10 years after legalization, Washington state cannabis growers face headwinds

Washington state residents voted to legalize adult-use cannabis 10 years ago this month, and in that time, the market has been a success – but not for everyone, and the challenges have been substantial.

As the state’s recreational marijuana industry has grown and matured over the past decade, some of the primary issues today include:

• A lack of access to capital. The state’s residency requirements hinder outside investment.
• Low wholesale prices. Craft and small cultivators confront an oversupplied flower market.
• Limited social equity opportunities for minority cannabis entrepreneurs.

But even with those challenges, that’s not to say the market as a whole hasn’t done what it was intended to do, which was to create a state-licensed economy for legal marijuana companies.

The 2022 MJBiz Factbook estimates adult-use sales in Washington state retail stores this year at $1.5 billion-$1.7 billion and reaching $2.3 billion-$2.5 billion by 2026.

“In 10 years, we went from medical patients being afraid they would lose their house because their neighbors would call the police on them, to soccer moms now serving cannabis at cocktail parties,” said Jessica Tonani, CEO of Verda Bio, a Seattle-based cannabis company specializing in plant research.

“We have come an extremely long way.”

Tonani made those comments last week while on a panel with fellow Washington marijuana business owners hosted by the State Liquor and Cannabis Board (LCB).

Craft growers

Like other long-running adult-use cannabis markets such as Oregon and Colorado, Washington state growers are experiencing low wholesale flower prices as cultivators continue to flood the market.

This year, cultivators had a strong growing season, with little to no adverse weather events, which led to a bumper harvest.

Add that to an already oversupplied market, and prices are sure to fall even lower.

Ryan Sevigny, a cannabis grower and president of Landrace Brands in the Seattle area, said the hurdles are mounting.

“The industry today is a tough place to be a farmer, particularly if you are small and would consider yourself craft,” he added.

Shannon Vetto, CEO of Evergreen Market, a cannabis retail company in the Seattle area, echoed that, saying craft growers are hurting the most and “being a farmer right now is so hard.”

“We have the best crops coming out in October and no one to buy them.”

For several years, the state has been weighing whether to allow small cannabis farmers to sell directly to consumers, similar to how wineries and breweries are allowed to operate.

Sevigny favors the move, but he would also like to see a discussion about defining craft cultivation licenses.

Vetto added that while retailers are nervous about direct sales, she believes “craft growing is a primary part of our ecosystem and we have to find a way to do that.”

Other cultivation hurdles cited included:

• The challenge cultivation businesses faced when state regulators changed the rules around canopy usage, which forced some growers to alter their cultivation plans.
• The cost, both financial and environmental, of using plastic radio-frequency identification (RFID) tags to account for plants in the Metrc seed-to-sale tracking system. One estimate puts the cost at about 33 cents per plant tag.
• The state’s excise tax rate of 37% on adult-use cannabis is by far the highest such tax in the United States. The average tax rate – including the excise tax and state and local sales taxes – totals 46.2%, which pushes some consumers to the illicit market.

Access to capital

Another long-standing complaint among industry officials is the lack of access to capital because, by law, cannabis business entrepreneurs must reside in Washington state for at least six months before obtaining a license.

Allowing out-of-state capital would “level the playing field,” Vetto said.

According to Vetto, marijuana multistate operators already are finding their way into the market despite the restrictions.

“We have some of the best growers in the nation, as well as some of the best operators, but I think we’re losing ground at some level,” Vetto added.

For Jim Makoso, president of Lucid Lab Group in Seattle, that lack of access to capital is a major obstacle to social equity gaining more traction in the Washington state market.

According to data self-reported to the LCB in 2020, less than 20% of marijuana retail owners identified as minorities.

Lifting the ban on outside investment is one component that could completely change the landscape for small and midsized businesses, Makoso said.

“The concern from a social equity standpoint is if we enable outside investment, larger companies will be able to come in and do what these large companies have done in other states, which is take a big foothold, have a huge amount of capital and push out products at lower margins to take advantage of higher volumes,” he added.

“Certainly, that’s a risk – and one you can’t mitigate away from.”

But, Makoso said, the risk to the industry is worth it.

“For social equity applicants, we need a thriving industry, and for that, you need access to capital,” he said.

Interstate commerce

One possible solution to many of the challenges in the market has been the potential advent of interstate commerce in the event of federal legalization.

To that end, an official from the Oregon Liquor and Cannabis Board met on Monday with Washington state regulators, including Director Rick Garza, so LCB staff could learn more about an Oregon law intended to position the state for interstate commerce should the federal government act.

In 2019, Oregon Gov. Kate Brown signed into law the bill that would permit the state to enter into agreements to export marijuana to other states.

The federal government must first lift its marijuana prohibition for Oregon’s export law to take effect.

Sevigny said that “oversupply could quickly evaporate if that comes to fruition.”

Access to capital also factors into interstate commerce. Washington companies would need to scale up quickly if the state wants to function as an export market, which seems likely with its abundant sun-grown cannabis.

Tonani sees an opportunity where “a lot of states might come online that have no infrastructure to grow right now.”

Source: https://mjbizdaily.com/washington-state-cannabis-industry-10-year-anniversary/