Growing Pains Part 1: Nipped in the Bud 

Small farmers had hoped to usher in California's new legal cannabis market, but the state's high taxes and fees and a loophole in its regulatory scheme are allowing Big Weed to take over.

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Thousands of these small cultivators have abandoned California's multibillion-dollar legal market and all that remains is the flotsam of broken businesses. On Humboldt County's local Craigslist, the "for sale" section offers pages of used cannabis farming equipment, including tractors, backhoes, bulldozers, water storage tanks, grow tents, large cold-frame greenhouses, commercial grade lighting systems, charcoal-filtered industrial fans, and thousands of yards of agricultural irrigation hose and tubing. Many of the items are brand new.

"It's hard to know the exact numbers because the records are so spotty," said Omar Figueroa, a Sonoma attorney who specializes in cannabis law, referring to the number of small farmers who have gone belly up. "But California's old-school, mom-and-pop businesses are being massacred."

For decades, Californians have been strong supporters of legalizing cannabis. California was the first state to legalize medical marijuana in 1996 with the passage of Proposition 215. And for the next two decades, the cannabis industry not only flourished in California, but business professionalism, transparency, and application of best practices served as a model for other states. The final hurdle for Californians was the legalization of adult use, which had been achieved in varying forms in the states of Washington and Colorado in 2012 and Alaska and Oregon in 2014.

In 2016, a group of advocates, politicians, and cannabis business people submitted the Adult Use of Marijuana Act, a 62-page initiative, to the California Attorney General's Office. The initiative was approved for signature gathering and it easily qualified for the ballot as Proposition 64.

The Yes on 64 campaign collected $20 million in contributions, thanks largely to supporters like Napster co-founder Sean Parker, who contributed $7 million; the Drug Policy Alliance, which threw in $4.5 million; and billionaire George Soros, who put in $4 million. In all, the Yes on 64 campaign outraised the opposition 12 to 1 in contributions and the ballot measure won handily on Nov. 8, 2016, garnering 57 percent of the vote.

Prop. 64 held a great deal of promise for the state's small farmers. They had opposed several previous proposed initiatives, because those measures would have allowed large corporate farms to dominate the market.

And Prop. 64 appeared to address their concerns. The initiative banned corporations from participating in the new weed market for five years and barred individuals and businesses from farming on property greater than one acre.

These restrictions helped convince many small cultivators to support Prop. 64. They were led to believe they would have time to establish their businesses and recoup their investments before having to compete with well-financed companies. The protections also gave them confidence to make investments in land, equipment, attorneys, and consultants and to embark on the expensive process of applying for permits and complying with the regulations of numerous local and state agencies.

Teisha Mechetti, a founding principle of AgDynamix, a cannabis consulting firm in Humboldt County, said the process to get permitted by local agencies is very complex and expensive and many small cultivators took the investment risk solely because of the protections in Prop. 64.

The investment in the licensing process is substantial. The basic cost, with consulting fees, is $75,000 for local permit approval and another $50,000 for a state license — and that's without complications such as code upgrades to existing structures and mitigating environmental concerns, according to Mechetti.

But as small farmers started shelling out cash for the permitting process, state regulators pulled the rug out from under them. Just before the Jan. 1 start date of legalization, corporations got a loophole to exploit in Prop. 64.

"The cornerstone of Prop. 64 was taken out at the last minute, and that has been the biggest disappointment," Brooks said. "Before we made the investment, we paid close attention to how Prop. 64 was written, and the five-year ban was the thing that made us think we would be able to compete."

Small cultivators were shocked when the California Department of Food and Agriculture released the regulations that would allow corporations to begin farming immediately. The loophole was in the state's small cultivators' category. The new regulations allowed corporations to obtain multiple small cultivator's licenses, a tactic known as "stacking." The practice allowed big cultivators to skirt the one-acre cap and let them grow on multiple acres.

The small cultivator license category was originally designed for operations that grow outdoors on less than a quarter-acre of land or 10,000-square-feet of indoor space. By mid-February, the Department of Food and Agriculture had issued approximately 540 temporary small cultivator licenses. But of those, a handful of corporate businesses took 30 percent — or 162 — of the licenses.

Before the state released its initial regulations (the permanent ones haven't gone into effect yet), large cannabis companies, including WeedMaps, Privateer Holdings, Harborside Health Center, and FLRish Inc., spent $1.6 million lobbying policymakers for more corporate-friendly rules during 2017, according to disclosures filed with the California Secretary of State's Office.

Oakland's Harborside Health Center and FLRish Inc, whose influential board members include Harborside Executive Director Steve DeAngelo and former San Francisco Mayor Willie Brown, pumped $385,000 into two lobbying firms — The Milo Group of California and California Strategies and Advocacy — during 2017. It paid off.

After state regulators decided to allow large cannabis companies to stack cultivation permits, the state Department of Food and Agriculture has favored two companies in particular: Honeydew Farms LLC and Central Coast Farmers Market LLC. They have received 30 small cultivator's licenses each. DeAngelo's FLRish holds, as of mid-March, 16 small cultivator's licenses for the company's Central Coast farms.


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