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Cannabis edibles expected to take small bite out of illegal sales

Licensed cannabis producers are optimistic that the introduction of legal edibles will help displace the black market, but analysts say it will take time to displace illegal sales. 

Edmonton-based cannabis producer Aurora is launching a line of edibles that include chocolates, gummies and vaping products. 

The company has submitted its products to Health Canada for approval and could begin selling them as of mid-December. 

Recreational Marijuana Would Create More Than 100,000 Jobs in Florida, Study Says

The number of jobs related to hemp, cannabis, and marijuana could increase more than sevenfold in Florida by 2025 — that is, if recreational marijuana gains approval in the November 2020 election.

The prediction comes from a new study on the cannabis industry conducted by New Frontier Data.

Slow rollout in marijuana sales costs Maine revenue and jobs

From legalization to legal sales, Maine is inching toward the slowest adult-use marijuana rollout in the U.S., with economists saying the three-year wait for stores to open will have cost Maine more than $82 million in taxes and 6,100 industry jobs.

The delay has caused some investors and industry experts to take their dollars and skills to other states, consultants say. Many of those who remain behind, committed to Maine, are spending cash they haven’t got to be ready for a market launch that is two years longer than average.

David Carr and Ray Payne have spent at least $750,000 waiting for that green light. That is what it took to lock down and hold on to the properties and personnel they will need to apply for the licenses required to open a recreational grow, manufacturing lab and retail store in Portland.

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Ray Payne, left, and David Carr of Coast 2 Coast Extracts stand in their empty cultivation warehouse in Portland. The partners have been making lease, insurance and security system payments on the space they hope to use to grow marijuana once the adult-use recreational industry is cleared to launch. Shawn Patrick Ouellette/Staff Photographer

And because this is cannabis, a federally illegal industry without access to traditional banking, Carr and Payne have had to turn to private investors, incurring high-interest debt and handing over equity in the company, to float the business until they can even hope to start making money.

“We are going deeper into debt every day,” Carr said. “We are pretty lucky. We have investors who really understand the cannabis space. They understand the risks, the delays. A lot of people don’t. But it’s debt we shouldn’t have, you know? We’ll be paying for this delay long after we open.”

Maine voted to legalize adult-use marijuana in November 2016. After legislative rewrites, gubernatorial vetoes, and contractual snafus, state regulators are now saying Maine will record its first adult-use sales on March 15, or 1,223 days after voters narrowly approved full-scale legalization at the polls.

The seven states that legalized recreational marijuana use and sales before or at the same time as Maine – Colorado, Washington, Alaska, Oregon, California, Massachusetts and Nevada – required an average of 497 days from legalization to record their first sales.

Even Michigan and Illinois, which legalized adult-use marijuana in 2018 and 2019, predict their markets will launch before Maine’s. Illinois adopted its legalization law last July and is predicting stores will open on Jan. 1, 2020, making its 160-day rollout the fastest in U.S. history.

AN ECONOMIC PLAYER

Maine’s recreational cannabis market will top $158 million in sales its first year and almost $252 million in its second, according to economist Beau Whitney at New Frontier Data, a national marijuana research company that has studied legal and illegal market development in other legalized states.

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These growth estimates are based on state population, marijuana consumption, medical marijuana sales and tourism trends, as well as the similarity of Maine’s proposed regulatory model with other markets. It assumes the black market will continue to serve 25 percent of total demand.

Using a conservative multiplier, where $1 spent is worth $2 to the economy, Whitney projects the adult-use market would have pumped more than $800 million into the Maine economy if the state could have pulled off an average rollout of 497 days instead of its 1,223 crawl to its first sale.

Based on Whitney’s projections, which have proven accurate in other markets, and the state’s tax rate of 20 percent, Maine could have made $82 million in marijuana taxes over those two extra years. That does not include other state taxes that would be collected, like payroll or income taxes.

Based on its projected size, New Frontier estimates Maine’s adult-use market will create 3,967 jobs in its debut year and 6,288 jobs in its second. These are plant-touching jobs only, like growers, chemists and retail clerks. The figures don’t include new indirect jobs, like accountants, security or human resources.

The average wage in the cannabis industry is about $17.50 an hour, or $36,400 a year, but that includes management positions and highly technical jobs requiring advanced degrees, like chemists. Most jobs in cannabis are relatively unskilled positions averaging between $12.50 and $15 an hour.

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During the two years the adult-use market could have been generating profits and creating jobs, Maine’s medical marijuana industry is likely to have taken a hit, however, losing 12 percent of its sales and about 69 jobs, according to Whitney’s estimates. Overall, however, that would still be a win in terms of dollars.

But faster does not always mean better, especially when it comes to marijuana, said Scott Gagnon, head of AdCare Educational Institute of Maine, director of the New England Prevention Technology Transfer Center and member of Maine’s soon-to-convene Marijuana Advisory Commission.

“Never a bad thing to not be in a rush to add a new commercial industry that sells addictive substances,” Gagnon said. “Rush to commercialization hurt states like Colorado and Washington, as it led to issues with youth use, impaired driving and youth access to potent marijuana edibles.”

He would have liked to see the advisory commission begin to meet sooner – it was created in 2018 when state lawmakers overrode Gov. Paul LePage’s legalization veto, but is meeting for the first time just this week – but is hopeful it still has the time to take steps to mitigate these public health issues.

“Now that the industry will be coming on line, I hope we will have robust and productive conversations to ensure we do everything we can to protect our youth and communities,” Gagnon said. “This must take priority over issues of profits and revenues.”

People disagree on the desirability of the delay, but most agree on the reason: former Gov. LePage.

“Maine has really been a bummer, and that bummer has a name: Paul LePage,” said Nic Easley, the CEO of 3C, a national marijuana consulting firm with clients in Maine. “You could have been the first in New England to legalize, but LePage handed all that money, all those jobs to Massachusetts.”

Easley said he knew several entrepreneurs who had considered Maine for business partnerships and investments and opted instead for Massachusetts, a larger state that legalized at the same time as Maine but went live in 2018. Some may return to Maine when sales start, but some are gone for good, he said.

“Who knows exactly what LePage cost you?” Easley said.

RELUCTANCE IN AUGUSTA

LePage was a staunch opponent of adult-use marijuana sales. He campaigned against the referendum question, then vetoed two post-legalization bills. Even after legislators overrode his veto, his administration did nothing to begin the process of writing regulations or licensing the industry.

LePage could not be reached for comment and didn’t respond to attempts to reach him through a former spokeswoman who now works at his public policy group and a former senior political adviser who is now a Washington, D.C.-based Republican political strategist.

There’s more to it than LePage, of course. The referendum in Maine had the smallest margin of victory – 51 to 49 percent – of any state that legalized adult-use sales. And Mainers who want marijuana can get it, either from the robust medical market or a long-lived black market, so there’s been no real public outcry.

Even Maine’s cannabis community was divided over legalization – many medical marijuana growers and patients worried it would spell the end of their market – so politicians didn’t feel overwhelming pressure to deliver on a question that lacked unanimous support among marijuana consumers.

Other states that legalized marijuana with governors who opposed it at the time managed to enact adult-use sales in spite of it, with the likes of Massachusetts’ Charlie Baker and Colorado’s John Hickenlooper eventually turning the people’s will into a reality.

Although LePage never publicly said “not under my watch,” he vowed not to move ahead with adult-use sales until Maine was ready, while doing very little to make that happen. Even after lawmakers overrode his veto, LePage hired no consultants, wrote no regulations, made no staff hires.

“The difference in Maine was you had a governor who just didn’t want to do it,” said Andrew Freedman, Colorado’s former marijuana czar who is now a consultant who has advised Maine on its adult-use rules. “If you’re a governor, you can just kick the can down the road if you want. That’s what he did.”

Matt Simon, the New England political director of the Marijuana Policy Project, said it is only natural to compare Maine and Massachusetts, two New England states that legalized cannabis on the same day. It took Masssachusetts 742 days to log its first adult-use sale, the country’s second-longest launch.

“The rollout in Massachusetts has been frustratingly slow in comparison with most of the West Coast states, but the process has certainly gone much more smoothly and quickly than in Maine,” he said. “It all comes back to Maine having a governor who persistently refused to accept the will of the people.”

According to Greg Huffaker, the director of client services at Canna Advisors who has advised marijuana clients in 40 states and countries, LePage’s anti-marijuana position outdid even former Florida Gov. Rick Scott, who tried every trick in the book to block expansion of that state’s medical cannabis program.

“Some states launch their marijuana programs at the direction of their voters and fix the problems when they come up,” Huffaker said. “Other states, like Maine and Florida, have executives in office that cite all the problems that could happen and say they want to fix them, when what they really want to do is stall.”

PLAYING CATCH-UP

That changed when LePage left office. His successor, Janet Mills, created the Office of Marijuana Policy in the Department of Administrative and Financial Services in February, just one month into her tenure, and began hiring consultants even before they had staffed the office.

The occupants of the new office don’t refer to LePage by name, but talk in terms of before and after a lot.

“I think there’s two different stories,” said Erik Gundersen, the marijuana office’s new director. “I think the ‘what’s taking so long’ is a history before the Office of Marijuana Policy. … Some work had been done, but we ended up having to backtrack on it.”

Under that scenario, Maine would roll out in just seven months, making it the fastest in the country.

Gundersen is proud of how much his office has accomplished in such a short time, and how closely it has worked with both other state agencies and the industry to develop sound state policies and regulations in record time. He hopes that brisk pace will allay any clock-watcher’s concerns.

“We understand people have been waiting a long time and there are a lot of money and small businesses that are waiting for this industry to roll out,” he said. “But at the same time, we have to make sure we do it right because we are still talking about an industry based around a federally illegal drug.”

Study suggests legal cannabis could create over 100,000 jobs in Florida

Florida voters may have the opportunity to legalize recreational marijuana at the ballot box next year, and a new study may help bolster the advocates’ case. 

The study, conducted by New Frontier Data, a Washington, D.C.-based think tank dedicated to providing empirical research on cannabis, suggests that the state could see a significant uptick in jobs over the next several years if pot is legalized. 

John Kagia, chief knowledge officer of New Frontier Data, said that if prohibition is lifted, the number of jobs in Florida related to hemp and pot could swell to 128,587 by 2025—a sevenfold increase from the nearly 17,000 cannabis jobs in the state.

Kagia, as quoted by the Miami New Times, that the types of jobs generated by the cannabis industry vary widely, including “lower-skilled labor roles such as trimmers or budtenders, [plus] higher-skilled workers like extraction tech, chemists, and other manufacturers dealing with edibles.”

The study also said that the Sunshine State could claim a 12 percent share of the entire nationwide cannabis market by 2025, which is expected to total almost $30 billion. 

Marijuana In The Sunshine State

Florida voters overwhelmingly approved a measure in 2016 that legalized medical marijuana, but a year later, the state’s Republican governor at the time, Rick Scott, signed a law prohibiting the smoking of cannabis in all forms. That changed earlier this year, when the state’s current governor, Ron DeSantis, also a Republican, signed a law overturning the ban.

“Over 70 percent of Florida voters approved medical marijuana in 2016,” DeSantis said in a statement after signing the law in March. “I thank my colleagues in the Legislature for working with me to ensure the will of the voters is upheld. Now that we have honored our duty to find a legislative solution, I have honored my commitment and filed a joint motion to dismiss the state’s appeal and to vacate the lower court decision which had held the prior law to be unconstitutional.”

Now, there’s a movement afoot to give voters the chance to go a step further and lift the prohibition on recreational use. Two separate groups of advocates are currently circulating petitions to propose a pair of similar questions on the Florida ballot next year. While both proposals would permit any Florida adult 21 or older to possess marijuana and consume it in private, only one would also permit Floridians to also grow cannabis at home.

Illicit cannabis companies find struggles, success in going legit

For many New York cannabis businesses operating in the illicit or gray market, preparing to go mainstream is essential. Some have made the move and are ready to share their wisdom. For those who haven’t, preparing during the lead up to the state’s eventual adult-use legalization could prove critical to securing a place in the one-day legal market. 

However, making the transition has its series of difficulties. 

New York State currently allows a select few options for cannabis business licenses. Ancillary businesses that don’t directly touch the plant are popular due to their ability to replicate virtually any other market without risk of violating the law. As such, these ventures often require little to no additional licensing, acting as any other legal business would. 

Companies like head shops and manufacturers are also seeing opportunity to a lesser degree. When it comes to the plant itself, though, the closest most companies can currently come to touching it is CBD. Under regulations, CBD cultivators and retailers can sell products, provided that they contain less than .3% THC. 

The only businesses allowed to touch THC-rich plants are the few vertically-integrated license holders granted by the state. New York officials began its program granting five licenses to companies, giving them the opportunity to open four dispensaries and one manufacturing location across New York. 

As program interest grew, parts of the state further suffered from lack of access to a dispensary. The state granted five additional licenses under the same four-dispensary, one manufacturing location arrangement to meet the demand. 

A limit on licenses is just one hurdle. The history of high entry costs have been a constant concern as well.

Estimates suggest that the price of entry for vertically-integrated licenses were between $15 and $30 million, according to various sources. The high price point to enter the space, if it were to open again any time, includes various fees and start-up costs. According to the state Department of Health, fees include a non-refundable $10,000 application, a $200,000 refundable payment to the state and the ability to prove a company can open the five mentioned locations. 

With limited access and a significant financial hurdle to clear, many deemed the venture impossible. Under adult-use legalization, however, access could expand greatly. 

Governor Andrew Cuomo’s so far failed adult-use legalization bill came at the expense of many promising outcomes. Criminal justice reform took the spotlight, and deservedly so. The shortcoming to pass the bill and overhaul a broken justice system, which includes scores of non-violent cannabis offenders, sparked the state to pass decriminalization measures as a momentary plan B for New Yorkers. 

If passed, the Governor’s Marihuana Regulation and Taxation Act would further address criminal justice efforts in the state, emphasizing penal justice and criminal procedure reform. 

Under the bill, entrepreneurs would also see expanded opportunities. The proposed Cuomo bill calls for licenses allowing cultivation, processing, distribution and sales of cannabis to people 21 or older. Licenses would expand to resemble those of other legalized adult-use markets. 

A plethora of business opportunities eventually will exist for companies, such as cannabis transportation, co-operatives, processing and just about every other venture imaginable. One area not likely to have been included in the bill was social consumption, an ongoing topic of discussion in cannabis as of late. 

Some entrepreneurs have already been able to pivot their illicit efforts into the mainstream. Often, this includes growers and cultivators. Adrian Edwards is the founder of Life Gardening Tools, a CBD venture that also focuses on urban gardening and bee advocacy. The company supports ethical beekeeping in Brooklyn, Staten Island and New Jersey in addition to selling an array of products from CBD oil, edibles, accessories and pre-rolled options it calls Hempette’s. 

The now legal CBD grower, extractor and retailer has over a decade of experience in the grey/white market. Most of his time has been in the illicit market, despite always seeking to enter the legal side of the market. 

Edwards, a black man, said he spent much of his time in the illicit market, often referred to as the black market, positing the inherent inequality of the growing legal, or white, market. To date, the industry continues to be largely caucasian-owned after decades of disproportionate policing during the drug war. Such policing continues to be an issue across the country. 

In the summer of 2018, Edwards saw a white-owned hemp store in the city. The revelation inspired him to go legal himself. “I realized if I didn’t get in now, then there was going to nothing but white-owned hemp and THC dispensaries while black people are still arrested and affected by the selective war on drugs,” Edwards explained.

When he wanted to make the transition, he did so with insights from leaders in the community, like Rep. Tremaine Wright, the representative for New York State Assembly District 56, representing the Bedford-Stuyvesant district of Brooklyn. 

Edwards attended a cannabis 101 event Rep. Wright hosted, which educated the community about CBD and its products. Rep. Wright passed on worthwhile advice to Edwards. “She told me to focus on advocacy and education in order to empower the folks who have been barred from benefiting from the cannabis industry,” said Edwards. 

He added, “Local politicians are doing their best to protect and heal their communities from the war on drugs.”

Edwards also credits Gia Morón, Executive Vice President of Women Grow, for teaching him “the importance of long-term thinking, patience, education and being an advocate.” He said Women Grow welcomed him with open arms, allowing him to be a representative for the black male community in the space. 

Going legal led Edwards to spend his time growing numerous revenue streams, including exclusive events and in-store sales. He also had to step out of his community to advance his network and funding. 

“When I first started, people in the African American community really didn’t know or care about hemp CBD. So, initially, I had to go to areas with the people who knew about CBD and had the money to pay for it.” He credits efforts like Rep. Wright’s for bridging this gap.

A year later, Edwards is fully mainstream and licensed. He considers the money, time and effort all worth it. He continues to network and market Life Gardening Tools today, and believes he has a business that can easily translate to an adult-use market if and when New York should legalize. 

He recommends others in the illicit market do the same. 

Transitioning from an illicit venture to a fully licensed one varies for businesses. Avis Bulbulyan is CEO of SIVA, a nationally cannabis consulting firm. Bulbulyan has over 12 years of experience in various cannabis sectors, including the Los Angeles’ Cannabis Task Force . He explained how market, sector, available resources and their commitment to the bigger picture all play a part. He noted a company should expect downtime during the transition. The cease in operation causes a loss in revenue. The downtime can last anywhere from a month to a year. 

“Most illicit operators can’t survive this part of the transition because of a lack of planning, short-sightedness in giving up immediate untaxed revenues for long-term growth and success,” he noted. 

He noted that New York’s current market is even more difficult due to the restriction on available licenses. “If you’re an operator in New York planning to stay in the industry, your best bet is to probably relocate to a different state.”

Bulbulyan agreed the financial hurdle is an issue, but is not the only one causing problems for possible entrepreneurs. He elaborated on what he considers a larger issue under current regulations, licensing. 

“What makes the state difficult is the nature of the licensing process, and the approach regulators take. New York has an extremely restrictive program with limited licenses issued. Being the best grower in the state would have nothing to do with securing a license.”

With scores of hurdles affecting New York and other illicit American cannabis ventures, it is unknown how many will successfully transition as the new cannabis normal sets in across the country. Hopefully, their hard work and sweat equity won’t be lost in the change.

Michigan hemp farmers collect first harvest for CBD products

Farmers harvesting the first batch of legal hemp Friday said they could be looking at Michigan’s next big cash crop.

For the first time, nearly 600 farmers are harvesting legal hemp across the state. The Michigan Department of Agriculture and Rural Development issued the first industrial hemp licenses to farmers earlier this year, allowing local entrepreneurs to enter the market for hemp-infused healthcare products -- promoted as a treatment for headaches, chronic pain and anxiety -- that consumers are finding everywhere from retail storefronts to shelves in Family Video stores.

Hemp is a fast-growing strain of cannabis with extremely low levels of THC, which means users can experience therapeutic benefits without getting high. The crop also has environmental benefits; it takes less water, is naturally resistant to pests and can be introduced into rotations with other cash crops like corn and soybeans to clean pollutants from the soil.

“The de-stigmatization is a big part of building this supply chain, understanding there is a lot of opportunities economically for framers, theres a lot of benefits to consumers," said Andrew Blake, co-owner of Blake’s Hard Cider and manager of the family cider mill. "There’s also probably some benefits touted out there that isn’t correct that we need to educate and understand. Getting the scientific community behind it and studies done, all of that is important as we try to build this out.

Stakeholders in Kinder Products Unlimited, a new business venture launched in partnership with Blake’s Orchard & Cider Mill, celebrated the harvest of seven acres of industrial hemp Friday in Armada. In addition to an indoor greenhouse operation, three acres were planted at a remote outdoor location removed from the orchard’s public fairgrounds to test how well the crop would fare on Michigan farmland.

Blake has plans to plant 20-50 acres of hemp next season. He partnered with childhood friend and attorney Gino Roncelli and cousin Rebecca Blake to launch the new band, which manufactures and sells CBD-infused products using Michigan-grown hemp.

Hemp is used a variety of commercial and industrial goods, but Michigan consumers are most familiar with ingestible products. Roncelli said hemp stalks and stems can be used to create various fibers and textiles, though those goods are several years away due to a lack of any regional production facilities.

“There’s probably not a great use for it at this moment,” Roncelli said. “There should be though, and someone is going to take that opportunity and use it.”

Blake represents the third generation of his family to farm in Armada since his grandfather opened a cider mill in 1946. The operation expanded significantly in the last 73 years and now includes 880-acres of farmland, a sprawling fairground packed with popular fall attractions, a tasting room and production facility for wine and hard cider products Blake launched in 2013 after returning to the family business.

Blake’s Hard Cider is the largest producer of alcoholic cider in the Midwest and 15th-largest in the U.S. From The business on track to sell 300,000 cases this year, all created in a 40,000-square-foot production facility behind its Armada tasting room.

Much of the infrastructure is already in place to begin producing CBD-infused teas, which is key to Blake’s vision for keeping the business vertically-integrated. Blake said the foray into CBD-infused products is a natural extension of his family’s self-reliant entrepreneurial spirit.

Hemp-based self-care products like oils, ointments, facial creams, bath bombs, gummies and even dog treats are already available on Kinder’s online marketplace and the farm’s retail outlets. Four flavors of canned CBD-infused teas will be available later this year, pending FDA approval.

Roncelli said the Michigan hemp market is expected to rapidly expand in the coming years and could replace soybean crops. The alternative crop could be especially for farmers who struggled with the effects of flooding and an ongoing trade fight with China which cut exports of Michigan agricultural commodities like soybeans.

One acre with 1,200 hemp plants can yield roughly $20,000 worth of crops -- a figure that blows other cash crops out of the water -- but Blake said the value will likely drop as other farmers begin planting their own crop.

“This is all very exploratory, but we’re all very excited about the opportunity,” Blake said. “As more people get comfortable and understand what it is and isn’t, we hope to be the educating piece.”

Hemp may soon be big business for Texas farmers

Industrial hemp and it’s blossoming future in Texas is a popular topic these days, admits Joshua McGinty, AgriLife crops expert.

“There’s a lot of people who show up for and against hemp production,” said McGinty, an assistant professor and extension agronomist at Texas A&M. “But either way, they show up – and pay attention.”

At 7 a.m. Wednesday, McGinty will offer his presentation “Current Legal Status and Possible Hemp Production in Texas” at the Victoria Community Center, 2905 E. North St.

Since Texas hemp production was made legal as of Sept. 1, many South Texas farmers have wondered whether the controversial crop is also profitable.

“It tends to boost attendance wherever we go with that,” said McGinty, who has already given at least several presentations about hemp growing.

Industrial hemp is the agricultural cultivation of strains within the Cannabis sativa species, which also includes marijuana.

But unlike marijuana, hemp is defined as containing less than 0.3% tetrahydrocannabinol or THC, a chemical that can intoxicate when ingested.

Industrial hemp, McGinty said, is used primarily in three ways.

Its fibers can be fashioned into textiles; its seeds can be used for cooking, livestock feed and other applications; and cannabidiol or CBD, a nonintoxicating chemical it produces, can be harvested and administered to treat all sorts of ailments from insomnia to anxiety to chronic pain.

While there soon may be money to be made, the market for industrial hemp is still uncertain in Texas, particularly with those centered on hemp seeds, McGinty said.

That’s in part because while hemp production may be technically legal, a lack of regulations effectively mean the plant cannot yet be cultivated in Texas, he said.

”You can’t actually grow it until the Texas Department of Agriculture puts in place the regulations around it,” McGinty said.

Those guidelines are expected to be implemented as early as spring 2020, he said.

Also still to be determined, he said, are the best methods and approaches to growing industrial hemp in South Texas.

Looking to Oklahoma as an example, McGinty said Texas agricultural officials may establish unique requirements for hemp, such as field inspections just before harvest.

With hemp and marijuana so closely related, farmers of the legal plant might accidentally harvest a plant bearing an illegal percentage of THC.

That’s why farmers should be wary of some environmental effects and the importance of picking the right hemp strain, he said.

But most of all, he said, farmers should be aware of the law, which McGinty said he will explain.

“By far the most important thing is where we are at legally. There’s a lot of people gearing up for hemp in Texas, but you need to pump the brakes a little bit until we have a set of regulations to work off of,” he said.

5 reasons the marijuana black market won't go away

Cannabis has been anointed by Wall Street as one of the fastest-growing industries on the planet. After sales more than tripled worldwide between 2014 and 2018, Wall Street has forecast a roughly fivefold to 18-fold increase in global annual revenue by the time 2030 rolls around. This type of growth is impossible for Wall Street and investors to ignore, which is a big reason pot stocks have been all the rage.

But if you've been paying close attention to the industry, you're likely well aware that marijuana stocks have been nothing short of a buzzkill over the past six months and change. Many have seen their share price cut in half, or possibly worse, as a host of challenges have cropped up.

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Black market marijuana is here to stay

Worse yet, the legalization of recreational marijuana in Canada, as well as in select U.S. states, hasn't stomped out black market cannabis, as initially expected. In California, the largest legal weed market in the world by annual sales, illicit marijuana sales are projected to outpace legal pot sales in 2019 by a significant margin: $8.7 billion to $3.1 billion. Meanwhile, analysts at Scotiabank estimated in early February that the black market would be responsible for 71% of total cannabis sales in Canada in 2019.

How are illicit producers bucking the push toward a legalized marijuana environment, you ask? The blame rests with the following five factors.

1. Supply issues in Canada

In our neighbor to the north, supply shortages have been a persistent problem since recreational weed sales began one year ago, with a trio of problems to blame.

First, regulatory agency Health Canada has been buried by cultivation, processing, and sales license applications. It entered the year with more than 800 applications on its desk, and despite implementing aggressive changes to the cultivation licensing process, it's going to take months, or perhaps more than a year, for the agency to work through its backlog. In the interim, cannabis growers are forced to wait to either grow or sell marijuana.

Secondly -- and I'll have more to say on this in a subsequent point -- certain Canadian provinces have been slow to give the green light to physical dispensary licenses. With few retail stores for consumers to shop at, illicit marijuana has filled the void.

And thirdly, pot growers have been slow to start and complete cultivation projects. All of these factors have allowed illicit weed producers to thrive.

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2. Tax issues in select U.S. states

In the United States, high tax rates have been effectively driving consumers to purchase black market marijuana.

California, for example, is taxing the daylights out of its pot buyers. In addition to passing along a state tax and local tax, buyers are paying a 15% excise tax, as well as a wholesale tax of $9.25 per ounce of dried cannabis flower, or $2.75 per ounce of cannabis leaves. Add this up, and it could work out to an aggregate tax rate of 45% on legal pot. And, mind you, this doesn't include additional costs such as the laboratory testing on weed grown in the Golden State, which is also being factored into the price that consumers pay.

Suffice it to say that legal cannabis simply can't complete with illicit producers on price. This is one of the reasons I firmly believe MedMen Enterprises (OTC:MMNFF) has struggled of late. To be fair, MedMen is losing a lot of money -- $178.4 million in net operating losses through nine months of fiscal 2019 -- and it recently terminated its acquisition of PharmaCann to seemingly conserve capital, so it has more than just one problem. But according to the company's third-quarter operating results and preliminary fourth-quarter review, MedMen's existing California locations delivered just 5% sequential growth in the third quarter and 10% sequential growth in the fourth quarter. That's not very impressive given how nascent the recreational industry is in the Golden State, and it speaks to the influence the black market has for the time being.

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3. A slow dispensary approval process throughout North America

Another clear problem that's allowed the black market to persist is the slow approval process for dispensary licenses in both Canada and select U.S. states.

In Canada, Quebec-based grower HEXO (NYSE:HEXO) announced during its fourth-quarter operational update that the slow pace of dispensary store openings has adversely impacted its sell-through rate. Despite recreational weed sales commencing last October, HEXO's home province of Quebec didn't even see its own dispensaries open seven days a week until May, primarily due to severe supply shortages. Furthermore, there are far too few locations open to provide adequate supply to Quebec's adult residents. Perhaps, then, it's no surprise that HEXO removed its 2020 sales guidance and reduced expectations for sequential fourth-quarter sales growth from "a doubling" to about 19%, at the midpoint. 

In the U.S., local regulators in California have been notoriously slow to approve dispensary store licenses. As of the midpoint of 2019, California had just one dispensary open per 61,000 adults aged 21 and over, which compares to one open dispensary per 5,567 adults aged 21 and over in neighbor state Oregon.

If the legal retail points aren't there, it becomes easy for consumers to turn to black market retailers.

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4. Jurisdiction problems in select U.S. states

Fourthly, the fact that legalized states have allowed municipalities to decide whether cannabis retail stores can open or not has also been a serious problem.

In Canada, the passage of the Cannabis Act made marijuana legal throughout the country, so this particular issue isn't of concern to our neighbor to the north. But in states like California and Colorado, statewide legalization looks more like Swiss cheese rather than a unified decision passed by voters.

In California, close to 80% of the 482 municipalities in the state have banned commercial marijuana activity. Although the Golden State's significantly higher population cities have given marijuana retail stores a green light, it's still left plenty of the state as sort of a no-go zone for pot. With such a large percentage of municipalities failing to OK licensed dispensaries, it's opened the door for the black market to flourish.

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5. Regulatory enforcement has been spotty

Last, but not least, regulatory enforcement designed to drive the black market out of business hasn't exactly been working. Based on data from the United Cannabis Business Association, via an audit that was recently turned into California Gov. Gavin Newsom (D-Calif.), 2,835 of the 3,757 listings of marijuana sellers in California on website WeedMaps were unlicensed. Although the state has promised to step up enforcement on illicit producers, it's yet to do so.

Enforcement has been a bit tougher in Canada, where CannTrust Holdings (NYSE:CTST) was recently taken to the woodshed. CannTrust announced in early July that it had been growing marijuana in five unlicensed grow rooms for a period of six months. This admission led regulatory agency Health Canada to suspend CannTrust's cultivation and sales licenses in mid-September. CannTrust also announced this past week that it would destroy roughly $58 million worth of plants and inventory from its illicit grow rooms in an effort to regain its licenses. With Health Canada making an example out of CannTrust, it's at least a step in the right direction toward tougher enforcement in our neighbor to the north.

Long story short, the black market isn't going anywhere anytime soon.

‘Largest pot recall ever’ shows how legal cannabis rules can add safety

In what appears to be the nation’s biggest pot recall ever, Colorado company Bonsai Cultivation voluntarily moved to take its products off of shelves at 144 retail stores in Colorado. Denver’s Department of Public Health and Environment issued the announcement on Monday.

During a DDPHE investigation, samples of dried marijuana were checked at labs and found to contain potentially unsafe levels of yeast or mold. DDPHE originally opened the investigation leading to the recall after identifying multiple samples that had failed tests from multiple retail store locations.

The recall covers the material — bearing the OPC code 403R-00228 — that came out of three of Bonsai’s cultivation facilities and eleven manufacturers who came into contact with the product through Oct. 14.

The owner of one of the stores mentioned in the recall list told Cannabis Now they have sold Bonsai products in the past, but they didn’t have any product from them at the time of recall. Nevertheless, they found themselves listed because they carried the company’s prerolls in the spring.

“It’s because it was any store that had bought from them since April,” the store owner told Cannabis Now, on the condition of anonymity. “Between that and the outdoor harvest being seeded by hemp, it’s been an interesting Croptober.”

We asked the National Cannabis Industry Association if this was the biggest recall of legal cannabis yet in the post-prohibition era. While Media Director Morgan Fox couldn’t confirm it was the largest, he did say the Colorado recall perfectly exemplifies how cannabis legalization can help keep cannabis consumers safe.

“This is exactly what a regulatory structure is meant for,” Fox said. “Testers caught it, and the single producer responsible is working with regulators to make sure these products are removed from stores and that consumers are warned about it.”

Fox said as far he knew, no one has gotten sick from these products, “and hopefully no one will thanks to this effective implementation of regulatory oversight.” (This stands in obvious contrast with the ongoing vaping crisis, where 26 people have been killed and 1299 sickened from what appear to be unsafe vaporizers bought on the illicit market.)

Fox believes the industry is putting in a solid effort to avoid these kinds of days.

“This is hardly a common occurrence either,” Fox said. “Overall, state regulators and licensed cannabis businesses are doing a great job at keeping potentially dangerous products out of the legal market, though federal descheduling and regulation would help them get even better. None of this control or mechanisms to protect public health exist in the illicit market.”

To help put it in perspective, Fox noted there were nearly 400 food recalls in the U.S. last year.

“I’d say the cannabis industry is doing quite well by comparison,” Fox said, before mentioning that over 206 million eggs from a single supplier were recalled for salmonella in 2018, 12 million pounds of beef from another that same year, “all under what is generally considered to be the safest food regulatory system in the world.”

Bonsai Cultivation bills itself as a state-of-the-art wholesaler of high-end cannabis. According to the company’s website, the management team has over 25 years of experience in the industry.

In July, Bonsai’s Sales Director Brendan McCormick told Westword he believed that state was undervaluing the price per pound of cannabis after the first batch of outdoor, probably light-dep, started hitting the market. Unfortunately, the flowers he was speaking on at the time would have seemed to have been caught up in this week’s recall.

While a lot of Colorado recalls only impact a handful of stores, every now and then there is a big one.

Back in 2015, Denver-based edible manufacturer EpiPure saw 7,700 units of 17 different products recalled. Some of the products tested positive for one or more pesticides banned by the Colorado Department of Agriculture. You can’t legally use things like myclobutanil, avermectin and imidacloprid on marijuana in Colorado, and they definitely can’t be in your finished oil.

We reached out to Bonsai Cultivation for comment, but had not received a response at press time.

Cannabis legislation progresses, yet US companies and US cannabis investors are moving in reverse

Buoyed by wide-scale public support, legislation to legalize and properly regulate cannabis in the U.S. on the state and federal level continues to gain steam. So why are commercial and investment banks moving in the opposite direction? And what are the risks to U.S. companies and workers who are trying to build out this high growth, CPG (consumer packaged goods) sector? As a result, the U.S. retail investor has become collateral damage.

The passage of the 2018 Farm Bill, which legalized the cultivation and sale of hemp and hemp derived CBD, signaled federal acceptance and expansion of the cannabis marketplace in the United States. Republican Majority Leader Mitch McConnell’s endorsement of the legislation and continued support is a further testament to Washington’s growing embrace of the cannabis industry. And recently, the House of Representatives passed its version of the SAFE Banking Act, which would give cannabis companies access to the U.S. banking system including retail banking, credit card processing and access to institutional lending (as opposed to dilutive convertible debt financings).

So it comes as a surprise that an influential U.S. commercial bank would take a step to thwart the efforts of Americans to invest in legal cannabis companies with U.S. operations.

Bank of New York Mellon Corp., one of the largest custody and clearing banks in the world, announced earlier this month it would stop accepting positions(custody) or trading with U.S. marijuana-related businesses, a decision which would restrict trading of popular cannabis companies that are listed on Canadian exchanges, but have U.S. operations. Canadian-listed firms without U.S. operations would still be able to be traded.

BNY Mellon’s head-scratching decision has moved in the opposite direction of the thrust of U.S. public opinion. A Gallup poll conducted in 2018 found that 2 out of every 3 Americans support legalizing marijuana, while key 2020 swing states including Nevada and Michigan have adapted to voters’ concerns by legalizing recreational cannabis use.

The only way to provide lasting relief for U.S. investors in cannabis is with legislation from Washington.

Currently, if you’re a U.S. company that employs Americans and provides legal cannabis products to Americans, you have to publicly list your shares on the Canadian Securities Exchange, without the benefit of U.S. Securities and Exchange Commission oversight.

Currently, if you are a U.S. retail investor you must do cross-border trades in order to invest in cannabis stocks with all of the capital and fees flowing right out of Wall Street to Bay Street in Toronto. But more importantly, the protection of US exchanges and securities laws are also missing.

It also means that America’s homegrown multi-state operators have to raise capital in Canada where there are major constraints on capital and prohibitive costs to the companies and to investors. Almost every deal/listing in Canada carries dilutive warrants that are ultimately cashed in once professional stock short-sellers drive share prices down. The result is that shares of almost every U.S. multi-state operator are down over 60% from their yearly highs, mostly at the expense of the retail investor who is the primary investor in these deals because large institutions are still restricted from investing in the sector.

Moreover, professional investors operating actively-managed or fixed portfolios of cannabis stocks are unable to invest in some of the highest growth cannabis companies — even though they are operating in states where what they do is totally within the law.

At a time where we are hearing chatter about restricting Chinese companies from listing their shares in the United States, this BONY Mellon decision serves to actually restrict U.S-based operators and investors in the cannabis industry at home.

The U.S. cannabis marketplace is one of the largest and most heralded emerging industries in American history. And unlike other nascent sectors, it’s a 100% American-made story. Because traditional credit and/or lending has not been made available to the marketplace due to marijuana’s antiquated and misguided classification as a Schedule 1 drug – along with heroin – the only meaningful way to access capital has been via a reverse merger go-public strategy in Canada.

The SAFE Banking bill now awaiting debate in the Senate is a historic piece of legislation that will open the door to broader financial and legal reforms. But it’s currently missing a key component that would allow for the movement of American, multi-state operators to the U.S. capital markets, with oversight by U.S. regulatory agencies. Such a provision would provide safe harbor to U.S. exchanges while allowing investment banks and pension funds to invest in U.S. cannabis operators compliant with state and federal laws.

Capital in an exciting, profitable and socially-beneficial industry shouldn’t just be flowing north to Canada. It should stay in the U.S. so that when Americans invest in this space, they can do so with confidence.