Copyright 2019 Tony Lima.  All rights reserved.

As always, a downloadable pdf version of this article is at the bottom of the page

Introduction

This is California shows how to grow a black market part 2 growers.  Part 1 looked at the retail end of the marijuana industry.  Here I’ll look at the supply of the essential ingredient.

California has done a wonderful job of segmenting the grower end of the industry. They have established no less than 18 different categories of grower, each with its own application and annual license fee.  A “Specialty Cottage Outdoor” application will cost you $135. The annual fee will be $1,205. For that you get the right to grow your weed outdoors with up to as many as 25 mature plants. On the other end of the spectrum is the “Medium Indoor” growing area. The application fee is $8,655. The annual license? $77,905. For that you get the right to set up an indoor cultivation site with between 10,001 and 22,000 square feet of total canopy.

If only that was all. In addition to the application and license fees, there is also a tax on output. You as the grower go through quite a bit of backbreaking labor. Then comes the harvest and you figure your problems are over. No such luck. The state is going to whack you with taxes on your end product amounting to $9.25 per dry weight ounce of flowers, $2.75 per dry weight ounce of leaves, and $1.29 per ounce of fresh cannabis plant (which must be weighed within two hours of harvesting).

Mind you, all this is before you’ve acquired any land, set up watering systems, and, for indoor grows, your lighting, ventilation, and other paraphernalia.

The Gruesome Details of Licensing

Table 1 shows the 18 types of growers, the application and license fees for each, and a brief description of what your license allows you to do.[1]  Despite all this hassle, as of July 2019 there were 12,323 licenses that had been granted.[2]  Over half fall into two categories: “Small Mixed Light Tier 1” and “Small Outdoor.”  It appears that production in this market is following the pattern set in most other industries. There will be a few very large producers and a large number of very small producers.

As of August 10, 2019 the California department of food and agriculture had issued 12,323 grower licenses. Of those, 9,467 were listed as inactive meaning the license had expired. One more application had been withdrawn. Another 992 licenses were for medicinal cannabis. That leaves 1,863 provisional and regular grower licenses for adult recreational use.

This unusual pattern was created because of CDFA regulations. They issued emergency regulations that included temporary grower licenses. The regulations stated that no more temporary licenses would be issued after December 31, 2018. The holder of a temporary license had 120 days to complete the application and either be denied or be granted a provisional license. That 1 means that the last valid date for a provision for a temporary license was April 30, 2019. Many applicants simply gave up. A number of them are probably still actually growing marijuana, but doing so in the black market.

Table 1 shows the complete list of grower categories as well as application and annual license fees and a brief description.

Table 1 Grower categories, application and annual license fees, and a brief description (click for larger image)

Reading the list of categories, there’s one rather obvious omission.  There is no mention of large growers.  The state is trying to give the smaller operations a few years to ramp up so they can compete with “big pot.” Licenses for large cultivations cannot be issued before January 1, 2023.[3]

For the moment let’s ignore the nursery and processor categories. We can then break the market down into three broad groups: small, medium, and specialty. Figure 1 shows what the market looks like in terms of number of licenses.

Figure 1 Growers with active licenses by gross size (click for larger image)

Naturally there are complications.  Unique in the state, Santa Barbara County allows “stacked” licenses.[4]  That means a single business entity can acquire multiple small and/or medium grower licenses.  Which pretty much eliminates the edge the state tried to give the little guys.  In a separate piece, I’ve written about the impact on the Santa Rita Hills winegrowing region of California.[5] This policy will also probably give Santa Barbara County a huge head start on the rest of the state.

Figure 2 shows the entire market.

Figure 2 The Complete Grower License Market (click for larger image)

Characteristics of Growers

A basic principle of economics is that fixed costs do not affect the profit-maximizing quantity of output.  But cannabis is not a commodity market.  The product is differentiated on various dimensions including THC content, aroma, flavor, packaging, and branding.  The fixed cost in this case is the per-ounce tax on output.  To maximize profits, growers should aim for high product quality.  Presumably that will allow a higher price for their output.

The Marijuana Business Daily published some data on this in July, 2019.[6]  Here’s what they found:

Figure 3 Differentiation Among Cannabis Cultivators (click for larger image)

Fully 69 percent of the supply is either high quality or organic, both powerful factors that allow higher prices.

The same publication provides some evidence confirming Santa Barbara’s head start.[7]  Figure 4 confirms that Santa Barbara has pulled ahead of Humboldt County, historically the center of the state’s marijuana production.

Figure 4 Licensed Cultivation Capacity by County (click for larger image)

Conclusion

Remember, all these taxes and fees raise the wholesale price.  Those prices become costs to retailers and manufacturers.  This is another big factor that contributes to the very high price of legal marijuana in California.

[1] California Department of Food and Agriculture (CDFA), CalCannabis Cultivation Licensing.  http://calcannabis.cdfa.ca.gov/ Accessed July 25, 2019.

[2] Getting this data is a little complicated. Go to http://calcannabis.cdfa.ca.gov/ and click on “Look up a cannabis cultivation license.” Do not enter any search criteria on the next page, just click on Search.  That will get you a database of all licenses.  On the search results page click the Download Results link just above the title row of the table.

[3] CDFA , CalCannabis Cultivation Licensing. https://www.cdfa.ca.gov/calcannabis/licensing.html . Accessed August 10, 2019.

[4] CDFA, Final Statement of Reasons and Addendum (January 13, 2019) https://cannabis.ca.gov/wp-content/uploads/sites/13/2019/01/CDFA-Final-Statement-of-Reasons-and-Addendum.pdf .  Accessed September 6, 2019.

[5] Lima, Tony (August, 2019) “Bad News for the Santa Rita Hills” CaliforniaWineFan.com. http://californiawinefan.com/2019/08/bad-news-for-the-santa-rita-hills/ .

[6] McVey, Eli (July 16, 2019). “Chart: Most wholesale cultivators competing on marijuana quality.” Marijuana Business Daily. https://mjbizdaily.com/chart-most-wholesale-cultivators-competing-on-marijuana-quality/ Accessed September 10, 2019.

[7] McVey, Eli and Maggie Cowee (December 3, 2018). “Chart: Where does California’s recreational marijuana supply come from?” Marijuana Business Daily.  https://mjbizdaily.com/chart-where-does-californias-recreational-marijuana-supply-come-from/   Accessed September 10, 2019.