In a previous article entitled "As Easy As Selling Weed?" we discussed the best-case scenario for a legal grower selling their product. This was one of our most popular articles to date, so we thought we should go more in depth on the complexities of the cannabis supply chain. The scenarios discussed in this article are based on the actual experiences and trends seen by ourselves and our partners and customers in the legal industry. As this article discusses traditional market activity outside of the law, we will continue in our theme of using Alice and Bob as examples, split between their potential legal and illegal options at every stage of the supply chain. Naturally our main focus will be on the cultivation and distribution stages in California as those are the target industries of our business.
Starting a Farm
The Legal Route: Bob wants to start a legal cannabis operation. For simplicity let's say he's lucky enough to already own a piece of land zoned properly for cannabis licensing. He does his research and finds a very difficult process ahead of him. First, he needs a business, so he goes and starts one, paying the startup fees for a sole proprietorship and filing everything with the county and state. Next he has to get a land use permit from the county, a process that takes several months since his local government has a huge backlog of applications to dig through.
Next he can start designing and building out his grow operation. He needs to level a piece of ground, build a large shed, install 3 hoop greenhouses, as well as run hundreds of feet of plumbing and power. He's no engineer, so he hires a firm to do most of this planning for him. It takes 2 months to get a site plan and drawings made. The shed is the easy part, just requiring a simple county inspection and an expensive building permit.
California requires cannabis businesses to file a Lake and Streambed Alteration (LSA) application for cannabis growing, regardless of their proximity to lakes or streams. This process is costly and scales with the size of your project. Bob's hired firm tells him what elements of his project are most likely to be problems with the LSA, and they spend another two weeks triple checking their plan to make sure it will work. Since the LSA is a pass/fail and can completely stop a cannabis project in its tracks, the extra time and money is worth it. Luckily, Bob passes.
Under California law, cannabis grow operations are subject to the California Environmental Quality Act, or CEQA process. Counties are supposed to handle most of this process for businesses but some counties like Bob's do not. Bob's hired firm informs him that his grow has the potential to impact the local environment, so he needs to report and address any potential impacts through the CEQA process to the state.
Everything looks good, so the plan goes up for public review under the CEQA process. No one objects to the project, so Bob's full project is signed off on CEQA and submitted to the county planning commission. They review everything over the course of several months, frequently requesting more information and at one point sending another inspector out to verify that some maps are accurate. Finally, they grant Bob a county approved cannabis cultivation license.
At this point, Bob needs to get a state license, a process that while usually simpler than the county license can still be full of hidden setbacks. Since counties are usually overwhelmed sometimes they miss things that can pop up in the state licensing process. Luckily, Bob's process goes smoothly and he's able to pay thousands of dollars for his state license.
Finally, after 18 months and 200,000$, Bob can legally start growing cannabis. This is a highly variable process that changes by county, business type, land zoning, the mood of the local politicians, and countless other variables. Bob's experience here is a generalized example that outlines the basic process.
The Traditional Route: Bob simply builds a farm and starts growing cannabis. He adds a barbed wire fence, a sturdy steel gate, and a system of security cameras to his property to protect against robbers. Maybe he gets some dogs too. If he wants to be environmentally conscious he can do his own research on responsible methods and build his farm accordingly, however there's obviously nothing requiring him to do this and it depends on his moral environmental ideals.
Time to Grow!
The Legal Route: Bob buys his clones from a legal nursery and records their package numbers, strain info, and storage location in Metrc, the California state mandated track and trace software. After a few weeks his clones have grown up and are in the vegetative phase. At this point Bob has to add a plastic Metrc ID tag to every one of his plants and record the tagging. As the season progresses and plants start to flower, they need to be recorded again as flowering plants. Any location changes of plants, dead plants, or plant waste need to be recorded in Metrc as well.
More time passes and it's harvest time. Bob has to weigh and record all of his harvested flower, his plant waste weight, and drying location. After it has dried, it needs to be weighed and recorded a second time. Next, the flower can be processed into trimmed flower, shake, and waste, all of which must all be recorded as tagged packages of the correct product type, complete with storage location. After a few weeks of curing, final packaging can be done, which requires- you guessed it- more recording of packages in Metrc. (If Bob is tired of wasting so much time in Metrc, we recommend that he check out OmniCann)
Bob takes samples of his products by strain and type and sends them off to a testing lab. The lab returns results showing the amount of cannabinoids like CBD and THC in the cannabis, as well as the presence of any contaminants like mold or heavy metals. If Bob's product passes the test, he is ready to sell.
The Partly Legal Route: This is more or less the same as the legal route, however there are some parts of the process that Bob can take advantage of for illegal gain. The most common one is under reporting plant weight at harvest, or simply not reporting manicure harvests at all. All Bob needs to do is to report his plant harvest weights as lower than they actually were and sell the extra unreported product traditionally, likewise prior to his final harvest he can take flower from the plant here and there and sell that as well. Since his legal farm is a very expensive business to run, the extra tax free money is a big help to cover holes in his budget.
The Traditional Route: Bob simply grows, harvests, and cures his crop. He has to look out for people trying to rob him, especially late in the season, but with good security he should be fine. The police never really seem to go out his rural mountain road and he's well connected with all his neighbors so they aren't going to report him. Sometimes when he needs help he pays friends in cash for work around the farm.
Time to Sell!
The Legal Route- Bob is sitting on a pretty good supply of flower, so he now starts the process of connecting with a distributor. In the city, Alice, our distributor owner, is likewise looking for product to buy. They connect, and Alice sends her buyer to Bob's farm to check out his product. If it's good, they agree on terms, and Alice sends her transporter to pick up the flower and deliver it to her facility. To comply with regulations, Bob has to create a transfer manifest for the product, complete with info about what products, which distro he's transferring to, and even the vehicle used for transport. Upon transfer, Alice must accept this transfer in the regulatory software, officially recieving the product into her ownership.
There's also the matter of taxes. Every category of product has a slightly different per-unit-transferred excise tax. In the case of packaged flower it's 150$/lb. This tax is paid by the final company to touch the product before it goes to retail. For instance, if Alice sells Bob's flower straight to a dispensary, she has to pay the excise tax, so to her, a $1,000 pound is actually $1,150. However, if instead she sells the product to another distro, she owes no excise tax.
A big factor here is time of sale. Sure, Bob just harvested a good crop and has good product to sell, but that doesn't mean he's going to choose to drop it the second it's done curing. The cannabis market runs cyclically, with several big grow seasons overlapped, mainly full term outdoor and light dep/mixed light. These seasons end at different times and flood the market with product, creating fluctuations in demand, supply, and price. If Bob is in touch with the market, he may wait a few months before he starts trying to sell his product to distros, hoping to hit the sweet spot between seasons of high demand/price and low supply. This is great for him, but the problem comes with the rest of the industry. Many growers also play this game, and it creates price bubbles. If everyone waits for a dry spell in the market, sure they can sell for higher prices but that is only true for the first wave of sellers. As soon as everyone starts selling, the average price begins to drop again and those late to the party are stuck selling at a bad price.
Likewise, this game of time to market applies to distributors as well. Alice will hold product for an extended period for two reasons. First, it allows her to have inventory on hand to bridge the gap in supply between seasons. Second, it allows her to speculate on consumer market trends. Maybe this month a certain strain isn't very popular in stores but it's always been fairly reliable in the past so she stockpiles a supply of that strain for now, betting that it goes back up in demand and price in a few months. Maybe a big market player just flooded shelves with a new design of vape pen, so Alice holds her concentrates for another month or two, planning to get it filled into the appropriate cartridges to target the refill market for the new vape.
The Partly Legal Route: The sales and transfer parts of the regulatory framework can be misused in several ways. Most commonly, many distributors don't accept incoming transfer requests through the Metrc software. This means that while Alice may have actually received the product, she can choose to ignore the transfer request and essentially leave that product in transit indefinitely where it isn't in her or Bob's inventory. This oversight in the regulatory system allows the existence of legally licensed distros that only exist to sell legally grown product to the traditional market. Since they receive legal product, they can be assured that they are getting something with good quality and verified test results. However, since product never enters their hands from a regulatory perspective, these distros appear to operate with zero inventory while actually funneling product to the traditional market and avoiding excise taxes.
As a farmer, Bob can file a transfer through the software that goes to any distributor in the state, without their permission or knowledge- he can simply pick one randomly off a list and transfer to them. Once one of these transfers has been filed, the product involved is no longer considered part of Bob's inventory- as far as the system is concerned, he's effectively sold his weed. This is definitely less common as regulators can see that he made up a transfer with random information, but it does happen. Once the product is gone- regardless of whether it actually has or not, Bob can sell it traditionally however he likes.
The Traditional Route: Bob can sell his product to literally whoever will buy it at whatever price they are willing to pay. He faces some risk from exposing himself to being ripped off by potential buyers, but if he's careful and only sells to people with a good reputation backed by his friends he should be able to safely move his product.
As shown above, there are multiple paths to market for Bob's product, through both the legal and traditional markets. Regulatory loopholes, market speculation, and the sheer cost of legal production can heavily influence market player's decisions.
In general, the cost and bureaucratic red tape to start a legal farm are the biggest obstacles to legal market expansion. The cost of legal planning and permitting services have skyrocketed in the face of explosive demand from legal farms trying to get approved. With so many people to process, county and state services are overwhelmed so third party inspectors and contractors step in to fill the gap at inflated rates. In the time it takes for a farm to get approved and licensed, the county or state rules may have changed, or the country may have run out of licenses to issue. In general, this snarl of complexity, delay, and cost makes the ease and simplicity of the traditional market very attractive- it is still very accessible and accepted to grow and sell outside the law.
For those who are willing to go through the time and cost hurdles of growing legally, the fairly porous regulatory system offers tempting ways to make money on the side. Cheating is very easy, and the prospect of tax free weed sales can be attractive to struggling farms. In fact, it can be argued that in areas with very high fees, backdoor sales are a very real lifeline to support the experiment of profitable legalization. While this may not be what regulators want to hear, the reality of the situation is that literally any fee, tax, or regulatory structure around cannabis will in some way support the traditional market.
The traditional market will be around for a very long time, following the cannabis culture established over the last century- in terms of size and seniority it is still THE cannabis market. As legalization expands and adapts, there will always be some degree of symbiosis between the legal and traditional markets. The majority of players in the legal market earned their experience in the traditional market. While many of those players are 100% committed to fully compliant legal operation, there will always be a certain amount who embrace the outlaw spirit of the original industry and are comfortable with breaking a few rules. With regulations still confusing and inconsistently enforced, social acceptance of cannabis culture at an all time high, and more politicians pushing for decriminalization in addition to just legalization, there is no chance that everyone is going to follow the rules.
Naturally, we're a company that sells software tools for legal business, so we only support and condone legal behavior- it keeps us in business! However, we're fully aware of the roots of our industry, and don't shy away from acknowledging the fact that the vast majority of cannabis activity is illegal. Understanding this reality we feel is critical to understanding how the legal industry works and the cultural foundations it is based on.
Pick the legal route-
The OmniCann Team