license, getting your farmed product onto shelves requires taxes, transportation fees, distribution fees, and product testing, all of which eat away at potential profits set by government regulations. Lastly, since cannabis is still a schedule 1 drug under federal law, major banks are quick to turn away from any business giving off the smallest scent of cannabis in their operations. This forces small cannabis businesses throughout the entire supply chain to face a brick wall of having a secure means of banking, cornering the industry to primarily operate off of cash.
Legal Weed Can’t Compete With Black Market
With so many costly regulations and taxes imposed by the government, the surplus of weed in California is injected back into the black market to taper lost profits. The exact reason for legalizing cannabis has backfired and brought the marijuana industry back to its roots. California, the largest market for cannabis in the United States and one of the earlier adopters of legalization, has faced little to no control over illegal cannabis sales. According to research from investment bank Cowen Inc., consumers spent $5.1 billion on legal weed in 2021, and an estimated $15 billion on illegal bud. On a national scale, the proportions of legal and illegal sales are significantly relevant. With legal cannabis valuing $25 billion, the black market has sold almost double.
Cannabis Legalization is Breaking Bad
The idea of ending illegal transactions, decriminalizing cannabis offenses, and provide economic opportunities for those negatively impacted is now feeling farfetched. With 2021 marking a 25% increase in cannabis related arrests by the Drug Enforcement Agency (mostly of people of color), legalization is currently taking a turn for the worst. Although a majority of Americans support the legalization of recreational and medical cannabis, the outcome is truly unfavorable.
Taxes Burden Marijuana Market Growth
The abundance of marijuana suppliers plummeting prices coupled with state and federal taxes eclipsing any other industry has driven consumers and cultivators to the streets. State taxes on cannabis retail sales go as high as 37%, and while the federal government doesn’t allow for the sale of marijuana, pot businesses are unable to take the same business deductions as companies in other markets, leaving them with a combined tax rate of up to 60% or more.
In states like Illinois, government tax revenues from cannabis outweigh liquor taxes. In the last year, marijuana brought in $467 million in taxes, compared to the $320 million from liquor. Despite decreasing cannabis stock prices ranging from 50 to 70%, tax revenues from cannabis companies have been breaking record highs.
Key Players in Marijuana Industry Speak Out on Hardships in Legalization
In Oakland, California, Amber Senter, CEO of MAKR, has developed a 1,200-square-foot commercial kitchen to manufacture cannabis-infused edibles. Her business is now facing the brink of survival, as state regulations requires her facility to go above and beyond to maintain complete transparency with law enforcement. In all legal cannabis business in California, it is required to have 24 hour live surveillance accessible to officers in every space where marijuana products are being held. This requirement is costly, and is only the tip of the iceberg of regulation expenses. State mandates and fiats also chip away business funds, making Senter believe the industry is near impossible for newly starting businesses to gain any steady ground. “What is legalization doing to small business owners like myself? It’s killing us,” Senter said.
The regulated market has even received criticism from individuals like Steve DeAngelo, dubbed by former San Francisco Mayor Willie Brown as the “father of the legal cannabis industry.” DeAngelo was a driving force behind California Proposition 64 and marijuana legalization. Since opening one of the state’s licensed dispensaries in 2016, DeAngelo’s outlook on the current industry has changed. “We legacy folks, over the course of 50 years, built a market which was fair, which was resilient and which served everybody in the market very well.” He said. “And now we’ve had this hand of government intervention completely disrupt it.”
Legal Cannabis Success Stories
Having to maneuver through California state regulations is one thing, but if you are a business like Cookies, with over 51 licenses spanning multiple states and countries, understanding the law is a key part of a successful cannabis venture. Company co-founder Berner has found success in understanding how to curve demand for his brand to beat the economic limitations set by regulations. At over $60 for an eighth of weed and over $100 for a Cookies hoodie, the premium Cookies’ marijuana and merchandise still sells out in the span of minutes.
The Future of the Legal Cannabis Industry
Most if not all industry players are relying on federal legalization to change the tide of downward profits. By decriminalizing cannabis, it would remove the 280E tax penalty on businesses which would allow them to utilize banks and conduct interstate sales.
