Pubdate: Sat, 06 May 2017
Source: Wall Street Journal (US)
Copyright: 2017 Dow Jones & Company, Inc.
Author: Allysia Finley


When California voted 57% to 43% last November to legalize
recreational marijuana-the eighth state to do so-it fertilized a
national market whose value by some estimates could top $20 billion by
2020. The ballot initiative was backed by a phalanx of
progressives-Napster founder Sean Parker provided the seed funding-and
liberal interest groups such as the American Civil Liberties Union.
But now as state lawmakers debate how to regulate the industry, one
worry is that the Teamsters will hijack the process and corner the pot

California was the first state to legalize medical marijuana, in 1996.
For two decades, local governments took the helm on regulation, which
worked fine so long as most growers and dispensaries were mom-and-pop
operations. But large businesses with sprawling operations
necessitated a uniform statewide system. In 2015 the Legislature
issued guidelines regulating the cultivation, manufacturing, delivery,
testing, taxation and sale of pot for medicinal use.

The regulations, modeled on those enacted to control alcohol after
Prohibition, established 17 different licenses. Manufacturers and
cultivators can hold dispensary licenses, and dispensaries can be
licensed to grow weed. But third-party distributors are required to
negotiate the exchange between growers and retailers.

These middlemen are responsible for collecting taxes and transporting
pot to laboratories for testing. They are forbidden from cultivating
or selling cannabis. This framework of three tiers-cultivation,
distribution and retail-is supposedly intended to ensure that every
ounce of pot can be accounted for and that growers don't illegally
divert their product to the black market.

Law-enforcement officials are urging lawmakers to adopt the same model
for recreational marijuana, since they believe a small number of
wholesalers would be easier to audit than thousands of growers and
retailers. They're joined by the Teamsters, who hope to cash in on the
pot market. "I'm not hiding our self-interest," Teamsters lobbyist
Barry Broad told Politico. "This is a growing industry and we'd like
it to grow unionized."

Yet progressives who championed the ballot initiative worry that
mandating a three-tiered system would upend the free market and create
the same kind of distortions that have beset the alcohol industry.
Craft distillers and wineries have long complained that a few large
alcohol distributors exercise oligopoly power. Spirits producers that
refuse to pay distributors a sizable cut can get shut out of stores.
Big businesses have an advantage because they can pay distributors
more to negotiate primo shelf space. Retailers protest that their
selection is limited because they cannot purchase directly from
producers. As a result, consumers pay more and have fewer options.

The California Cannabis Industry Association-joined by business groups
such as the California Retailers Association and the National
Federation of Independent Business-is warning lawmakers that mandating
third-party marijuana distribution would increase prices and introduce
organized crime, a dig at the Teamsters' history of

Last month, cannabis groups sent a letter urging Gov. Jerry Brown to
reject the idea: "We believe that allowing cultivators and
manufacturers to hold distribution licenses is in the spirit of
developing policies that will undo the illicit market rather than
reinforce it, and provide opportunities for small producers to compete
with larger players."

For their part, the Teamsters argue that a three-tiered system is
necessary to prevent vertical integration that could lead to higher
prices. "It raises really significant antitrust issues that we don't
think are accounted for," Mr. Broad, the union lobbyist, told the
Sacramento Bee. "It's quite conceivable that the entire market can be
owned by someone who also controls distribution and access to the market."

But vertical integration can produce efficiencies, and it's doubtful
that one large business could corner the market unless granted a
monopoly by the government. The state doesn't mandate a three-tiered
system for fresh produce, but farmers and grocers go through
wholesalers anyway because it's economical. A tomato grower may not
want to negotiate individually with hundreds of restaurants or store
managers. Nonetheless, a farmer may want the ability to sell his
produce directly to customers at a farmers market.

The bigger risk is that a few distributors could control access to the
market, and that the Teamsters could disrupt the free flow of
marijuana by going on strike. Yet Mr. Broad seems confident the
legislature will see things his way. "To have local government,
organized labor and law enforcement all together is a pretty potent
alliance," he told Politico. "What's on the other side? A couple
marijuana people with illusions of grandeur?"

Never underestimate the clout of labor unions in Sacramento. Still,
the Teamsters may find themselves outgunned by pot businesses and
investors that have billions at stake in ensuring the industry's
growth isn't inhibited.
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MAP posted-by: Matt