.Growing Pains Part 1: Nipped in the Bud

Small farmers had hoped to usher in California's new legal cannabis market, but the state's high taxes and fees and a loophole in its regulatory scheme are allowing Big Weed to take over.

Agatha Brooks frequently works 10- to 12-hour days, tending her small cannabis farm in Northern California’s storied Emerald Triangle. She said a typical day at her 10,000-square-foot cultivation site involves “transporting pots, watering, deleafing, trellising. And then there’s harvest time. It’s like any farm, you have to work around the plants’ schedule. When they are ready, you can’t delay.”

But caring for her pot plants is only part of her job in California’s new regulated cannabis marketplace. She said she also has to work “on the business itself, figuring out track and trace, testing, packaging, labeling, marketing, and getting your product to a distributor.”

Brooks, who asked to use a pseudonym because she does not want run afoul of county bureaucrats or federal authorities, has been growing cannabis for 10 years. She has invested tens of thousands of dollars in her small business, and she said she’s grateful she has received both a local permit and state license to grow cannabis. But her challenges are far from over.

It’ll be years before she recoups her investment and begins to make a profit. And the state’s new weed market is especially tough on small farmers, who are facing unexpected competition from large cannabis companies.

Many small growers had expected to have five years to grow their businesses before big farms entered the marketplace. But a loophole in the state’s new regulatory regime has opened the door to mega-farming.

“There’s a large cultivator growing on seven acres just down the road from us,” Brooks said. “That’s exactly what we thought we would not be competing against.”

Longtime Humboldt County weed grower Michael Hadley has also made the transition from working in the county’s legendary black market to becoming a permitted, licensed, and code-compliant cultivator. But he’s also unsure his farm will ever be profitable with the heavy regulations, fees, taxes, and competition from large corporations.

He’s also concerned about dramatic changes to Humboldt County’s cannabis culture, which had an almost pagan worship of a plant that created an alternative lifestyle in the misty hills north of the “Redwood Curtain.” Owner of Humboldt Homegrown Cannabis, Hadley is a working-class guy who has taken great pride in the quality of the various strains he’s developed over the years. And during the Proposition 64 campaign in 2016 to legalize cannabis, he was excited by the promised protections for small, craft farmers — a concept based on the Napa Valley wine industry that was promoted heavily by proponents of Prop. 64.

“I developed a kick-ass logo, and I was putting together a website, but I put an end to that,” Hadley said. “The old idea of sun grown and farm fresh is a thing of the past. Now, your product is sold under another company’s name or ground up into elements — THC, CBD, terpenes… You get no recognition for the quality, and no one knows your company’s name.”

While Brooks and Hadley’s farms are facing uncertain futures, they regard themselves as lucky. All around California, thousands of small cannabis businesses have been effectively shut out of the new legal weed market. According to a recent report by the California Growers Association (CGA), the California Department of Food and Agriculture has issued cultivation permits to fewer than 1 percent of the state’s estimated 68,000 small cultivation businesses — and that doesn’t include small manufacturers of edibles, tinctures, and various cannabis-infused products that were operating prior to the start of legalized adult use on Jan. 1.


The dramatic restructuring of the cannabis market will mean that in the months ahead, consumers will not be able to find many of their favorite products on the shelves, and their choices will be greatly slashed. There may be a price drop later this year, but many brands favored by consumers are disappearing. “There are craft farmers who have been operating in California for 20 years and their products, which folks know and love, can no longer be found on dispensary shelves,” said Hezekiah Allen, executive director of the California Growers Association (CGA). “And as the market is consolidated by corporations, the prices will creep back up. It will be the same model as we see in other corporate dominated markets such as big box hardware stores and Walmart-type stores.”

What’s happening to the legions of small cultivators is nearly impossible to track. According to cannabis activists, some farmers, particularly those who were comparatively new to the industry, have given up and moved on to other endeavors. Others have uprooted and moved to friendlier states. Some longtime farmers, daunted by the regulated market’s heavy expenses, taxes, and low-profit predictions, have shrugged and gone back to the black market where they can continue to grow as they always have: illegally but free of hassle from the state’s new pot bureaucrats armed with pocket protectors and clipboards.

As a result, just four months into California’s regulated cannabis market, there is tremendous unrest among small cultivators who have been complaining loudly at local city council meetings, county boards, and in courtrooms. The CGA has filed a lawsuit alleging that the state has violated the intent of Prop. 64 by allowing large companies to begin operation before what was supposed to be a five-year ban on their entry to the marketplace.

“The regulated market was intended to be built by small- and mid-size businesses — the same businesses that have taken all the risks, paid taxes, and created jobs over the past 20 years,” Allen said.

Thousands of these small cultivators have abandoned California’s multibillion-dollar legal market and all that remains is the flotsam of broken businesses. On Humboldt County’s local Craigslist, the “for sale” section offers pages of used cannabis farming equipment, including tractors, backhoes, bulldozers, water storage tanks, grow tents, large cold-frame greenhouses, commercial grade lighting systems, charcoal-filtered industrial fans, and thousands of yards of agricultural irrigation hose and tubing. Many of the items are brand new.

“It’s hard to know the exact numbers because the records are so spotty,” said Omar Figueroa, a Sonoma attorney who specializes in cannabis law, referring to the number of small farmers who have gone belly up. “But California’s old-school, mom-and-pop businesses are being massacred.”

For decades, Californians have been strong supporters of legalizing cannabis. California was the first state to legalize medical marijuana in 1996 with the passage of Proposition 215. And for the next two decades, the cannabis industry not only flourished in California, but business professionalism, transparency, and application of best practices served as a model for other states. The final hurdle for Californians was the legalization of adult use, which had been achieved in varying forms in the states of Washington and Colorado in 2012 and Alaska and Oregon in 2014.

In 2016, a group of advocates, politicians, and cannabis business people submitted the Adult Use of Marijuana Act, a 62-page initiative, to the California Attorney General’s Office. The initiative was approved for signature gathering and it easily qualified for the ballot as Proposition 64.

The Yes on 64 campaign collected $20 million in contributions, thanks largely to supporters like Napster co-founder Sean Parker, who contributed $7 million; the Drug Policy Alliance, which threw in $4.5 million; and billionaire George Soros, who put in $4 million. In all, the Yes on 64 campaign outraised the opposition 12 to 1 in contributions and the ballot measure won handily on Nov. 8, 2016, garnering 57 percent of the vote.

Prop. 64 held a great deal of promise for the state’s small farmers. They had opposed several previous proposed initiatives, because those measures would have allowed large corporate farms to dominate the market.

And Prop. 64 appeared to address their concerns. The initiative banned corporations from participating in the new weed market for five years and barred individuals and businesses from farming on property greater than one acre.

These restrictions helped convince many small cultivators to support Prop. 64. They were led to believe they would have time to establish their businesses and recoup their investments before having to compete with well-financed companies. The protections also gave them confidence to make investments in land, equipment, attorneys, and consultants and to embark on the expensive process of applying for permits and complying with the regulations of numerous local and state agencies.

Teisha Mechetti, a founding principle of AgDynamix, a cannabis consulting firm in Humboldt County, said the process to get permitted by local agencies is very complex and expensive and many small cultivators took the investment risk solely because of the protections in Prop. 64.

The investment in the licensing process is substantial. The basic cost, with consulting fees, is $75,000 for local permit approval and another $50,000 for a state license — and that’s without complications such as code upgrades to existing structures and mitigating environmental concerns, according to Mechetti.

But as small farmers started shelling out cash for the permitting process, state regulators pulled the rug out from under them. Just before the Jan. 1 start date of legalization, corporations got a loophole to exploit in Prop. 64.

“The cornerstone of Prop. 64 was taken out at the last minute, and that has been the biggest disappointment,” Brooks said. “Before we made the investment, we paid close attention to how Prop. 64 was written, and the five-year ban was the thing that made us think we would be able to compete.”

Small cultivators were shocked when the California Department of Food and Agriculture released the regulations that would allow corporations to begin farming immediately. The loophole was in the state’s small cultivators’ category. The new regulations allowed corporations to obtain multiple small cultivator’s licenses, a tactic known as “stacking.” The practice allowed big cultivators to skirt the one-acre cap and let them grow on multiple acres.


The small cultivator license category was originally designed for operations that grow outdoors on less than a quarter-acre of land or 10,000-square-feet of indoor space. By mid-February, the Department of Food and Agriculture had issued approximately 540 temporary small cultivator licenses. But of those, a handful of corporate businesses took 30 percent — or 162 — of the licenses.

Before the state released its initial regulations (the permanent ones haven’t gone into effect yet), large cannabis companies, including WeedMaps, Privateer Holdings, Harborside Health Center, and FLRish Inc., spent $1.6 million lobbying policymakers for more corporate-friendly rules during 2017, according to disclosures filed with the California Secretary of State’s Office.

Oakland’s Harborside Health Center and FLRish Inc, whose influential board members include Harborside Executive Director Steve DeAngelo and former San Francisco Mayor Willie Brown, pumped $385,000 into two lobbying firms — The Milo Group of California and California Strategies and Advocacy — during 2017. It paid off.

After state regulators decided to allow large cannabis companies to stack cultivation permits, the state Department of Food and Agriculture has favored two companies in particular: Honeydew Farms LLC and Central Coast Farmers Market LLC. They have received 30 small cultivator’s licenses each. DeAngelo’s FLRish holds, as of mid-March, 16 small cultivator’s licenses for the company’s Central Coast farms.

DeAngelo and Harborside officials declined to be interviewed for this report. But in a recent opinion piece in Leafly, an online cannabis magazine, DeAngelo argued that small cultivators endanger the effectiveness of the new adult-use market because he said they can’t efficiently deliver affordable product. He also wrote that the claim that small cultivators need to be protected from large corporate companies is wrong.

“Here’s the thing: Propping up California’s small-scale cannabis farmers with regulations that forbid efficient-scale cultivation hurts consumers by limiting choice and competition,” DeAngelo wrote. “It inflates retail prices and ultimately threatens the viability of the entire regulated cannabis system.”

So far, California’s regulated cannabis system has been increasingly dominated by Big Weed. For example, a Canadian corporation, Sunniva Medical Inc., recently received local approval to build a 500,000-square-foot cultivation facility in Cathedral City, near Palm Springs. The automated production center will cost an estimated $54 million to build, employ 100 to 200 people, and will ultimately produce more than 270,000 pounds of cannabis annually. City officials estimate that Sunniva will generate between $5 million and $10 million in local tax revenue each year.

With the five-year ban on corporations now effectively gone, local government agencies are having a difficult time resisting big cannabis companies, with their attorneys, consultants, and promises of fat tax receipts. “We are excited to be chosen as the location for this world-class cannabis center that utilizes the latest sustainable technology for cultivation,” Cathedral City Mayor Stan Henry said breathlessly in an announcement of the mega-weed facility. “The Sunniva Campus will have a tremendous, positive impact on our economic development through job creation and tax revenue for our public safety, roads and bridges, and community parks.”

Nevada company Players Network and its subsidiary Green Leaf Farms, LLC have received approval to build a 6.5-acre industrial park in Desert Hot Springs. The site will include manufacturing and a 400,000-square-foot cultivation facility, which is already cultivating cannabis. The two companies also plan to develop an 8-acre “non-cannabis zone,” which will include a hotel, sky bar, cannabis college, condos, commercial offices, and convention space.

In a press release, Green Leaf’s CEO Mark Bradley boasted about the advantages that the massive facility will have in the California market. “Some of the major expenses associated with growing consist of electricity and water utilities,” Bradly said. “This location will be substantially more cost effective for both of these cost drivers, which will provide us with a competitive edge over other California cultivators.”

Allen said the accelerated corporate consolidation is resulting in the marketplace being driven by price rather than quality. “The cannabis market has a value and heritage in California, and, like the wine market, products are brought to market from across an amazing spectrum of providers. Price is not everything,” Allen said. “But in the commodity market, it’s simply a race for who can hit the lowest price, which has a terrible effect on the product quality.”

At a Humboldt County Board of Supervisors meeting earlier this year, 30 local cannabis cultivators packed into the chamber to plead for relief. The growers told supervisors that their businesses are being plowed under by excessive fees and taxes and that a longstanding way of life in the county is being destroyed.

One cultivator, Harold English, said he had been operating in the county since 1973, and now his farm is shut down while he waits for county permitting. And worse, he said, large farms are sprouting up all around the county in the meantime.

“I’ve never been closer to losing everything than right now,” English said. “Speaking on behalf of mom-and-pop growers, you’re going to push us out, and that will change the character of this county.”

Another cultivator, Nicole Keenan, was more direct. “You guys are fricking killing me,” she said. “You’re killing us and ruining our community.”

Another problem for small cannabis businesses has been county bans. Prop. 64 allowed California’s 58 counties and 482 municipalities to decide for themselves if they wanted to participate in the cannabis industry. According to the CGA, only 13 counties have approved ordinances that allow commercial cannabis activity. There are six additional counties likely to approve some type of cannabis ordinances, and another 14 counties are studying the issue.


Sierra foothills counties like Calaveras, Placer, and El Dorado, where there is a long history of cannabis cultivation, have enacted bans. After the Calaveras County Board of Supervisors recently approved a cultivation ban by a 3-2 vote, 500 established cannabis businesses that were either legally operating under Proposition 215 and the Medical Marijuana Regulation and Safety Act, or had applied for licenses under Prop. 64, were forced to shut down, return to the black market, or move to another state, according to Allen.

“Some of the growers have banded together to sue the county for the promises they made to growers, some of whom had applied for local permits and paid fees, etc.,” he said. “Others, some who have lived in Calaveras County for generations, have taken their families and moved on to other counties or states. It’s a catastrophe.”

Local requirements in Oakland have also beleaguered cannabis businesses. Oakland’s “equity program,” which is designed to create opportunities for low-income people of color to get a foothold in the new industry, has actually favored larger businesses over smaller ones, some cannabis activists say.

The program gives priority to applicants whose businesses are half owned by qualified equity applicants who can show their income is less than 80 percent of the median and that they have resided in certain Oakland neighborhoods that historically had high rates of marijuana arrests. The other option for a permit is to incubate an equity applicant by providing, rent-free, 1,000-square-feet of operating space.

The requirements are turning out to be relatively easy for large companies to accommodate and nearly impossible for small- and mid-size ones. One Oakland manufacturer, who asked not to be identified because his company is still seeking local permit approval, said offering 50 percent of the business to an equity applicant is not viable given high taxes and narrow profit margins. And he said that providing 1,000-square-foot space rent-free to incubate a small business is not realistic, because of the high cost of rental space in Oakland.

“We just couldn’t do it. It’s simply not an option for us,” said the owner. “I see the good intent of the program, but because we didn’t have an equity partner and couldn’t afford to incubate a business, we were put on a back burner, which meant we had to shut down our business, which employs 17 people, most of whom are minorities.”

Oakland’s equity program is hurting small- and mid-size cannabis businesses, said James Anthony, an attorney who specializes in cannabis law. “I understand the noble intention of the equity program, but it’s also hurting existing, minority-owned cannabis businesses that can’t afford to incubate an equity applicant,” Anthony said.

Despite the complications, there are still opportunities for the small cannabis businesses who are playing by the rules. Advocates are working to ease stringent regulations and attempting to reduce corporate influence on state regulators.

The CGA lawsuit is currently on hold, while the state finalizes cannabis industry regulations, but if the state does not close the “stacking” loophole and reestablish protections for smaller businesses, the suit will go forward. “The Department of Food and Agriculture’s temporary regulations allow large business interests to corner the market, while tens of thousands of small- and mid-size businesses are still working to fight local bans, raise capital, or establish operations in compliance with new rules,” Allen said. “We could not stand by while a single regulatory decision threatened the future of so many hardworking Californians.”

Some lawmakers have come to the conclusion that the state’s high tax rates on cannabis are keeping cultivators and others in the black market, which further hurts those who have spent thousands to be permitted and licensed. To take the pressure off, Assemblymembers Rob Bonta, D-Alameda, and Tom Lackey, R-Palmdale, have introduced legislation that would suspend all cultivation taxes until 2021 and cut the state tax rate in weed from 15 percent to 11 percent.

In the same spirit, the Berkeley City Council recently voted to lower the city’s retail sales tax on adult-use cannabis from 10 percent to 5 percent. Oakland and other municipalities are considering similar reductions. There is also a movement to create a state cannabis bank, which would offer banking services and business loans, thereby taking a great deal of pressure off of small companies.

Numerous opportunities have also sprung up around the state to help small business people learn how to navigate the labyrinth of California’s pot bureaucracy. In Oakland, Debby Goldsberry, executive director of the well-known dispensary Magnolia, offers businesses classes specifically geared to cannabis entrepreneurs.

“It’s hard to run a small business, and a lot of people have been growing up on a mountaintop somewhere,” Goldsberry said. “So, in our classes we go step by step: how to incorporate; how to write a business plan; how to find a location; how to get permits; and we bring in the best lawyers and accountants. We try to do our part in making information available.”

Each day, Agatha Brooks continues to work on her small farm in the Emerald Triangle, and each night, she wades through reams of state-required paperwork. Legal cannabis farming is not what she expected, but she remains positive about the future. “I see ourselves as a startup — we put in long hours and hard work,” she said. “It’s important to continue and we’re committed and excited.”

Michael Hadley has been working on a spreadsheet that will give him an idea about his farm’s profitability after expenses, fees, and taxes. He doesn’t care about making a lot of money, but he wants to earn enough to stay on his property. He lives near the Klamath River in the rural hills of northeast Humboldt County. He’s glad to be a legal cannabis cultivator after years of black-market farming, but he’s still a bit wistful about the past.

“The black market was too stressful, and I wanted to do the right thing. But things are different. We used sell out completely by Halloween, and I’d have a harvest celebration with reggae bands. I’d buy 15 kegs of beer, and the people … there were graffiti artists, poets, hobos, Hells Angels. I wish I’d kept a journal.

“That was why we did it. We were a little gem.”

This is the first of a two-part series on the many challenges facing small- and medium-size cannabis businesses in California’s new highly regulated market.


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