4/20 Day: The cannabis industry has too much pot. Can trade between states help? | AP News

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

"Liquidation sale," it said. Attached was a spreadsheet of items up for grabs: LED grow lights for $500 apiece. 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 some licensed growers have funneled product to the out-of-state black market just to stay afloat.

California's "Apple store of weed," MedMen, is teetering with millions in unpaid bills, while the Canadian cannabis company Curaleaf has shuttered most of its cultivation operations in California, Oregon and Colorado.

Along the West Coast, which dominated U.S. marijuana production long before states began to legalize it, producers face what many call the failed economics of legal pot.

There is vast supply, thanks to great growing conditions and a wealth of expertise, but any surplus remains officially trapped within each state's borders due to the federal ban on marijuana. Prices have plunged 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 producers. "I'm tired of running a failing business."

No one in the industry expects a fractured Congress to help out anytime soon by legalizing the drug, allowing pot businesses to deduct expenses or even just easing banking restrictions that frequently cut them off from loans or credit.

Instead, some are pinning their hopes, however faint, on President Joe Biden's administration clearing 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 would hew close to the "Cole Memorandum" of 2013, 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 as far as permitting interstate commerce.

Nevertheless, lawmakers in Washington state last week approved a "trigger bill" — modeled after ones already passed in Oregon and California — authorizing the governor to enter into interstate cannabis trade agreements should the feds allow it.

Twenty-one states have now legalized the recreational use of cannabis by adults. Sales just began in Missouri, are expected 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 should businesses be 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 adopted to keep the Justice Department at bay — including restricting the size of growing facilities and banning out-of-state investment — remain in place.

That has helped some smaller growers thrive. But it could hamstring those hoping to compete in an interstate marketplace alongside larger, more efficient producers from Oregon or California, who operate under fewer limits.

In Oregon, where sales began in 2015, large growers have achieved some economy 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 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 already buy 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, an analyst for the commission. "If you put a box around Iowa and said you can only grow corn in Iowa to sell to Iowans, you'd have exactly the same dynamic."

Contributing to the glut in Oregon and to a lesser degree in Washington is that the states licensed so many growers. The initial idea was to ensure enough supply for the legal market, bringing down prices to compete with the black market. Oregon, with a little over half of Washington's population, has hundreds more licensed growers.

The oversupply has been terrific for cannabis consumers.

When legal sales began in Oregon, a pound of cannabis might have gone for $3,000 wholesale; today, that same pound might 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 in pot shops are still cheaper than illicit weed. The state is raking in half a billion dollars a year in taxes, money it devotes to health care and government operations.

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

With such cheap prices, keeping the industry sustainable is a challenge.

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

With the spring planting season arriving, he already has three shipping containers full of weed, 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 revenue last year was down by about half.

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

"We hope we can sell most of it to keep the lights on," Howard said. "It's a miracle that we're still in existence."

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

In one meeting with producers in southern Oregon, Paul Rosenbaum, then chair 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 next term, they are 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 businesses and freedom should they get caught selling out the back door. But some have only hung on by getting product to the black market.

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

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

The arrival of legal, adult-use 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 open the way for federal legalization.

But about two-thirds of California communities don't allow legal marijuana activity, which helps the tax-free illegal market flourish.

A post-pandemic economy ushered in layoffs in a sector that already was strained. Hefty taxes, inflation and regulatory costs weigh on bottom lines, and a glut pushed wholesale prices to fire-sale levels. As in Oregon, it's no secret some California growers have pushed legal product into illicit sales.

An analysis by cannabis investor Aaron Edelheit determined California's legal market lost nearly one-quarter of its total growing area after the start of 2022 — "a wipeout," he called it. With so many producers 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 nurturing boutique buds in a steel-gated warehouse on the fringes of Los Angeles.

Five years later, he's sold his license and hopes to contract with a large grower to sell bud under Hultstrom's brand.

"I don't know any companies that are really making money," he said.

L.A. dispensary owner Gregory Meguerian said he folded a cultivation project: "You've got to know when you cut your losses."

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

"Every time somebody fails, market share goes to somebody else," Sechrist said. "We have borrowers throughout the country and California that are doing extremely well."

Indeed, 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, Washington, produces about 1,200 pounds (544 kilograms) of flower every year, which it sells to regular retail-store customers, said co-founder Joseph DuPuis. Brand loyalty has helped his team of 13 survive and profit, but he'd like to see Washington better prepare itself for a national market.

"If you can withstand the storm, you have a chance to come out to calmer seas and survive in this market," DuPuis said.

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