The Triumph of Illicit Cannabis Cultivation and Retailing In California and the Liquidation of the Artisanal Growers

Across much of the United States, legal cannabis firms are failing, and large sums of money are being lost. As noted in a recent Investopedia article, “Retail investors who once looked to cannabis to make them rich would now in many cases settle for getting their money back.” The collapse is most severe in the agricultural sector. Plummeting wholesale prices are driving most small-scale cannabis farms into bankruptcy. According to the same Investopedia article:

In California, … the wholesale price has wilted to less than $700 per pound. Some 60% of the pot farms in the Emerald Triangle, the traditional heartland of cannabis cultivation in northern California, have reportedly gone out of business since California legalized recreational use six years ago.

If anything, this article underplays the dire situation in the Emerald Triangle, a region usually defined as encompassing Mendocino, Humboldt, and Trinity counties in northwestern California. I know several artisanal cannabis farmers in the region who would be happy to receive $500 a pound, which is near their break-even point. Some cannot get more than $300, resulting in a substantial loss with each sale. A few years ago, they were receiving around $1200 a pound.

 

As might be expected, the wholesale price collapse is the result of oversupply, which stems from two main reasons. First, the state has awarded a sizeable number of cultivation permits to large, well-capitalized corporate farms, which have flooded the legal market. Second, illegal cultivation continues unabated in many areas. Illicit growers do not pay fees or taxes, nor do they fulfill the many onerous obligations faced by legal growers to remain in compliance. As a result, illegal operations often outcompete above-board farms, driving them out of business.

A downward spiral has thus emerged, with both county governments and the state losing the licensing fees and other revenues that they have been counting on. California now faces a lose-lose-lose situation, one in which scofflaws succeed while those who have gone to herculean efforts to become legal find that it has all been for naught. (I know retirement-age growers who had no computer experience whatsoever, as they had moved to the woods in part to get away from modern technological society. But to gain legal status they have had to master the intricacies of California’s online track-and-trace Metrc system, in which even leaves destined for the compost heap must be weighed and reported to the state. It has not been easy.)

The burdens placed on legal growers can be overwhelming, as will be explored in later posst. For now, a quote from an article by Kevin Rector, originally published in the Los Angeles Times, will suffice:

In place of handcuffs and prison sentences to deter cannabis cultivation, the state has established a vast system of taxes, fees and regulations to control it. The taxes are steeper and the rules more onerous than those in other agricultural sectors. … “Are all the small farmers destined to fail? That’s our biggest fear,” Casali said one recent morning at his farm. “It’s the War on Drugs Part II.”

But this a very different “War on Drugs” from the one that preceded it, as it focuses on those inside the law, while largely ignoring those outside of it. California’s political leadership feels guilty, for good reason, about the harms imposed on marginal members of society by the anti-marijuana campaigns of the 1960s, 70s, and 80s. As a result, illegal growers are now largely tolerated. Small-business owners, however, are regarded differently, and are given much less consideration.

A recent Fox News article outlines many of the problems generated by illicit cultivation. It begins by describing a massive illegal grow in  Riverside County, which is also California’s new center of corporate cultivation. As the author writes:

“The illegal industry is competing with the legal industry and essentially putting them out of business,” says Sgt. James Roy, head of the Riverside County Sheriff’s Department’s 12-person marijuana eradication team. “This place is no different than thousands of others we hit this year confiscating about a half-million plants in Riverside County alone,” Roy said…. Along with these growers, these illegal growers, comes a fair amount of violence and a lot of weaponry,” says Roy. “We serve warrants on operations like this every day. And in 80% of the locations, we are finding weapons, high-powered weapons, assault rifles, things like that.”

The same article tersely explains why legal growers cannot compete: “By requiring licenses to grow and transport pot, permits to sell it retail, and taxes to buy it, the state effectively imposed a 70% tax on legally purchased marijuana.”

One might expect the legal risks incurred by illegal cultivation to impose a stiff penalty of its own, thereby leveling the playing field. But that’s not how it works in California, where large-scale illicit growers, despite the violence, uncertain product quality, and environmental degradation associated with their operations, have little to worry about. No one in California is facing prison or even county jail for illegal cannabis operations, and the modest fines that are occasionally levied are just considered a part of doing business, if not just ignored.

It is not just cannabis farmers who are facing devastating competition from illegal operations, but also dispensaries. Particularly in the Los Angeles area, unlicensed and unregulated “trap shop” dispensaries have become widespread, and now significantly outnumber above-board operations. These illegal businesses are typically set up in conventional retail space and have the appearance of legitimate dispensaries. As a result, customers often have no idea that they are engaging in an illicit transaction. A recent article in cannabis.net outlines the problem:

Recently, an audit revealed that California’s 900 licensed cannabis operators have about 2,800 illegal competitors, more than three times the number of total legal sellers, which could be higher today. These unregulated stores, most of the time, have untested stock products that are not up to state-issued production standards, nor do they follow the state’s regulations for cannabis operations. Patronizing an unlicensed store is more or less the same as buying from a dealer around the block. You only get promises that you’re purchasing the best product in the area, whereas it’s basically junk.

Unlicensed dispensaries are so widely tolerated that Yelp has a page listing the “best illegal cannabis dispensaries near me.” (I cannot say, however, whether the dispensaries listed here are truly illegal.) For several years, the important cannabis website Weedmaps also listed unlicensed dispensaries, although that is no longer the case. If one wants to avoid patronizing illicit operations, the maps provided by Weedmaps are a good place to turn.

With these stories in mind, it seems that the root problem of the California cannabis crisis is a perverse set of attitudes on the part of the state’s political leadership. To put it simply,  California, and particularly its large cities, are tough on small legal businesses and lax on illegal ones. Under such a regime, it becomes extremely difficult – and often simply impossible – for the legitimate sector to compete with the underground one. As a result, the entire legalization experiment in California is failing. The expected revenues are not filling state and local coffers, and the myriad pathologies of the illicit market remain firmly ensconced.

The “soft-on-crime, hard-on-small-business” attitude is on its surface rooted in a left-wing political philosophy, one based on compassion for those who have supposedly been forced by circumstances beyond their control to engage in illegal activities. But, as will be explored later, what is actually encountered here is a form of pseudo-leftism, a perverse political philosophy that favors the corporate sector and is hostile to minuscule family farms and tiny retail firms.

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