Cannabis industry poised to explode to $22 billion

JAMES DUNN

Prop. 64’s proposal to legalize adult marijuana use in California triggered a battle about business more than a tussle over moral issues with the drug. If recreational pot use becomes legal on Nov. 8, the market for legal cannabis could soar to $11 billion by 2018 and $22 billion by 2020, according to the State of Legal Marijuana Markets report, published by ArcView Market Research in February. The market could ascend 30 percent a year.

California produces $32 billion worth of wine sold into the national market — nearly 90 percent of overall sales. Just as Napa and Sonoma counties produce some of the finest wine in the world, Sonoma County and the North Coast produce some of the highest-quality cannabis on the planet.

If Prop. 64 passes along with recreational cannabis bills in Arizona, Nevada, Maine and Massachusetts, Sonoma and Mendocino counties will become lead producers in an accelerating market that may eclipse the vast wine industry.

Legal cannabis from one state cannot be taken across state lines to states where it is illegal, but adjacent states where it is legal may relax vigilance, such as occurs between Oregon and Washington.

If California legalizes recreational cannabis, it could create in pragmatic terms a contiguous West Coast market with total population near 50 million. (See chart)

With the election just two weeks away, passage of Prop. 64 is far from certain, though polls put some 60 percent of voters in favor. Lt. Governor Gavin Newsom visited Santa Rosa on Oct. 11 as part of his statewide effort to promote passage of Prop. 64. But Newsom failed to win support from the Sonoma County Growers Alliance, a 200-member group of local businesses and individuals involved in cultivating medical cannabis.

CANNABIS ECLIPSES MARIJUANA

Two words in the industry have become fighting words in the conflict: marijuana vs. cannabis.

Newsom seeks legal adult use of “marijuana.” Growers cultivate medical “cannabis,” and many now consider the word “marijuana” or “marihuana” to be uncool, with murky etymological origins (see sidebar).

State lawmakers adopted the linguistic shift, initially passing the Medical Marijuana Regulation and Safety Act, signed by the governor in Oct. 2015. Then bill SB 837 made numerous amendments to and changed the name of the new set of laws to Medical Cannabis Regulation and Safety Act, effective Jan. 2016. Among other changes, the amended laws regulate water use for cannabis cultivation.

Prop. 64 seeks to ease worries of small cultivators that they will be driven out of business if large cultivators overwhelm the cannabis market, driving down prices and controlling distribution. Big cultivators cannot enter the market in California for five years, the proposition states, and are then subject to antitrust provisions. But the reassurances failed.

In early 2015, a handful of local growers founded the Sonoma County Growers Alliance, with Tawnie Logan as its executive director. “I have been cultivating for 15 years,” she said, refining her methods through permaculture and organic farming. Previously she worked for Boulder-based Organic Bountea company, which sold compost tea to cultivators in several states where medical cannabis is legal. That experience gave her a national glimpse of the rapidly maturing cannabis market.

FEAR OF MEGA-GROWS

“We have gone from thousands of small farmers, especially in states that have legalized. They’re consolidating small farmers. Massive mega-grows are coming on,” Logan said. “It’s hard for small farmers to compete on that market.” She heard troubling reports on excessive use of electric power, water and pesticides. “They were seeing effects in their rivers,” she said. “Firefighters were refusing to go into buildings where there were grows on fire. They didn’t want to be exposed to pesticides.”

The FDA has not granted permission for use of any pesticides on cannabis, Logan said, “because cannabis is a Schedule I drug. It’s not a plant, it’s a controlled substance,” she said. “Our industry is riddled with this because at the federal level, they’re saying this is a controlled substance that’s completely illegal and has no medical value.

In California, it has an incredible array of medical values, and happens to be a plant.” California is the only state that has identified cannabis as a plant, Logan said, as part of the Medical Cannabis Regulation and Safety Act of 2016 (amended MMRSA). “Everything went from marijuana to cannabis,” Logan said, in the 2016 version.

Barely 18 months after it started, the local alliance swelled to 200 members, most in Sonoma County with about 30 in Marin, Napa, Mendocino and other counties. The alliance is largely cultivators, but includes labs, manufacturers and distributors. Proliferating cannabis legislation creates waves of new regulations as the pot market girds for growth. “Cultivators needed to be empowered,” Logan said.

Medical cannabis quietly grew up as a potent industry in California over 20 years since 1996, when voters first made it legal for patients. “Dispensaries, being retail, were the centerpiece of an industry,” she said. Cultivators were not protected in an unregulated market. “If you leave any industry unchecked without regulations, there would be way more bad actors,” she said. “Capitalism gone unchecked becomes monopolies. Greed gets in the way, destroys capitalism.”

MEASURED BY CANOPY AREA

Regulators don’t measure growers by plant count, which Logan considers irrelevant. Even a small table can hold trays of clones. “I could put 300 rooted plants on this table,” she said. “Or if I had one sun-grown plant, it could take up twice the size of this table.” Colorado initially tried to regulate by tagging every single plant. “Plants can die,” Logan said, and the tagging did not stop diversion of product to unregulated corners of the market or ingress of black-market pot. What matters is square feet.

California embedded distribution into 17 license types in the new laws. “We have over 50,000 cultivators in California,” Logan said, and “9,000 cannabis operators in Sonoma County” connected to the industry, with more than 6,000 of those doing cultivation. “The majority are cottage farmers,” she said.

In Sonoma County, a typical cultivator has less than 2,000 square feet of canopy, according to Logan. Most of the crop is indoors in places such as Santa Rosa; most cultivation is outdoors or in greenhouses in more rural zones.

“Prop. 64 gives way to an unlimited canopy” in five years, she said. “There’s very little room for competition in that marketplace.”

PREMIER CANNABIS SEAT

Sonoma County accounts for more than 10 percent of cannabis cultivation statewide. “We will be one of the premier commercial cannabis seats of California,” Logan said, with cultivation, processing technology and distribution. “We are the gateway.” Sacramento provides a secondary major gateway.

 

“Sacramento is ahead of us. They already allow distribution.” Humboldt, Mendocino, Siskiyou and Shasta counties primarily provide cultivation.

“These two channels,” Sonoma County and Sacramento, are where the product gets processed, packaged, stored and distributed to vast markets in southern California, Logan said.

Cultivators “are the people who might lose their jobs if Prop. 64 passes,” she said, “and we lose that control from producer to wholesaler to retailer.” She wants a new proposition to legalize recreational cannabis in 2018 while better protecting small farmers, drawing on the experience of new state laws to regulate the industry for medical cannabis. “MCRSA is a well-written piece of legislation. It’s beautiful,” she said.

“Stand with small business,” the alliance’s position states. “Vote no on Prop. 64.”

“When distribution consolidates, we lose as a society,” Logan said. In the wine industry, “very few distributors have access over that wholesale market. Producers should not be allowed to control wholesale and retail portions of the cannabis market, she said.

Sonoma County’s Cannabis Technical Advisory Committee includes representatives from agricultural, water and open-space preservation districts, as well as the district attorney, sheriff, resource management. The committee drafts land-use regulations for commercial cannabis in the county. “It’s not perfect, but it’s a really good start,” she said, “a very comprehensive initial framework, tailored to our county’s needs.”

TERPENES: CLOVES, CITRUS

She sees a spirit in the local industry that supports organic farming, sustainable practices and innovative processing technology, especially extraction of terpenes, essential oils that contribute to aroma, flavor and health effects. Some terpenes have anti-inflammatory, anesthetic, anti-anxiety, antibacterial or relaxing effects.

Myrcene, a common terpene in cannabis, smells like cloves and is a potent analgesic (painkiller), anti-inflammatory and antibiotic. Limonene smells like citrus, and has anti-fungal and antibacterial properties. Cannabinoids such as THC and THC-V result in psychoactive effects, and other cannabinoids such as CBD, CBN, CBC and CBG have other physiological effects.

“We are the innovative hub,” Logan said. Many new jobs will be created as cannabis business grows. As with wine grape growing, most local cannabis cultivators will aim for high quality rather than huge quantity.

INDUSTRY OF GAMBLERS

The cannabis industry resembles a wild-west marketplace. “There are a lot of risks,” Logan said. “This is an industry full of gamblers.” She likens the breakdown of stigmas around cannabis use to the advancement of civil rights.

For farmers with up to 5,000 square feet of cultivation, average income is $80,000 to $100,000, Logan said. She aims to give up her position with the growers alliance and go back to farming.

“I want to feel safe, empowered and protected to do this right,” she said, not subject to raids by police.

Cannabis can be dry-farmed, much the way ultra-premium wine grapes are grown, Logan said. “Water use is excessive. A seasoned farmer would laugh at the idea of 20 gallons per plant per day,” she said. “That is an incredible amount of water.”

With dry-farmed cannabis, “you don’t have as high a yield, but higher quality,” she said. “You can charge a premium.”