Mid Year Outlook, 2018

More functioning, stable supply chains should start to emerge in Q3, a good thing for the market. The July 1 deadline stimulated a lot of new connections in the market and the general feedback is very positive. California is a big state and what the market needs most is a more robust network and better connections. Increased consumer confidence and awareness of the regulated marketplace will be important to the markets success.

That said, overall growth of the market will continue to be constrained by local policy. Continued recession is likely at the macro level, despite improvements for some supply chains. Most of the consumers in the state do not have convenient access to licensed retailers. Accordingly, large swaths of the state remain dominated by the unregulated market. Establishing a functioning supply chain relies on access to the consumer and that will require a lot more retail licenses in the state.

A focus on enforcement in communities with bans is misguided. If cities and counties do not create an opportunity for licensed operators to serve the local market then enforcement will be an ongoing, costly, permanent effort.

While many are focused on the “premiere” markets, there is tremendous opportunity in secondary markets, the dozens of small and mid sized cities with hundreds of thousands of unserved consumers.

Businesses that are over extended or that have scaled production without adding additional retail capacity are likely to face increasing challenges selling their products. Oversupply is a ticking time bomb in California, with the potential to significantly damage the market, as it has in other states.  

A new factor this year are the states first large grows. A prudent and conservative strategy probably includes only scaling after demand is proven while others will take more risk and plant a crop without knowing how it will get to market. There are a handful of business, some rookie and some veteran seeking to bring some of the states largest harvests ever to market. Fortunes may be earned and most certainly will be lost.

One time regulatory costs are proving to be a significant barrier for growers and business owners in communities that are issuing permits. These costs would be much more manageable if small businesses had access to streamlined, low cost capital. There is tremendous opportunity for a revolving loan fund to help stabilize thousands of small businesses by assisting with one time costs.

Few people have heard of them now, but by the end of 2018 most Californians will know about Cooperative Cannabis and the Cannabis Cooperative Associations that bring those products to market. This new type of cooperative will empower small businesses to work together to achieve stability and to benefit from more efficient supply chains. 

Over recent years much of the market has shifted to delivery service based retail. Far too few of them have been permitted at the local level and this is a leading cause for the contraction in the market. There is tremendous opportunity to create “hubs,” licensed facilities that house multiple delivery services. There is tremendous potential for delivery services to have a strong positive impact on the market.  Regulators and lawmakers—both state and local—would be well advised to carefully consider the pro’s and con’s of cannabis delivery.

The Los Angeles area, a complex patchwork of jurisdictions, has an especially challenging situation as a small group of regulated businesses face local competition from an expansive unregulated market. The future of regulated Cannabis in California is integrally connected to the state of affairs in LA, so all eyes will be on the City as it launches Phase 2 of permitting and perhaps can start to make progress turning the tide. Consumer awareness campaigns focused on connecting consumers with licensed shops should be a central focus of coordinated efforts within the industry.

The transition from temporary to annual licenses will be costly and may change the landscape. Most notable will be the cost. Temporary licenses are free, while the annual licenses have fees. The fees range from around $1200 for the smallest growers to $77,000 for the largest cultivation license and ranging from $4,000 to $120,000 for retail. License stacking will become very expensive, with some of the largest growers in the state facing license fees of $2 million or more.  The ancillary businesses—lawyers and consultants—will be busy with full schedules so be sure to give them as much advanced notice as you can if you need work done.

The upcoming regulatory transition has the potential to impact every business in and around the cannabis market, so everyone should be paying close attention. We expect the initial draft will look a lot like the current emergency regulations, and the transition to regular regulations will include a robust public comment process. A lot has happened very quickly and experiences have been hugely varied. Public comment will include all of these varied perspectives. The agencies are required to read and respond to all comments receive—significant changes are possible. If significant changes are made, then the rules would have to go through a second public comment period. The rules are expected in the first two weeks of July. Public comment period is 45 days.

There will undoubtedly be some significant ripples in the market as the first licensed light deprivation harvest and later the world renowned full season harvest enters the market. These harvests are marked by some of the richest and most delicate entourages of flavors, aromas, and cannabinoids rivals top quality indoor in any setting. Lower overhead and less energy input ensure these harvests have top quality, clean product for every shelf. Connoisseurs and those familiar with this market know to look for light dep to start making a real impact as early as mid-July, with the best stuff coming in September. Full season should hit the market in October, with the real top quality full season not expected to be cured until December or January.

 

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