Pubdate: Sun, 22 Feb 2015
Source: Herald, The (Everett, WA)
Copyright: 2015 The Daily Herald Co.
Author: Amy Nile


One Grower Says Regulations, Taxes and a Volatile Market Are Making 
the New Marijuana "Green Economy" Just a Pipe Dream So Far.

ARLINGTON - The farm near here looks much like its rural neighbors on 
Highway 9. But this one is under 24-hour surveillance.

Signs outside a house and two buildings warn that guns and children 
are not allowed. As one approaches the locked doors of the operation, 
there is a faint smell of marijuana.

Inside, about a dozen workers grow and harvest plants, package dry 
leaves and buds and prepare it for sale on the state's newly legal 
recreational marijuana market. The agricultural part of the operation 
is backed by a sophisticated business that is navigating a labyrinth 
of regulations, changing rules and nervous neighbors.

Avitas Agriculture is a state-licensed marijuana producer and 
processor. Its name is sativa spelled backwards, a subtle disguise 
for a company trying to apply traditional business sensibility in a 
market with a smoky reputation.

So far, though, volatile market shifts and taxes have made it tough 
for Avitas and other marijuana companies to turn a profit. A 
challenging business environment is making it tougher to make a 
living than many expected.

"We see a lot of people who jumped into this with a 'green-rush' 
mentality," said Brian Smith, a spokesman for the Washington State 
Liquor Control Board, which regulates the commercial marijuana system.

Many of the recreational marijuana businesses will not survive, he 
predicted, and it could take several years before enterprises recover 
startup costs.

Volatile market

Adam Smith, no relation to the state official, and Jason Smit 
co-founded Avitas, which grows top-shelf weed for recreational pot 
stores from Bellingham to Olympia.

When voters in 2012 approved Initiative-502 to legalize recreational 
marijuana for adults, Smith saw an entrepreneurial opportunity. Until 
recently, he worked in Seattle as a vice president of business 
operations at a sports media company. Smith partnered with Smit, who 
was an engineer for an aerospace company.

Smit knew how to work within strict government regulations and had 
experience growing medical marijuana. Now he oversees the crop at 
Avitas while Smith runs the business.

They are working under stringent rules of the Liquor Control Board. 
The state tracks every part of the production process from seed to sale.

Avitas and other marijuana businesses have seen the market flip-flop 
since last July, when sales began. Retailers couldn't keep enough pot 
on the shelves. Supplied by few approved growers early on, stores 
were unable to keep up with demand for the newly legal marijuana. Pot 
was selling for more than $30 a gram at the cash register.

Now prices have fallen to between $11 and $28 per gram because 
there's more marijuana available, according to one industry analysis. 
The state has licensed more growers, and the fall harvest flooded the 
market with sungrown crop from Eastern Washington.

Average legal retail prices are still higher than those on the 
competing black and medical markets. State officials think legal 
recreational weed can compete favorably with those other sources if 
prices stabilize at around $12 a gram.

The state now has licensed about 380 growers and 100 pot stores. In 
Snohomish County, Avitas is among about 16 growers. At least seven 
marijuana shops have opened in the county.

Avitas is waiting to see if the Snohomish County Council will shut 
down marijuana businesses in certain rural areas, including its 
present location. Under pressure from residents in those areas, the 
county is to reconsider rules this spring.

The Legislature, meanwhile, is considering more than a dozen bills 
that could affect the industry.

Accountability on the farm

Avitas invested about $500,000 to get started, Smith said. Much of 
that cost came from complying with government workplace standards, 
among other things.

Once the Liquor Board approved the site, Avitas had 15 days during 
which regulators looked the other way as the company acquired the 
actual plants, which were technically illegal. Each plant was then 
given a barcode and entered into the state tracking system.

Smit grows about a dozen strains of marijuana, including indicas, 
sativas and hybrids. He knows he has exactly 570 plants. The tracking 
requirement of the state has been likened to a winemaker documenting 
every grape.

Even waste is accounted for. At Avitas, plants that are to be 
disposed of are ground up, mixed with soil and placed in a bin that 
is padlocked until it can be hauled to a commercial compost site.

Avitas grows marijuana inside a 4,200-square-foot greenhouse - 
smaller than a basketball court.

Smit and Smith believe passers-by should not be able to tell 
marijuana is being grown inside. But when the plants begin to flower, 
there is a faint smell outside, close to the buildings. Smit said he 
hasn't had any complaints and would take measures to control the odor 
controls if the smell bothered neighbors.

Avitas harvests about 50 pounds of marijuana a month. The weight of 
the harvest is entered into the state system, and the plants are 
placed under 24-hour quarantine to give regulators time to make a random check.

The marijuana is then moved to a separate processing building, where 
they are line-dried. The buds that comprise sellable product are 
hand-trimmed and cured.

Samples are sent to a state-approved lab for analysis. The marijuana 
is checked for contaminants, and the potency of the ingredients is measured.

"There are no checks and balances like that on the medical side," 
Smit said. "It's like the Wild West."

While the sale of marijuana for medical use is legal under certain 
circumstances, there is no state oversight of the product.

To the store

The marijuana is then weighed, packaged and labeled. Workers at 
Avitas follow similar hygiene standards to those for food handlers. 
They wear hair nets and latex gloves.

"We're definitely trying to bring professionalism to the industry," 
said employee Jeremy Montgomery, as he packaged the "Chocolope" 
strain during a recent tour of the business.

Another Avitas employee, Shane Smullin, previously worked as a 
quality inspector on a production line in aerospace. While the jobs 
are different, he said, the regulatory requirements have a similar 
effect on the work.

"You make sure you're producing exactly what you say you are," he said.

The packaged product, too, must be placed in 24-hour quarantine to 
allow the state time for random checks. It then is shipped, in a 
state-approved vehicle with a manifest, to the 36 stores which Avitas 
supplies. At the stores, the product is entered again into the state 
tracking system.

Herbal Nation in Bothell and Kush Mart in Everett are among the local 
shops that sell Avitas pot.

"They're our top shelf," said Kush Mart employee Eric Wing, pointing 
out the frosty appearance and the sticky texture of Avitas buds.

Why the price is high

Smith said stores are marking up marijuana considerably. Recently, 
Avitas has been selling wholesale marijuana to retailers for about $7 
a gram. Retailers, he said, are selling it for prices ranging from 
about $15 to more than $25 a gram.

Kush Mart co-owner Dmitry Loffe said he tries to keep prices low, but 
taxes make it hard for retailers to make money when they compete with 
other purveyors of pot who are subject to less tax or none at all.

Smith agrees that taxes put pressure on the profit margin.

First, a 25 percent excise tax is levied on recreational marijuana at 
each step of the process - from grower to processor, from processor 
to retailer, and from the store to the customer. Avitas gets a break 
on the producer-to-processor step because it does both.

Also, the standard state sales tax and the state 
business-and-occupation tax apply to recreational marijuana. 
Ironically, the U.S. Internal Revenue Service also collects taxes 
from marijuana businesses, even though, at the federal level, the 
product is illegal.

Smith and other marijuana business owners are calling for reforms to 
the tax system so they can lower the overhead that affects prices. 
Sellers on the black market obviously don't add taxes to the price of 
their wares. Medical marijuana businesses add state sales tax to 
their prices, pay the state business-and-occupation tax and pay 
federal income tax - but do not pay the special, multi-level 
recreational marijuana excise tax.

In the meantime, Smith is coming up with creative ways to survive in 
a market of high taxation, fluctuating prices and a glut of product. 
He is negotiating what he believes is the industry's first "forward" 
contract - agreement to buy future marijuana produce at a price 
agreed upon today. It's a common practice in agriculture and other industries.

Smith said he is working on deals with two marijuana farms in Eastern 
Washington to buy about 1,000 pounds of marijuana from the coming 
summer and fall harvests. He plans to expand Avitas' processing 
business by making the sun-grown pot into concentrated-marijuana 
products. The deals would also help Avitas tamp down the effect of a 
surge in inventory that drives down prices, he said.

Smith thinks Avitas is well positioned to survive the volatile market 
in the short-term, but believes changes are needed to stabilize 
prices and ensure the viability of the industry.

"It's a regulatory nightmare for the farmers," Smith said. "Marijuana 
is an agricultural plant. It should be treated like agriculture."
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MAP posted-by: Jay Bergstrom