Legal pot in California

The new legal marijuana system in California is coming online much slower than anticipated. The main factor is likely the “dual permit” system, whereby a state license won’t be issued until the local jurisdiction issues a permit. Over half of the local jurisdictions currently do not issue permits, either with outright bans on legal pot businesses or because they are still developing the rules for issuing licenses.

Costs for a state license are high, which discourages a lot of businesses, and some local jurisdictions are likewise demanding large fees for new businesses. Built-in advantages for small enterprises were eliminated at the state level just before implementation, giving a substantial advantage to the well-heeled corporate types. In addition, limits on the number of growing licenses were dropped, clearing the way for moneyed organizations to buy many dozens of licenses to build the largest cannabis farms in the world.

Stores are concentrated in the big cities, smaller towns (that allow stores) have maybe 1 or two places licensed. Four months in, the state has already noted that tax collections are much lower than anticipated, and their projections were on the low side to begin with.

Because not all of the state rules have been finalized yet, there’s a free-for-all as stores make their best guesses on packaging, labeling, and advertising. Since all of those rules will change, investing in marketing or packaging equipment is stymied.

California has a distributor system whereby all cannabis grown is sold to a middle man for packaging, which is then sold and delivered to the processors or to stores. But that system isn’t running yet, causing even more confusion. I am very curious how this system will work, since no other state has such an arrangement. Nevada tried it, but it’s not working yet, and may not.

Only licensed entities can sell to each other, which means that no matter how many growers there are, if they haven’t a license legal stores can’t buy product from them, creating an artificial shortage in the stores. Variety on the shelves is very thin, compared to Washington and Oregon.

Retail prices are high, about double those in WA and OR, and about the same as Nevada. Taxes are not the explanation as WA has much higher taxes. We saw this in all the legal states: initially, prices are high to recover the costs of start-up and compliance, and then go down as the competitive environment matures.

Meanwhile, the mature illegal market is thriving without the high start costs and compliance costs. Unlicensed growers have a much easier time selling product out of state, at twice the price they get in CA. Some of the potential businesses look at the obstacles and decide they’ll stick with the system they have been using quite successfully for twenty or thirty years. Better you take the risks you know than betting everything on an unknown.

Big money from NYC hedge funds and Canadian investors are going into shockingly enormous growing operations in the Central Valley and the SW deserts. The state already grows about 8 times what it consumes, and this will make the overproduction problem much worse. Everything so far conspires against the family-owned operations.

We would expect the largest market in the world to be complicated, expensive, and slow, so time must be allowed before we see what California’s system looks like.

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