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Ganja glut? With excess weeds, growers seek interstate sales




TUMWATER, Wash. (AP) – The email went out to legal cannabis growers around Washington state, notifying them that another of their colleagues had gone under.

“Liquidation sale”, it said. Attached was a spreadsheet of items that can be picked up: LED grow lights for $500 each. Rotary evaporators for hash oil, $10,000.

Across the Columbia River in Oregon, where the state’s top marijuana regulator recently warned of an “existential crisis” in the industry, it’s an open secret that some licensed growers have been sending product to the out-of-state black market just to stay afloat.

California̵[ads1]7;s “Apple store of weed”, MedMen, is reeling with millions in unpaid bills, while Canadian cannabis company Curaleaf has closed most of its cultivation operations in California, Oregon and Colorado.

Along the West Coast, which dominated US marijuana production long before states began legalizing it, growers are facing what many call the failed economy of legal pot.

It’s a big deal, thanks to good growing conditions and a wealth of expertise, but any profits remain officially trapped within each state’s borders due to the federal ban on marijuana. Prices have plummeted and producers have struggled.

“I’m at rock bottom,” said Jeremy Moberg, who owns CannaSol Farms in north-central Washington and, like many licensed growers, complains that the state’s 37% cannabis tax leaves virtually no profit margin for growers. “I’m tired of running a failing business.”

No one in the industry expects a divided Congress to help immediately by legalizing the drug, allowing pot companies to deduct expenses or even just easing banking restrictions which often cuts them off from loans or credit.

Instead, some are pinning their hopes, however faint, that President Joe Biden’s administration will clear the way for marijuana trade among states that have legalized the drug. That would allow the West Coast – with its favorable climate and cheap, clean hydropower for indoor growing – to help supply the rest of the country, they argue.

In Senate testimony last month, Attorney General Merrick Garland said the Justice Department will soon announce a new marijuana policy — one that will come close to the 2013 “Cole Memorandum,” which made clear the feds would not interfere with state efforts to regulate marijuana. as long as certain law enforcement priorities were met.

Drug policy experts say they do not expect the new policy to go so far as to allow interstate trafficking.

Nonetheless, lawmakers in Washington state last week approved a “trigger bill” — modeled after bills already passed in Oregon and California — that gives the governor the authority to enter into interstate cannabis trade agreements if the federal government allows it.

Twenty-one states have now legalized the recreational use of cannabis by adults. Sales just started in Missouriexpected to begin in July in Maryland and totaled $300 million in the first year of New Mexico’s program.

How states have set up their markets has implications for how their industries are doing now – and how they might fare if companies are allowed to sell out of state.

Washington and Colorado were the first states to legalize recreational marijuana in 2012. Many of the early regulations Washington passed to keep the Justice Department at bay — including limiting the size of cultivation facilities and banning out-of-state investment — remain in place.

It has helped some smaller growers thrive. But that could hamper those hoping to compete in an interstate marketplace alongside larger, more efficient producers from Oregon or California, which operate under fewer borders.

In Oregon, where sales began in 2015, large growers have achieved some economies of scale that could give them a leg up in a broader market. But in the meantime, the state’s oversupply is considered the nation’s worst.

In February, the Oregon Liquor and Cannabis Commission reported that marijuana businesses were sitting on about 3 million pounds (1.36 million kilograms) of unused cannabis, as well as 75,000 pounds (34,000 kilograms) of concentrates and extracts.

Steve Marks, then the commission’s executive director, said Oregonians are already buying as much weed as they can use. Federal inaction poses “an existential crisis” for Oregon’s industry, he warned.

“Cannabis in Oregon is like corn in Iowa,” said TJ Sheehy, analyst for the commission. “If you put a box around Iowa and said you can only grow corn in Iowa to sell to Iowa, you’d have the exact same dynamic.”

Contributing to the abundance in Oregon and to a lesser extent in Washington is that the states licensed so many growers. The original idea was to ensure enough supply for the legal market, and bring prices down to compete with the black market. Oregon, with just over half Washington’s population, has hundreds more licensed growers.

The oversupply has been great for cannabis consumers.

When legal sales began in Oregon, a pound of cannabis could have gone for $3,000 wholesale; today, that same pound can be $100 to $150, said Isaac Foster, co-founder of Portland Cannabis Market, a wholesale distributor.

In Washington, which has some of the highest cannabis taxes in the country, the prices consumers pay at pot shops are still cheaper than illegal weed. The state collects half a billion dollars a year in taxes, money it uses for healthcare and state operations.

Three-quarters or more of cannabis users in Washington, Oregon and Colorado — all among the earliest legalization states — reported purchasing marijuana products from legal outlets in 2021, according to the International Cannabis Policy Studybased at the University of Waterloo in Ontario, Canada.

With such cheap prices, it is a challenge to keep the industry sustainable.

Moberg, of CannaSol Farms, is down to seven employees — down from more than 30 in 2014 and 2015 when Washington’s pioneering industry launched amid tight supply and high prices.

When the spring planting season arrives, he already has three containers full of weeds, he says, including 75% of what he produced last season, and 1,000 pounds (453.6 kilograms) still unsold from the year before that. His income last year fell by about half.

East Fork Cultivars, one of Oregon’s first licensed growers, has stored thousands of pounds (kilograms) of marijuana, co-founder Nathan Howard said.

“We’re hoping we can sell most of it to keep the lights on,” Howard said. “It’s a miracle we still exist.”

Oregon regulators know growers are suffering, but say they’ll be in a good position if the feds allow interstate commerce.

In a meeting with growers in Southern Oregon, Paul Rosenbaum, then head of the state’s cannabis commission, told them to hang on.

“You’re all staying in this game for one reason: that the federal government, whether it’s this term or the next term, they’re going to recognize marijuana on a 50-state basis,” he recalled telling them. “And Southern Oregon is to marijuana what Bordeaux is to France.”

Industry insiders say legal growers generally want to supply the legal market, rather than risk their business and freedom if caught selling out the back door. But some have only hung on by getting the product to the black market.

“They were either going to die or get creative,” said Tanner Mariani, director of sales for the Portland Cannabis Market. “And a lot of people chose to be creative and … found a way to get it from this market to the other side and then out of state.”

Authorities have also been battling illegal farms operating under the guise of legality — particularly in Oregon, where many have been financed by foreign cartels.

The arrival of legal adult sales in 2018 in California — the nation’s largest pot producer and the world’s fourth-largest economy — was seen as a breakthrough that would help pave the way for federal legalization.

But about two-thirds of California communities do not allow legal marijuana activity, helping the tax-free illegal market flourish.

A post-pandemic economy ushered in layoffs in an already strained sector. Steep taxes, inflation and regulatory costs weigh on the bottom line, and a glut pushed wholesale prices to fire-sale levels. As in Oregon, it’s no secret that some producers in California have pushed legal products into illegal sales.

An analysis by cannabis investor Aaron Edelheit determined that California’s legal market lost nearly a quarter of its total growing acreage after the start of 2022 — “a wipeout,” he called it. With so many manufacturers going under, wholesale prices have started to recover in California.

One of the state’s first licensees was Erik Hultstrom, who envisioned thriving in a green rush economy and began tending boutique buds in a steel-gated warehouse on the outskirts of Los Angeles.

Five years later, he has sold his license and hopes to get a contract with a major producer to sell bud under Hultstrom’s brand.

“I don’t know any companies that are really making money,” he said.

LA dispensary owner Gregory Meguerian said of folding a cultivation project: “You have to know when you’re cutting your losses.”

There have been predictions of an industry-wide collapse, but not everyone is worried. Rob Sechrist, of cannabis-only lender Pelorus Equity Group, described the market turmoil as normal for an emerging industry.

“Every time someone fails, the market share goes to someone else,” Sechrist said. “We have borrowers across the country and California who are doing extremely well.”

In fact, cannabis distributor Nabis is opening a massive warehouse southeast of Fresno this month.

Some growers have found a happy medium.

Indoor grower Doc & Yeti Urban Farms, in Tumwater, Wash., produces about 1,200 pounds (544 kilograms) of flowers each year, which it sells to regular retail customers, said co-founder Joseph DuPuis. Brand loyalty has helped his team of 13 survive and make money, but he’d like to see Washington better prepare for a national market.

“If you weather the storm, you have a chance to get out into calmer waters and survive in this market,” DuPuis said.

___

Selsky reported from Salem, Oregon. Blood reported from Los Angeles. Thomas Peipert in Denver and Gillian Flaccus in Portland, Oregon contributed.



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