Stocks for some publicly traded cannabis companies were plummeting. A still-thriving illicit market in California made it tougher for new legal operators to compete. Investors were starting to become more selective and the big chunks of capital that could fuel large-scale improvements and building booms were getting harder to find.
Full Answer
Why is California’s cannabis market so complicated?
“It’s complicated, because we had a 20-year history of a quasi-legal, look-the-other-way gray market,” says Adam Spiker, executive director of the Southern California Coalition, a cannabis industry group.
Why is California’s weed economy in disarray?
Rather, the state’s weed economy is in disarray largely because of everything that happened in the two decades before Prop 64 passed. Cannabis has long been a crucial part of Golden state culture, a perfect fit for the laid-back, health-conscious attitude that has been percolating out west since well before the first hippies arrived in the Haight.
What is California’s cannabis conundrum all about?
California’s cannabis conundrum speaks to the enormous challenges of bringing a gray market that for decades has thrived in the shadows into the light. But the problems run deeper than any flaws in Proposition 64, or actions taken over the past five years.
What is the history of cannabis in California?
Cannabis has long been a crucial part of Golden state culture, a perfect fit for the laid-back, health-conscious attitude that has been percolating out west since well before the first hippies arrived in the Haight. The story of California’s legal weed chaos dates back to 1996, when voters passed a law allowing medical marijuana.
Is there an oversupply of cannabis?
“We have a crazy oversupply issue here,” she said. of the state's excess marijuana. “It's a race to the bottom.” AuClair is still going ahead with plans to grow 500 pounds of marijuana this coming year, the same as in 2021.
How big is California's cannabis industry?
California legalised medical marijuana in 1996 and recreational cannabis in 2016. The state is now the largest legal weed market in the world, raking in $5.2bn in sales in 2021.
Is cannabis profitable in California?
According to the group, the industry is lucrative for the state — California collected about $817 million in adult-use marijuana tax revenue during the 2020-2021 fiscal year — but not for cannabis business.
Where is the most cannabis grown in California?
The Emerald Triangle is a region in Northern California, named as such due to it being the largest cannabis-producing region in the United States. The region includes three counties in an upside-down triangular configuration: Humboldt County, on the coast.
The biggest marijuana market in the world is being stymied by high taxes and overregulation
A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @AMCScam
California's taxation and overregulation are crushing its pot industry
To begin with, it's taxing the daylights out of its consumers.
California-focused pot stocks are feeling the pain
As you might imagine, a state that's forecast to account for perhaps 25% of all U.S. sales by 2024 is bound to attract a lot of attention from vertically integrated operators. Unfortunately, this attention hasn't panned out for a number of pot stocks, at least in the early going.
Drawbacks
Not long ago, a San Diego resident who we'll call Adam (his name is withheld to protect his employment status) consulted Weedmaps, an app similar to Yelp but for weed businesses, and found a local retailer to deliver high-potency edibles for a fair price. “They contacted me, asking if I was law enforcement,” he told Civilized.
Terminology
When talking about this issue, it’s helpful to parse out the terms. “Black market,” while still in common use, feels a bit outdated and pejorative to those who know the industry well.
Market Size
A simple Weedmaps search turns up several thousand retailers, but there are fewer than a thousand licensees in the whole state: a clear indication of how common illegal retail activity really is.
Risks to Buying on the Unregulated Market
In addition to the sale of unmarked “mystery” products like those Adam and Nicole encountered, counterfeit products posing as known, legal brands is a problem among unlicensed retailers.
Challenges to Eroding the Illegal Market
Hezekiah Allen believes that the biggest barrier for cannabis businesses seeking to enter the legal market is the two-track licensing system whereby the local city or county has to issue a permit before the state can issue its own. “Most cities and counties in California are not issuing permits," he said.
Enforcement Efforts
Some jurisdictions, according to Traverso, are more active in enforcement than others. “Local control is what the people voted for with Prop 64,” he said, so local governments have a lot of authority, and everyone does things a little differently.
Solutions to the Illegal Market Problem
Traverso believes that as the industry becomes more sophisticated and organized, legislation will come down the pike to fix problems — “whether that’s lowering taxes or trying to find a banking solution, or putting more resources toward enforcement,” he said.
Illicit industry may be playing a shadow role
A Northern California grower-retailer also said that not only is there a glut in the legal supply of weed, but there’s a flood in the illegal supply of weed that’s backed up into legal channels.
Cannabis economics are changing forever
Prohibition grossly distorted the cost of pot, but as it recedes, cannabis economics are changing.
How we got in a marijuana muddle
Cannabis has long been a crucial part of Golden state culture, a perfect fit for the laid-back, health-conscious attitude that has been percolating out west since well before the first hippies arrived in the Haight.
The challenges of going legal
California’s illicit market is enormous and efficient. This year alone, the state has seized more than 1.2m illegal cannabis plants and more than 180,000lb of processed pot.
What comes next?
So do California’s struggles spell doom for the broader effort to legalize weed?
The Golden State represents the world's largest legal marijuana market
California's legal cannabis market will grow 23% to $3.1 billion in 2019, according to a new report by Arcview Market Research and BDS Analytics. And by 2024, the state's legal weed industry could exceed $7 billion in annual sales.
OTC: PLNH.F
Arcview and BDS' report also noted that California represents a largely untapped opportunity for cannabis retailers. The state currently has a low number of marijuana stores relative to its population, with only one licensed retailer for every 35,147 adults over the age of 21.
Cresco Labs
Dispensary operator Cresco Labs ( CRLBF -1.85% ) has cannabis operations in 11 states. But it's the company's pending megamerger with Origin House ( ORHOF ) that makes it a great play on California's weed market in particular.
Planet 13 Holdings
While Cresco Labs is working to get its pot products into hundreds of retail locations, Planet 13 Holdings ( PLNH.F -2.76% ) is opening its first store in the Golden State. But don't let that stop you from taking a look at its stock, because it's no ordinary store.
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Drawbacks
Terminology
Market Size
- A simple Weedmaps search turns up several thousand retailers, but there are fewer than a thousand licensees in the whole state: a clear indication of how common illegal retail activity really is. Earlier this year, the LA Times reported that about 80percent of the cannabis bought in 2018 in California originated on the black market — an estimate that comes from cannabis analy…
Risks to Buying on The Unregulated Market
- In addition to the sale of unmarked “mystery” products like those Adam and Nicole encountered, counterfeit products posing as known, legal brands is a problem among unlicensed retailers. California strictly regulates the quality of licensed cannabis, but it’s unlikely that what’s sold on the illicit market has been tested for pesticides, molds, or other toxins. “We want to make people aw…
Challenges to Eroding The Illegal Market
- Hezekiah Allen believes that the biggest barrier for cannabis businesses seeking to enter the legal market is the two-track licensing system whereby the local city or county has to issue a permit before the state can issue its own. “Most cities and counties in California are not issuing permits," he said. "So most cannabis business people simply ca...
Enforcement Efforts
- Some jurisdictions, according to Traverso, are more active in enforcement than others. “Local control is what the people voted for with Prop 64,” he said, so local governments have a lot of authority, and everyone does things a little differently. “We want to prioritize going after the unlicensed people in places where there are legal operators because we want to make sure that …
Solutions to The Illegal Market Problem
- Traverso believes that as the industry becomes more sophisticated and organized, legislation will come down the pike to fix problems — “whether that’s lowering taxes or trying to find a banking solution, or putting more resources toward enforcement,” he said. For its part, the BCC is willing to refine the regulations in order to smooth out bumps and allow more efficient access to legal sta…