Pubdate: Thu, 03 Jan 2019
Source: New York Times (NY)
Copyright: 2019 The New York Times Company
Author: Thomas Fuller


SAN FRANCISCO - A billion dollars of tax revenue, the taming of the
black market, the convenience of retail cannabis stores throughout the
state - these were some of the promises made by proponents of
marijuana legalization in California.

One year after the start of recreational sales, they are still just

California's experiment in legalization is mired by debates over
regulation and hamstrung by cities and towns that do not want cannabis
businesses on their streets.

California was the sixth state to introduce the sale of recreational
marijuana - Alaska, Colorado, Nevada, Oregon and Washington paved the
way - but the enormous size of the market led to predictions of
soaring legal cannabis sales.

Instead, sales fell. Around $2.5 billion of legal cannabis was sold in
California in 2018, half a billion dollars less than in 2017 when only
medical marijuana was legal, according to GreenEdge, a sales tracking

"There are definitely days that I think that legalization has been a
failure," said Lynda Hopkins, who is on the board of supervisors in
Sonoma County, which took a lead in licensing marijuana businesses but
became embroiled in disputes over regulations and taxes, not to
mention angry residents who did not want cannabis grown in their

The easy part of legalization was persuading people to vote for it,
industry analysts say. The hard part, now that it's legal, is
persuading people to stop buying from the black market.

In Colorado and Washington licensed sales soared after legalization.
One crucial difference with California is its massive surplus - the
state produces far more pot than it can consume.

The tons of extra cannabis continue to leach out across the country
into states where it is legal.

"The bottom line is that there's always been a robust illicit market
in California - and it's still there," said Tom Adams of BDS
Analytics, which tracks the cannabis market. "Regulators ignored that
and thought they could go straight into an incredibly strict and
high-tax environment."

The most recent official estimates of California's cannabis
production, a report published a year ago by the California Department
of Food and Agriculture, showed the state producing as much as 15.5
million pounds of cannabis and consuming just 2.5 million pounds.

California's surplus - equal to 13 times Colorado's total annual
production - is smuggled eastward, especially across the Rockies and
Mississippi where the wholesale price is as much as three times as

Cannabis Benchmarks, a company that tracks marijuana prices, reported
at the end of December that the average price of regulated cannabis in
California was $1,183 a pound, compared with $3,044 in Illinois,
$3,072 in Connecticut and $2,846 in Washington, D.C.

Supporters of legalization long ago acknowledged the problems of
California's surplus and said it would take years to address.

In an interview in 2016, Lt. Gov. Gavin Newsom, who takes office as
governor next week, estimated that 85 to 90 percent of the cannabis
that California produced was exported. "It's a very serious issue," he
said, "and it's going to create a dynamic where the black market will
likely persist in a very stubborn way."

The distinction between legal cannabis businesses and scofflaws is
about to become much sharper. The loosely regulated system of medical
cannabis cooperatives that has existed for two decades will be illegal
after Jan. 9. This gives law enforcement more clarity.

Jonathan Rubin, the head of Cannabis Benchmarks, says market forces -
low prices and extreme competition - will also force many smaller
California marijuana companies out of business.

This is straining another promise made by proponents of legalization:
that small producers would be protected.

"The icon for cannabis is going to become the Marlboro Man," Ms.
Hopkins, the Sonoma County supervisor, said referring to the symbol of
the tobacco industry, to which critics often compare the cannabis
business. "In California we've done what we always do - regulate,
regulate, regulate, which ultimately gives significant advantage to
large companies with significant economies of scale."

The popular image of California's marijuana growers may still be
hippies hiding out in the forests of Humboldt County but increasingly
the reality is more like the operations of NorCal Cannabis Company in
Santa Rosa, north of San Francisco.

The company has converted what was a semiconductor factory into a
cannabis production operation where employees walking down antiseptic
hallways wear latex gloves and supervise an Israeli-style irrigation
system and a $1 million air filtration system. Next door is a company
that makes coatings for aircraft cockpit gauges.

Legalization has been liberating for big players like NorCal

"This is our coming-out party," said Jigar Patel, the president of the
company, who toured the complex in a white lab coat. "It's waking up
and doing what you love without wondering if the man is behind you."

But for hundreds of other smaller producers the paperwork alone has
been enough to put them out of business. A cannabis producer must
submit applications to as many as five state agencies, including
obtaining a certificate to ensure they are able to use a scale.

Lori Ajax, the head of California's Bureau of Cannabis Control who is
sometimes called the state's cannabis czar, described 2018 as "rough"
both for the regulators and the industry.

Her office is planning a public information campaign to try to
persuade consumers to stop buying illegal pot.

"We have to get more consumers buying from the licensed market," she

Legalization was promoted as helping to end the war on drugs. But Ms.
Ajax says California has no choice but to "step up" enforcement of
cannabis scofflaws.

"As a state we have to get more aggressive," she said.

With less than two dozen enforcement officers, she will need help from
other government agencies.

Ms. Ajax said she was encouraged by the "surge" of applications by
cannabis businesses at the end of 2018. The Bureau of Cannabis Control
has issued 2,500 temporary licenses. Yet this is still a fraction of
the tens of thousands of cannabis businesses in the state.

Mr. Adams of BDS Analytics says 2018 was a year of "constantly
diminishing forecasts" of cannabis sales. But he and others believe
the legal market can only grow, especially after the disputed decision
by Ms. Ajax's office to allow cannabis delivery services to operate
across the state - even in areas where local municipalities have
chosen to ban pot businesses.

Increased sales could push tax revenue closer to the forecasts on the
2016 ballot, which predicted revenue would reach the "high hundreds of
millions of dollars to over $1 billion annually."

Through September, Sacramento has collected only $234 million in
cannabis taxes. Colorado, with a population half the size of Los
Angeles County, collected around the same amount last year.

Gov. Jerry Brown, who leaves office Jan. 7, described cannabis revenue
as unreliable in a recent interview with The New York Times.

"I have not counted on any revenue from marijuana," he said. "Who's
counting on the marijuana revenue? People said that to make it more
plausible for voters."

Still, in many ways 2018 was a banner year for cannabis legalization.
Canada became the first industrialized country to allow sales of
recreational cannabis; the Mexican Supreme Court ruled that banning
cannabis was unconstitutional, paving the way for legalization;
Vermont and Michigan legalized recreational marijuana and Oklahoma
became the 30th state to legalize medical marijuana.

Ms. Ajax sees a solution to California's cannabis surplus if and when
marijuana becomes legal nationwide.

"It would be wonderful if we could sell to other states," she said.
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