Cannabis Capitalism: Who Is Making Money In The Marijuana Industry?

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Marginalized groups that championed legalization struggle to compete with corporate refugees jumping on the bandwagon

Two hours north of San Francisco, in Mendocino county, orderly roadside vineyards give way to the rugged forests and misty coast of the Emerald Triangle, America’s most celebrated marijuana growing region. In June, more than 300 cannabis industry insiders gathered there for a weekend of bonfires, starlit hikes and river swims.

It was a lovely setting to discuss why none of them seemed to be making money.

Americans spend roughly $40bn annually on legal and illegal marijuana. Their appetite is almost certain to increase as it becomes easier to legally access the drug and the industry continues to promote pot as compatible with a healthy adult life.

In California alone, tens of thousands of farms grow the plant, which is increasingly processed into gorgeously packaged vape pens and edibles marketed to customers outside the core stoner demographic of young men. Today, seniors are the fastest-growing group of marijuana users in the US.

The future looks very green indeed. But since New Year’s Day 2014, when Colorado opened the world’s first regulated recreational marijuana market, the business climate for weed companies has proven immensely difficult for a range of reasons, including high taxes, rapidly changing regulations and a still robust illicit market.

Besides the business challenges, America’s legal marijuana industry also has to reckon with an unavoidable moral dimension. The US has been engaged in a “war on drugs” since Richard Nixon declared it in 1971. While white Americans use marijuana and other drugs at roughly equal rates to African Americans and Latinos, in virtually every respect, racial minorities have been disproportionately incarcerated and otherwise punished for involvement with drugs, including selling marijuana.

In addition, marginalized groups – Aids patients, disabled people, veterans – who championed legalization when it was far riskier to do so now find themselves ill-equipped to compete against well-capitalized corporate refugees looking to jump on the bandwagon.

One company, Acreage Holdings, which closed on $119m in investment capital this summer, has enlisted the former Republican speaker of the House John Boehner to help it navigate the market. Boehner has never smoked pot – “he hasn’t felt the need or inclination”, according to a spokesperson – and he declared himself “unalterably opposed” to legalization when he was in office.

With legal marijuana now one of the country’s fastest-growing industries, who profits is as much of a civil rights question as who gets punished.

The industry’s moral challenge is to ensure the groups who have suffered the most under the drug war can participate in the green rush and enjoy the spoils of legalization.

The story of Amber Senter, a businesswoman and activist who attended the weekend campout, dubbed Meadow Lands, goes some way to explain why racial equity will be as difficult to achieve in cannabis as it is in the rest of American life.

Senter moved to Oakland, California, in 2014. A coast guard veteran with a background in corporate marketing and graphic design, she worked as an executive at Magnolia, a dispensary, and became a prominent advocate for women of color like herself in the industry.

Oakland, the birthplace of the Black Panther party, is known for radical politics and racial tensions. It was among the first US jurisdictions to recognize legalization as an economic opportunity and has sanctioned dispensaries since 2004. More recently, it became one of the first places to create an “equity program” to support marijuana entrepreneurs who were locked up for pot-related offenses or who come from neighborhoods considered disproportionately affected by the “war on drugs”.

Senter didn’t qualify for an equity permit. But in November 2017, her business partner signed a memorandum of understanding to open a dispensary with Marshall Crosby, a personal trainer in his 50s who did qualify.

A native of Oakland’s impoverished east side, Crosby has lived a hard life. One of eight children, he said he had several bullets lodged in him and had served stints in jail. “I became a statistic in the drug life a long time ago,” he said.

On 31 January, Crosby had some good luck. Oakland put the names of a few dozen equity hopefuls into a lottery and pulled names to see who could pursue a dispensary license. Crosby was among the four winners.

A few weeks later he wrote to Senter’s partner: “I have decided not to work with you. Went another route.” Rather than work with his local partners, Crosby had decided to partner with Have a Heart, a dispensary chain based 800 miles away in Seattle eyeing expansion in Oakland.

In an interview, Crosby said he felt abandoned after he had signed the memorandum with Senter’s partner. And he felt an affinity for Have a Heart’s COO, Ed Mitchell, who grew up in another rough part of the Bay Area. With Have a Heart, Mitchell said Crosby would also receive a payment of an undisclosed amount once they secured the license.

Oakland’s equity program had been laboriously developed over years to maximize not just jobs for Oaklanders but local ownership of marijuana companies. But the policy didn’t stop Crosby from partnering with an outside company.

“It’s a classic story of gentrification,” Senter said following Meadow Lands. The dispensary chain was “taking advantage of opportunities that were not made for them”. In addition to boxing her out, the new store, she said, would compete with, and potentially undersell, existing locally owned dispensaries.

Have a Heart said it would hire Oaklanders for 90% of its jobs in the city and would invest in cleaning up the area of Chinatown where it hopes to open. “We believed Oakland was a place where we could really do some good,” Mitchell said.

Even if this is true, the situation anticipates similar deals which may reward a few local individuals but extract profit out of the city for large corporations.

“Someone was just able to swoop in and sabotage fair business dealings; that’s wrong,” said Anne Kelson, an Oakland cannabis attorney who is not professionally involved in the case.

Kelson said the incident had shaken Oakland’s cannabis community. “More than one business operator has come to me and said: ‘If Amber Senter can’t make it, who can?’”

Across the bay in San Francisco, another ambitious dispensary chain, MedMen, is pursuing partnerships with equity applicants. Compared with less sophisticated operators, MedMen brings “a certain guarantee of execution”, its spokesman, Daniel Yi, said. “At the end of the day a business that’s not successful wouldn’t help anyone.”

Marijuana farming in California
Most attendees at the campout in June belonged to the industry’s craft cohort. Many of them have been professionally involved in cannabis for decades.

Marijuana farming in California has never been easy. Those who succeed are skilled, cunning and well-versed in the law.

Today they’ve applied their intelligence to the endless intricacies of the California market. It both conforms to and departs from stoner stereotypes that most conversations at Meadow Lands dug into riveting topics like zoning variances, building materials and water use rules.

Of the state legalization experiments, California is, by far, the largest and most complex. For growers who operated in California’s gray and illegal markets and now want to transition into the legal market, the economics can be brutal. In the illegal market, an Emerald Triangle farmer might have sold a pound for $3,000 tax-free. Now the price is more like $600, before taxes and compliance-related costs.

“I’ve never seen a craft cannabis brand work out, because it’s not cost effective,” Hilary Bricken, a Los Angeles cannabis attorney with Harris Bricken said.

“Presently, no one in legalized marijuana is getting rich,” Steve Schain, a senior attorney with the cannabis-focused Hoban Law Group, said.

In Schain’s view, even the largest and most professionally run companies are being built to be acquired when major agriculture, alcohol and pharmaceutical companies consider it safe to profit. Already, immense grow projects, hundreds of thousands of square feet, are coming online in the desert east of Los Angeles, and across Canada.

The difficulties small farmers face were anticipated. In the lead-up to legalization, California’s small growers had expected a provision which would prohibit farms larger than about an acre (43,560 sq feet) until 2023, giving small growers time to adapt.

But when the rules came out last November, a new loophole allowed mega farms immediately. The California Growers Association, which has roughly 1,000 members, is suing the state.

At Meadow Lands, a French-born hashmaker known as Frenchy Cannoli argued craft cannabis should follow France’s wine model and create a “hierarchy of quality” based on the concept of terroir, the idea that environmental factors like soil and climate contribute to a plant’s ultimate yield. Today, he said, many places produce great wine, but because France established the standard in the 1800s, “they will always be the center of the wine industry”.

Initiatives to create French-style “appellations” for northern California cannabis are under way, but they may not do much if the growers still have to immediately compete against big industrial farms.

While California’s small growers are struggling, they also have clout. Which explains why one of the visitors to Meadow Lands that weekend was the California state senator Kevin de León, an underdog US Senate candidate running to the left of his fellow Democrat, Senator Dianne Feinstein.

While some Democrats, such as Feinstein, have made their peace with legalization, De León gives it a full-throated endorsement. “For many underemployed workers and the unemployed, cannabis is the future,” De León said, speaking at a campsite one morning. Dressed in pressed slacks and a crisp white shirt, he joked: “I’m not a narc.”

The audience laughed. After a night of camping, it was 8.30am and they were passing joints.

Cannabis space
Canada, true to form, has moved to legalize marijuana in a more orderly fashion than the US, with legalization day set for 17 October. The industry there perhaps gives their counterparts in the US a vision of the future.

In Canada, a handful of companies already dominate the cannabis market. And a few weeks after Meadow Lands, a very different marijuana industry gathering took place at a big glass hotel in central Vancouver.

The opening party took place in a smoke-free ballroom. The keynote speaker was Henry Rollins, the legendary punk rocker known for his association with the straight edge culture, who doesn’t consume cannabis himself. His message to the International Cannabis Business Conference was that the industry shouldn’t be too greedy. But he wasn’t fooling anybody.

“It’s the suits taking over,” Carolyn Cudmore, the founder of the Vancouver craft company the Preroll Factory, said.

In a “shark tank”-style competition, four startups made presentations before representatives of Canopy Rivers, the investment arm of Canopy Growth, one of Canada’s largest marijuana companies, which trades on the New York Stock Exchange. The prize was billed as up to C$1m (US$763,000) in seed capital, though the winner wasn’t guaranteed anything.

After appraising a testing lab and a sophisticated sensor device for indoor pot farms, the judges awarded the best pitch prize to the feel-good choice, Bella Vista Cannabis, an organic cannabis farm run by a bearded fifth-generation farmer. One judge said Bella Vista won the pitch because of its commitment to the environment and its social mission.

A few weeks after the conference, Canopy announced it itself had received a commitment from Constellation Brands, the American drinks company that owns Corona beer, for a $4bn investment.

As for Bella Vista, the farm faces faces many of the same pressures crushing California’s craft growers. Canopy hasn’t yet said whether it will invest.

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