Growing Pains: Can Sustainable Farmers Survive Legalization?

Part 3 of our 3-part series: Green Rush Blues: California Cannabis After Legalization
By Angela Bacca On January 29, 2018
Securing local and state licenses to cultivate cannabis is costly
Securing local and state licenses to cultivate cannabis is costly

The California counties of Humboldt, Mendocino and Trinity, which comprise the Emerald Triangle, emerged as the epicenter of domestic cannabis cultivation in the late 1970s and early ‘80s. After the Golden State legalized medical marijuana in 1996, the nascent cannabis industry spread throughout much of Northern California’s remote regions and into the Central Valley. But today anxiety is high in weed country, which desperately needs the industry to survive.

The cost and risks of coming into compliance with county ordinances and state laws has deterred a lot of the Emerald Triangle’s underground growers from choosing the path to legitimacy. With a larger and more lucrative black market beckoning outside of California, many cannabis farmers have opted to continue operating outside the law by exporting their product.

In order to become a licensed grower in California, there are various agencies one must seek approval from. One has to take all the necessary steps to obtain local permits (including payment for legal and licensing fees); register fingerprints with the state Department of Justice; submit proof of compliance with the California Environmental Quality Act (CEQA); submit cultivation, business and environmental plans, proof of ownership or right to use the cultivation space, any streambed or water alteration plans; implement a technically complex track-and-trace system; get a seller’s permit from the state, and more.

Securing local and state licenses to cultivate cannabis is costly. And even after small growers pay for the property improvements, lawyers, architects, land use and permitting experts, and licensing fees, many will find themselves taxed out of existence.

Under California’s new tax scheme, growers are taxed by the state at a rate of $148 per pound of cannabis flower and $44 per pound of cannabis leaves. In many places, growers pay an additional tax to the city or county of $25 per square foot of garden space.

Costs cannot simply be passed onto the consumer. Customers—both medical and recreational—are already being squeezed at the register. The state has imposed a 15 percent excise tax on all cannabis products. Several cities and counties have imposed an additional local tax that’s as high as 15 percent. California sales and use tax, which ranges from 7.5% to 10%, is then applied not just to the retail cost, but to the excise tax as well (in other words the excise tax is taxed).

What’s more, cannabis businesses may be penalized an additional ten percent if they pay their quarterly tax installments in cash!

Given that banks aren’t supposed to service federally illegal marijuana companies, cash is the only viable option for the cannabis industry in California at this point.

The Los Angeles Times estimates the high rate of taxation could lead to retail prices going up 70 percent in 2018, thereby ensuring that the black market will persist as an alternative for cannabis consumers as well as producers.

Supply Glut

“The future of Mendocino is kinda bleak for small farmers,” says cannabis industry veteran Anna Foster. “The way the regulations are being set up, it isn’t helping them compete.”

The challenges facing Mendocino farmers, according to Foster, are magnified by inconsistent county and city rules across the state and the current supply glut that is causing a sharp decline in per-pound prices. Taxes do not adjust with the price the supply is sold at.

The 2017 fall harvest brought the lowest prices in the legal medical market yet, with some growers saying they are unable to move even their top shelf at a break-even price. It is typical for growers to wait until post-harvest prices start to rise again before moving their product, but many are expressing concern they won’t be able to move it at all.

Concerned about the adverse environmental impact of Green Rush grow-ops, Mendocino and Humboldt have implemented measures to limit the size of gardens and the number of cultivation licenses given to those who were in the area before legalization. This approach, however, has made it very difficult for the region’s responsible growers to compete with better funded, large-scale industrial farms in other parts of California and the booming black market.

In Mendocino, for example, the largest garden size allows for a total of 22,000 square feet (including walkways and spaces not utilized for growing). A few hours south in Salinas, the agricultural town best-known as the setting for John Steinbeck’s novels, Monterey County regulations allow huge cannabis cultivation operations.

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Harborside CEO Steve DeAngelo

Harborside Health Center, one of the largest and highest-grossing cannabis dispensaries in the world, recently shifted from sourcing most of its supply from smaller medical farmers and producers to its own 47-acre farming operation in Salinas.

“How are we going to be a weed county if we can’t even grow a whole acre of cannabis?” asks Foster, who lives in the Mendocino town of Willits.

Foster fears that the un-level playing field will devastate Northern California’s small cannabis farming communities. With the wholesale price of cannabis on the decline yet heavily taxed, some farmers “are looking at jobs outside of cannabis, because it’s not profitable or sustainable,” she explained. “They have always been farmers, but now they have to be businesspeople. And they don’t know how to be businesspeople because they’ve always been farmers.”

Looking for Work

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Will Foster and his family

Foster grew up in the world of marijuana cultivation and activism before the Green Rush and has been employed in the cannabis industry for most of her life. Her father, Will Foster, was arrested in 1995 for growing cannabis in his Tulsa, Oklahoma, basement to treat his degenerative arthritis. In 1997, he was convicted and sentenced to 93 years in prison, generating national coverage and outrage. During Will’s incarceration, Anna moved to Oakland, California, where she lived and worked with author/activist Ed Rosenthal and his wife Jane Klein, who ran a cannabis-oriented publishing company and other businesses affiliated with the early Bay Area medical marijuana movement.

More recently, Foster teamed up with Karen Byars, a longtime Emerald Triangle cannabis grower and advocate who has been hosting educational events to help the region’s responsible actors transition into a legal, regulated industry.

Byars relocated from Amarillo, Texas, to the Emerald Triangle in 1990 to participate in the Redwood Summer protests that sought to disrupt the logging industry and protect the disappearing old-growth redwood trees the region is famous for. Her work as an environmentalist exposed her to the underground cannabis farming community during Operation Green Sweep, a federal crackdown on marijuana growers who sympathized with the “tree huggers.”

After the passage of proposition 215 in 1996, Byars began to cultivate medical marijuana with an all-women’s collective in Mendocino’s Round Valley. Two decades later, when cannabis was legalized for adult use, she and Foster organized a job fair, resume-building workshops, and other vocational development services to support the establishment and growth of stable industry businesses in the region.

In late 2017, their organization, Mendocino Cannabis Resource, hosted its first job fair. Over 600 people attended, twice the expected number. With just 16 vendors hiring farm laborers, managers, scientists, accountants and other workers, the demand for jobs clearly outweighed the supply. Half of the job seekers were locals, while others came from the eastern U.S. or as far away as Chile and China; most of them wanted to find a way to make money from growing marijuana.1

Small was Beautiful

In the past, when the cultivation scene was completely underground, successful growers would reinvest their money in small, local businesses – both by choice and because other kinds of investment required considerable illegal maneuvering. Growers spent their cash on community development, contributing to independent radio, local theater productions, and start-ups that doubled as community centers.

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The good ‘ol days

“It used to be that you kinda knew this guy’s sound studio wasn’t paying the bills,” Byars recalled, “but there was this cool place everyone had access to.”

Today, Byars is concerned that out-of-town land-grabbers and speculators betting on cannabis grows are extracting wealth from small communities in the Emerald Triangle without contributing much in return.

“People are coming up here and ‘green rushing’ these communities without knowing what they are doing,” she cautioned.

In the pre-legalization marijuana market, most of the money accrued to the growers. The price per pound peaked after the passage of 215. But as the medical market evolved into the post-prohibition commodity market, the economic focus has shifted from growing marijuana to processing, taxing, distributing and retailing it.

In post-prohibition California, new regulations siphon much of the profits from farmers to fill the state treasury. “People are treating growers like ATMs because they know all the money is in the weed. All the middlemen profit. The farmers and consumers lose,” said Foster.

Going Broke

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New tax regulations are crippling some growers

Kevin Simmonds is a licensed contractor and cannabis cultivator who’s been serving the Bay Area market since 2010. Based in Santa Rosa, he struggles with lifelong pain due to arthritis, which is why he started growing medical cannabis. Simmonds uses an indoor compartmentalized grow system so that he is perpetually harvesting fresh product for dispensaries every week.

But now Simmonds is also struggling with the costs of coming into compliance, the glut of growers, and the plunging price per pound – and he may not survive. It would be much easier for him to keep turning a profit if he chose to move his product on the black market, which he has no interest in doing.

“It’s always been my intention to participate in whatever regulation scheme they come up with. This is it, I am stuck dealing with it and I am going broke,” says Simmonds.

To become compliant with the regulations that went into effect on Jan. 1, he had to invest nearly $100,000 in his indoor operation. He will be taxed per square foot of his garden’s canopy by both the state and Sonoma County. Additionally, he had to front tens of thousands more to get state licensing. Meanwhile, his margins are shrinking fast as prices drop in the legal market. He is worried that with the low wholesale price, high taxes and black market competition, legalization could bankrupt him.

“I have some cost projections for the coming year, and it’s going to be super tight. It is going to be a matter of if I can move all my product and have successful runs that yield well, every time. Without all those components, I will fail,” Simmonds confides.

Simmonds currently has three to four employees that tend the gardens and four full time trimmers relying on work from his operation.  “What I am up against,” he emphasizes, “are some well-financed operations starting up, people who can afford to lose money for a good long time.”

He said if he must take a significant corporate buyout to survive, he would happily do so at this point.

“I was born with juvenile rheumatoid arthritis. The prediction for me was that I would be on public assistance the rest of my life. Through [growing] cannabis, I was able to find a way to financially prosper and raise my kids. I put them through private schools and bought a house. All of these things would never have happened if it wasn’t for the small business models created by [Prop 215, which established] the foundation for my ability to start with nothing and make something,” Simmonds explains. “Now if anyone wants to make something with cannabis, they have to come in with at least a million dollars.”

Beyond California: The National Export Market

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Adam J. Smith

Adam Smith has seen this scenario play out before on a smaller but significant scale in Oregon. A longtime proponent of drug policy reform, Smith has been working both to save and promote responsible, locally-owned cannabis businesses in the Beaver State, which legalized recreational marijuana in 2014.2   Ultimately, the success of these farming communities may rest upon the ability of West Coast cannabis companies to export and sell product in a legal national market and beyond.

“It’s desperately important that we end federal prohibition, that we allow export,” asserts Smith.

“Northern California, like Southern Oregon, is deeply dependent on the fact that those small farms have supported thousands of families and whole communities,” he explains. “And there is a very good chance, in California in particular, that [the regulators] 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 the product of an authentic, generations-old Northern California cannabis culture.”

With the roll-out of legalization in Oregon, Smith quickly recognized how big outside investment could negatively impact local economies in cannabis-dependent regions. “Those out-of-state interests had more money and resources than the local industry, but we’ve had an industry here for generations. It is an indigenous industry. It’s not Massachusetts with millionaires opening mega-grows.”

How can the indigenous cannabis industry in Northern California and Southern Oregon avoid being steamrolled by outside forces?

“With craft beer, if you don’t support your local brewer he can sell beer to [out-of-state] markets,” Smith notes. “If you don’t support your local cannabis growers, they go out of business or back to the black market.”

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“California-grown” cannabis

Smith recently founded the Craft Cannabis Alliance (CCA), a membership association of cannabis businesses in Oregon that share a “commitment to an authentic craft cannabis industry that respects and serves people, place, planet and plant.” The goal of the CCA is to build an industry that benefits small producers in cannabis-reliant economies by defining and promoting “craft cannabis” and providing resources to businesses with aligned missions. Smith intends to work with growers from California and other legal states as well.

A Different Kind of Capitalism

“Oregon Cannabis has a global brand and people should know about it,” Smith explained. “When the walls [of federal prohibition] come down, if the shelves here are dominated by international and out-of-state companies, then that’s who is going to own the export market, and we will never buy it back. We will just be a low wage factory for the enrichment of other places and other people. Even if it is grown here, if you are buying cannabis and it’s owned by a Texas investment group or a Florida company or a Canadian company, you are just sending the profits out, bleeding money out of state, while we sort of give away our local industry. What do we do about that?”

Smith continues, “Our message is that we are not doomed to be in this sort of extractive capitalist model that will steal this from us or bleed this [region]. We can create and support an industry here, that is locally owned and where the money reverberates back through this economy. This is something that is worth saving and if we can bring in tourism to support this part of the industry, it can build communities, institutions and wealth here.”

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Implementing sustainable growing practices

The CCA defines the craft cannabis industry around six basic tenets: clean product, sustainable growing methods, ethical employment practices, community engagement, substantial local ownership and “meaningful participation in the movement to end the drug war, not just opening up the next cannabis market — because otherwise you’re just profiteering off of 80 years of ruined lives and destroyed communities, and that’s not moral and it shouldn’t be okay with consumers.”

As Smith sees it, the cannabis industry provides the “perfect vehicle to express a different kind of capitalism.” But steps need to be taken now at the federal level to stabilize the markets.

“This is why we have to tear down the federal walls as quickly as possible,” says Smith. “A lot of people are going to go out of business. If cannabis is allowed to be sucked into an extractive corporatist system, leaving people who care about deeper things on the fringes of this industry … it will not only be an economic disaster, it will be a cultural disaster.”


ALSO IN THIS SERIES

Part 1. Eco-Crisis: Will Cannabis Legalization Save California’s Forests?
Part 2. Black Markets Matter

Angela Bacca is a Portland, Oregon-based freelance journalist with a MBA and 10 years experience in cannabis media. She specializes in coverage of cannabis in conservative states, science, medicine, politics, business, culture and media.

FOOTNOTES

1 - Original High Times magazine columnist and cannabis cultivation author Ed Rosenthal testified in Will Foster’s defense as an expert witness and advocated for Foster while he was incarcerated. Foster is free and lives in California today.
2 - Adam Smith has a long history in the drug policy reform movement. In the early 1990s, while he was attending law school at Boston University, Smith helped found DRCNet, one of the first online forums to organize national activists opposed to the drug war. “At that time, the discussion of drug policy in the mainstream media was basically a conversation between people who wanted to build prisons and people who wanted to build more prisons,” said Smith. Through DRCNet (which would later become StopTheDrugWar.org), Smith was instrumental in organizing student activists in what would become Students for Sensible Drug Policy (SSDP). After President Bill Clinton signed an amendment to the Higher Education Act in 1998, thereby eliminating financial aid for any student with any drug conviction, SSDP grew into a nationwide network with about 60 to-80 college and university chapters in its first year.