published on October 5, 2018 - 7:00 AM
Written by David Castellon
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As in many states that that have legalized marijuana, Oregon voters passed their recreational marijuana law in 2014 amid hopes it would be an economic boon and create new industry for Oregonians.

But while America’s legal pot industry is widely seen as poised for massive growth — with a recent Forbes article citing cannabis-related jobs as the fastest-growing job category in the U.S. — growers in Oregon have hit a wall.

 

Basic economics

“It’s basic supply and demand,” with Oregon cannabis growers producing much more legal product than they can sell in their state, said Andrew Hunzicker, a Bend, Oregon CPA specializing in serving clients in the cannabis industry and teaching clients across the country about the cannabis business.

He and other cannabis experts say that growers in California — where growing and selling marijuana for recreational use became legal this year — could face similar problems comparable to Oregon, where many cannabis growers are struggling to stay afloat in the face of weak prices.

In November 2015, when Oregon’s first legal recreational cannabis harvests came in, farmers were getting paid about $2,000-$2,400 a pound for their crops, and “Now we’re down to $400 a pound, if you can get it,” said Adam Smith, founder and executive director of the Craft Cannabis Alliance.

The Portland-based trade association represents cannabis businesses largely owned by Oregonians that have made commitments to sustainability, community engagement and ethical business and employment practices.

“We’re seeing a lot of folks going out of business, a lot of folks laying people off, struggling to survive,” Smith said of Oregon’s legal pot growers. “And what will end up surviving here are the large, out-of-state companies, Canadian companies, who can afford to come here and wait out the market while everybody else goes out of business, buying up the brands they would like for pennies on the dollar.”

 

Loose licensing?

Oregon’s pot problems stem partly from the state not limiting the number of licenses it issues for recreational cannabis related businesses, which state legislators decided to do largely to pull people involved in the state’s already prolific black-market pot industry into the white market, Hunzicker said.

But cannabis thrives in Oregon’s soil and climate, so it’s no surprise that with so many farmers jumping aboard that they produced far more product than can be used in a small state with a little more than four million residents.

That brings up the other, more pressing problem — Oregon and the 29 other states, along with Puerto Rico and Guam, that allow medicinal or recreational marijuana production are prohibited from selling or transporting what they produce to customers in other states.

And that’s where California’s slightly newer cannabis industry also could hit a wall, the experts said.

 

Interstate commerce

“California, like Oregon, is a natural export state,” said Smith, noting that for decades both states have transported their illegally grown cannabis to different states and around the world, as Northern California and Southern Oregon are the “sweet spot” in the nation for growing the plants.

“In Oregon, the only producers that are still making a living are the producers that decided not to get licensed, because they can still sell to their people in Chicago or New York or Indiana or whatever, whereas the licensed growers can’t send it out of the state, and they’re dying,” Smith said.

And that makes no sense, Smith added, because the oversupply actually is a bounty that could fill the demand for cannabis all over the world if federal law would allow sales across state lines.

“But if you think there’s a bounty right now, just wait until California gets its licensing in order. You guys are going to have a much bigger oversupply problem than we have,” he said.

 

Green in the Golden State

While a legal “wall” prohibiting out-of-state trade of cannabis is a problem, California isn’t likely to experience the sort of price spiral as occurred in Oregon, said Sean Donahoe, an Oakland-based consultant on regulatory and compliance issues for licensed cannabis businesses and co-founder of the California Cannabis Industry Trade Association.

For one thing, he said, California has a much larger population— more than 39 million residents.

On top of that, the state has many more tourists coming through it, deepening the pool of consumers buying legal recreational cannabis here, Donahoe said.

On top of that, he said, “We’re looking at whether demand outstrips supply, but we’re not looking at all the different categories of demand,” including cannabis oil that can be used in skin creams and medicines that don’t get people high.

And as non-psychoactive and micro-dose marijuana-based products become more in demand, their manufacturers here will need more cannabis, Donahoe explained.

 

Local prohibition

One problem California’s cannabis industry is facing is the large number of cities and counties restricting or outright prohibiting cannabis businesses, to the point that California has about the same number of licensed cannabis retailers as much smaller Oregon, Donahoe said.

With so few places to buy legal cannabis and related products, a lot of potential customers in California aren’t buying, Donahoe said.

Only a handful of cities in the southern end of the Valley have been open to licensing such businesses, with Woodlake opening the region’s first recreational cannabis store earlier this year and the Fresno City Council voting late last year toward allowing only medical marijuana businesses — two decades after such businesses became legal in the state.

Regulations for Fresno’s new cannabis businesses are being worked out, with city officials estimating business licenses may not be issued until late summer of next year.

One solution would be for the federal government to legalize pot in all states, which essentially would eliminate the out-of-state trade wall and allow California and Oregon farmers to expand sales of their crops out of state.

 

National picture

“The fundamental problem is the federal government, meaning our federal government, unlike federal governments around the world, continues to have a backwards policy on this industry and this crop, in particular, and continues to treat it in a manner that does not conform to reality,” Donahoe explained.

“The commonality of the problem is the East Coast and the northern-tier states that previously imported — smuggled — black market cannabis are now setting up their own in-state cannabis programs and beginning to grow in states like New York in warehouses and places like Minnesota in warehouses,” he explained. “And so, unfortunately, these other states appear to be taking the business of who is traditionally supplying the cannabis of the United States, which is California or the West Coast.”

He and the Oregon experts agree that their two states can grow markedly better cannabis than other states and even other parts of the world, to the point that if they could sell and market legal product elsewhere, they could dominate the market — as California now dominates the illegal pot market — as people would seek out California- and Oregon-grown cannabis in the same way they do wines, fruits and nuts from these regions.

As such, Donahoe said California legislators should be putting pressure on the federal level to change the law.

Those following the cannabis industry are optimistic that will happen, as there is wide public support nationally for the change, legislation in the works to do that and President Donald Trump has said he would support such legislation.

“There are 30 states where it’s legal. There’s no rolling it back,” Hunzicker said.


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