Eight months following the launch of California’s recreational cannabis market last January it has become increasingly apparent that the transition from a statewide medical cannabis program to fully regulated adult-use cannabis market is not going smoothly. Cannabis legalization in California is so rife with issues that the black market continues to thrive while tax revenue comes in way under projected estimates. Here’s a look at what’s wrong with the California cannabis market:
A restrictive regulatory framework
California, with the largest cannabis economy of scale in the world, is governed by a set of temporary rules drafted under emergency conditions. While legislators continue to debate permanent changes to those rules right now, they will not go into effect for many months.
To complicate matters more. The cannabis industry’s six-month grace period to come into compliance with some of the new rules ended in July, adding to the complications at every level of the supply chain.
A patchwork of regional regulations left many areas of the state with no access to legal cannabis. It can’t be sold or delivered locally creating so-called pot deserts. According to estimates, 40 percent of the state has to drive 60 miles or more to find a licensed dispensary or recreational shop.
Happy #Friday! By popular demand, we've uploaded a Redline version of our proposed non-emergency #cannabis regulations to our website. This version displays our emergency (readopted) regulations as the base text and highlights the proposed changes in red:https://t.co/UXdAFRSclv pic.twitter.com/KZdb03TLnb
— BCC Info (@BCCinfo_dca) August 3, 2018
A rebellious black market
Meanwhile, WeedMaps.com openly lists scores of black market dealers who will deliver cannabis products anywhere in the state. Although the state has sent more than 2,500 cease-and-desist letters to illegal pot businesses, there’s not enough workforce to shut them all down.
Taxes are so high in some places that the black market can easily compete and continue to thrive.
Burdensome testing requirements
Recently, a change in lab testing regulations left many products unsellable and many store shelves empty. According to data from the California Bureau of Cannabis Control, since new state laboratory testing requirements began in on July, one in five batches of marijuana has failed to make the grade either due to inaccurate labeling, contamination from pesticides and processing chemicals, or mold and other bacterial content, further exasperating the dearth of inventory and a major backlog for marijuana labs. Recently, the state recalled three separate cannabis products from store shelves for not meeting new standards.
Good morning, everyone! Seeing as how we're in the middle of an active #public comment period, we thought it might be appropriate to release a YouTube video explaining the #regulatory process and the different ways you can submit your comments! #cannabishttps://t.co/wGFS4oc16W pic.twitter.com/drPLwcXLuS
— BCC Info (@BCCinfo_dca) August 14, 2018
A war on CBD oil
In early July the California Department of Public Health issued a policy memo, prohibiting the use of hemp-based CBD in food and beverage products, causing an uproar among many local retailers. As anyone in the industry knows, food and beverage products containing CBD are widely available.
The department’s memo triggered another memo from the Department of Alcoholic Beverage Control reminding the industry that adding cannabinoids of any kind — CBD or THC — to an alcoholic beverage is also prohibited. The memo warned restaurant and bar owners that selling alcohol and cannabis at the same location is prohibited.
Big business asserts control
For years growers sold marijuana directly to consumers at “marijuana farmer’s markets” and events like the Emerald Cup. Recently, another bill failed to pass which would have allowed licensed growers to sell directly to consumers at these events, putting that practice in question. Major California cannabis brands opposed the bill as did the United Cannabis Business Association, which represents Los Angeles and Orange County —area retail dispensaries.
A new (cannabis) world order
Recently state officials announced that cannabis tax revenue fell far short of estimates in the second quarter. Officials estimated total revenues of $185 million for the first six months of the year. The actual total was $82 million — a deficit of more than $100 million.
Meanwhile, the entire industry is still, for the most part, a multi-billion dollar cash business. At the end of July, California lawmakers shot down a proposal to allow private banks to do business with the state’s legal marijuana industry.
While the state’s regulations are in flux and transitioning from temporary rules to permanent rules, stakeholders work hard to influence the process. In the second quarter of this year, spending by lobbyists surged to almost half a billion dollars with Weedmaps.com being the biggest spender at $75,000. Between April and June Weedmaps contributed more than $150,000 to political campaigns including more than $50,000 on June 1st to the California Democratic Party. Cannabis delivery company Eaze Solutions spent nearly $66,000 lobbying.
Stakeholders also began to consolidate their power. Two prominent cannabis industry trade groups recently announced the formation of a new political alliance. The Los Angeles-based Southern California Coalition and the Sacramento-based California Growers Association say their new coalition “aims to be the most powerful political voice for the cannabis industry in the state of California.” The two groups combined represent more than 1,600 companies at all levels of the supply chain.
Recently, regulators held a hearing attended by dozens of marijuana business owners, industry lawyers, activists, and consumers. Over the course, the two-hour hearing, Lori Ajax, the state’s top marijuana regulator, listened to a litany of 90-second complaints and suggestions related to all aspects of the industry. At the end of it all Ajax admitted, “Unfortunately, there is confusion out there.”
Even with all the confusion, California recreational sales expect to surpass $2 billion over the next two-and-a-half years.