.Who Will Survive in the New Era of Legalized Cannabis?

[dropcap]J[/dropcap]ust weeks into cannabis legalization, Santa Cruz County’s dispensaries are licensed and open for business, and SC Labs is licensed to conduct the now state-required testing of all products for a roster of chemicals that will grow from 12 to 66 come July.

But without a license, growers and manufacturers can’t enter their product into a distributor’s inventory, and a slow trickle of temporary state licenses is just beginning to reach the small pool of cultivators and manufacturers who were in a position to apply.

As all await a new cannabis ordinance that may or may not be able to include them, there is talk among the industry that the environmental impact report, which cost taxpayers $451,689 and serves as the informational foundation of the ordinance, could be scrapped entirely—a hypothetical that County Supervisor John Leopold says is “too early to tell.”

A public meeting and panel discussion on the Future of Cannabis is scheduled for 7 p.m. on Jan. 24 at the Resource Center for Nonviolence—co-hosted by Cannabis Advocates Alliance, WAMM, the SC Veterans Alliance, and GreenTrade, a coalition seeking to promote an environmentally responsible cannabis trade in Santa Cruz County.

Next week, the county will hold two public meetings to present a path forward for the establishment of legalized cannabis cultivation and manufcaturing in the county. The meetings are 5:30 p.m. on Wednesday, Jan. 31 on the fifth floor Board Chambers in the county Governmental Building and 5:30 p.m. Thursday, Feb. 1 at the Felton Community Hall. At 9 a.m. on Monday, Feb. 5, the public is also invited to a meeting in which county staff will present its recommendations for the new ordinance to the Board of Supervisors.

Colin Disheroon of Santa Cruz Naturals, like many dispensary owners in the county, says he stocked up on product in anticipation of this interim period. But his inventory is quickly shrinking, and he’s disappointed by the selection and pricing offered by the now-mandatory distributors that have approached him.

“The cost of edibles has almost doubled,” he says, adding that the available flowers are of commercial grade quality—not ideal for a dispensary whose mission has been, for the last seven years, to prioritize organics.

“It’s a lot of monocrop product coming from big corporate greenhouse grows in Salinas Valley, and there’s a good amount of product coming from far Northern California,” says Disheroon. “There’s almost zero local product coming from local farmers.”

The issue, of course, is not that Santa Cruz farmers aren’t already growing a significant portion of the state’s cannabis—with many farmers priding themselves in high-quality and heirloom strains. The problem, rather, is that as of Jan. 1, the gray market that fueled dispensaries for years is now obsolete.

“It’s black and white again,” says Disheroon. “I know a number of growers—growers that we have been working with for years—who are saying that their only option is to turn to the black market to stay in business. I think that we’re going to see that the black market is going to be producing nicer, higher-quality product than the legal market, and it’s going to be cheaper because of all the taxes.”

Cloudy Futures

Although Leopold cautions that we’re only a few weeks into legalization, and the county is working hard on drafting an ordinance that brings folks into compliance, it’s clear that not everyone will be able to comply with the new regulations.

“I don’t think that there was any delusion by policy makers at the state or local level that pure legalization would eliminate a black market,” says County Supervisor Zach Friend. “There’s a black market in all kinds of legal things now. So, that doesn’t surprise me. And when you get the commercial players in, what you may see is actually some of the early players unable to sustain from a price standpoint just because of competition statewide.”

Adding to the uncertainties is U.S. Attorney General Jeff Sessions’ rescinding of the Obama-era Cole Memos earlier this month, which protected cannabis-legal states from federal interference. And just two weeks ago, the Board of Supervisors in California’s Calaveras County, which had its cannabis ordinance already in place, voted to ban commercial cannabis, giving growers 30 days to cease operations. The ban came after the county had collected more than $3 million in licensing fees, and more than $10 million in tax revenue.

Echoing a mounting distrust within the industry of the revenue-focused powers that be, Disheroon doesn’t mince words: “We’re heading down the same path,” he says.

Bottle Neck

Who survives—or at least who will have a shot at it—in the new era of regulated cannabis will largely be determined by the conditions of the county ordinance. The rules, as of yet, seem like they may suit large-scale greenhouse growers on the Pajaro Valley floor—many with no prior experience growing cannabis.

County and state tax revenues will pour in regardless of who and where cannabis is grown, and anonymous sources within the industry fear a bureaucratic ban on rural cannabis—as several stipulations in the draft ordinance make it infeasible for rural commercial farms, like the ones in the hills and mountains, to continue legally. In an October Board of Supervisors meeting, the board confirmed that “somewhere around” $1.4 million of its estimated annual $2.5 million in tax revenue would be used for enforcement of noncompliant operations. Santa Cruz County’s Cannabis Licensing Manager Robin Bolster-Grant says there will be a transition time before enforcement begins.

“Our standards have always been that if you are doing something egregious, if you are hurting the environment, we care about the impacts,” she says. “If folks are doing what they’ve been doing, there’s going to be a transition time, just like the state has given folks six months before they’re really focusing on track and trace [laws].”

During 2016’s open season of registration, 760 applicants paid the $500 fee to register. In retrospect, many could have held on to that payment. As of print time, around 80 requests for letters of authorization, which show good standing with the county—a required accompaniment for temporary state license applications—had been filed, according to Bolster-Grant.

“It’s an extremely small number. I would have expected close to a thousand, if everybody who is truly involved in commercial cannabis production was trying to obtain the state license,” says Dan Peterson, who resigned after nine months from his position as cannabis licensing manager in June of 2017, citing ethical reasons.

“I felt that it was a disservice, and unethical to be accepting money from people for their applications to get a license, and additional monies to have their cultivation sites inspected as a pre-licensing inspection, when we didn’t even know what the rules were or how they could come into compliance,” says Peterson of his reasons for leaving. “When I started to do the digging, because my job was to figure out how these people were supposed to become compliant and then help them become compliant, I quickly realized it couldn’t be done.”

As of print time, 49 letters of authorization had gone out, resulting in roughly 110 temporary state licenses, says Bolster-Grant by email, noting that the disparity in numbers is because the state has more categories than the county.

Bolster-Grant notes that many of the initial 760 registrants were speculative—attorneys throwing their hats into the ring and never following through, for instance. Only about 150 continued the process and opened a Cannabis Business Tax—a prerequisite for seeking a state license made public in November of 2016. But the narrowed pool of potential licensed cannabis businesses could also signify that people are pulling up stakes and moving their cultivation or manufacturing businesses out of county, quitting entirely, or hanging back until the 11th hour to see if they can comply with the ordinance. Small mom-and-pop businesses may also still be working to raise enough money to request their letters of good standing, which require county fees of $2,500 for a pre-licensing inspection, as well as $800 for each letter—with manufacturers who also cultivate paying that fee twice.

The county says that it’s cleared up a permitting snafu that sent license-seekers, including its 14 dispensaries, back and forth between the planning department, which would not issue a permit without a license, and the licensing department, which would not issue a license without a building permit, but other disincentives exist in the draft ordinance that may make it hard for anyone not on ag land to pull a license.

“I think that there are a lot of obstacles for the folks in some of the more remote areas, and fire regulations could be one of those things,” says Bolster-Grant, “but if you look at the state regulations and what they are requiring in terms of energy conservation, water conservation, a whole host of other things, those things in combination with what we already have on the books about environmental protection will certainly make it difficult or not feasible for folks in the mountains.”

She adds that the authorization requests came from all areas of the county, and will be considered on a parcel-by-parcel basis. Totaling around 40,000 square feet, the pending plots average about 2,000 square feet and range from 540-square-foot specialty grows to large South County parcels of 20,000 or 30,000 square feet, including two family farms in the cut flower industry.

“From a regulator’s perspective, I want everyone to be regulated and do well, but from my perspective, the [ag] farmers may not be perfect stewards of the environment or with pesticides, but they at least know how to be regulated, and how to file the necessary applications, pesticide use, water use. It gives them an advantage, and there is less of a learning curve,” says Bolster-Grant.

Peterson notes that those in commercial ag land in Watsonville—who were not required to pay a registration fee—also have the advantage of capital, legal representation, and immunity from a myriad of permitting obstacles required of rural plots. Most problematic is a Factory Industrial, or F-1 fire code, which was addressed in public comments to the EIR. The code, which includes manufacturing of airplanes, electric generation plants and hemp-fiber products, does not apply to any other rural greenhouses or agricultural buildings in the county; California Fire Code groups wineries, orchards and other small farms in rural residential areas under Group U.

Unlike Group U, F-1 requires a holding tank of 120,000 gallons of water and a 20-foot access road—a dealbreaker for many in the mountains because, “You can’t build a 20 foot access road because you’re in timberland area which is regulated by Cal Fire and you can’t remove trees,” says Peterson.

“For those folks that can’t make a go with it, the regulations are just too onerous, we are looking at what are the alternatives, and how do we establish a pathway,” says Bolster-Grant. “We have learned from this industry that they are very creative. You find an obstacle and they find another way to do it. I suspect that we’ll see some pretty interesting ideas about how to use what they’ve learned over these years to figure out how to continue.”

Organic Gathering

One such creative idea brewing among the industry is to write a ballot initiative, something advocacy group Association for Standardized Cannabis (ASC) is actively discussing. The initiative’s goals would be to lower taxes and straighten out the process to allow a thriving economy—especially if the ordinance adopted by the county makes compliance infeasible for many. The general public is advised to speak with local dispensary owners for information on how to support such an initiative.

GreenTrade is focusing on elevating the Santa Cruz brand and appellation—a crucial move, says board member Christopher Carr, if Santa Cruz wants to survive in competition with large corporate grows in Salinas, Monterey and Humboldt. Carr has received his county letter of good standing for Grateful Gardens—a 5,000-square-foot garden on a family farm in the mountains—and is awaiting state approval.

“There are many bigger operators around the county—guys and girls, families, that are still holding out, and I’m hoping that if I can do this as a small farmer, and set the precedent and continue to try to educate and shed light, I would hope that our leaders can get behind that effort in good faith too,” says Carr.

Carr says the next action will be ensuring that Santa Cruz has a voice in Sacramento, to find a way to reduce the state’s 15 percent excise tax. At a local level, says Carr, “We just want to use what’s available to get things done—it’s a democracy, Santa Cruz can figure this out, Santa Cruz can organize.”

Updated 1:53 p.m., Jan. 25: County meetings previously uncomfirmed have been confirmed, with dates, times and locations detailed in the fouth paragraph.