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.Pot Problems

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The cannabis industry may be facing an extinction event

California’s legal-pot industry has struggled since it began in 2018. High taxes, burdensome regulations, the refusal of many local governments to issue licenses and the continued dominance of the illicit trade have all kept what should be a large, thriving business from reaching its potential.

The crisis moment might have been delayed by the Covid pandemic, when cannabis was deemed to be an “essential” business and thus continued to operate even when most other businesses were closed during the lockdown. As that was happening, demand for weed grew, thanks in part to a lot of people staying at home with not much to do. That likely allowed many stores to remain open and many growers to keep growing, even as they continued to struggle and even as many of their peers left the business or went back to serving the illicit market.

But now, the industry might be facing an “extinction event,” as some in the industry and the media have put it. That of course overstates things, though not by much. The industry isn’t going to disappear, but it’s already shrinking fast and in danger of becoming much, much smaller and of being dominated by a few big players. Industry consolidation is something many industry advocates started warning about even before voters approved Prop 64 in 2016, which authorized legalization.

Partly as a result of the above list of systemic problems, and partly thanks to problems that have cropped up recently, the California cannabis industry now faces its greatest challenge yet. And for the moment, there doesn’t seem to be a solution. “Perfect storm” is a horrible cliche, but it fits the current circumstance.

First, there’s the problem of money. There isn’t enough of it, despite all the dollars consumers spend on legal weed. Retailers have worked with ultra-thin margins all along, so anything that adds to their costs hurts. Dispensaries in general have taken on large amounts of debt during the six-plus years since legalization. That problem became worse this year when the tax law was changed to make retailers responsible for paying the state’s cannabis excise tax—previously, distributors were responsible for making those payments. Over time it doesn’t much matter who pays those taxes, which of course are ultimately paid by consumers, but in the short term it puts a heavy burden on cash-strapped dispensaries.

One report toward the end of last year put the total amount of debt among dispensaries at about $600 million. Whatever the real number is, it has likely ballooned this year already. The deadline for dispensaries to pay the state’s excise tax was May 1, and more than 13% failed to do so by that date, according to the California Department of Tax and Fee Administration. That represents 265 shops that now face penalties of 50% of what they owe. That could be a “death blow” for many of them, as SFGate recently put it.

Meanwhile, pot growers continue to flee the legal market in droves, thanks again to costs as well as persistently low wholesale prices. The state’s “canopy”—the total acreage devoted to growing weed—shrank by about 23% since January of 2022, according to one analysis. During the same period, 1,766 cultivation licenses went inactive, 845 of them just this year, according to the California Department of Cannabis Control.

As if all this weren’t enough, a pathogen has spread to nearly all of California’s pot plants. The disease, HLVd (hop-latent viroid), doesn’t kill the plant, but it reduces the weight of buds by nearly a third and it reduces THC content, making every plant grown less valuable than it otherwise would be.

There are solutions to the pathogen problem, mainly involving testing and removing infected plants. But it’s one more burden for an industry that can’t take any more.

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