Albuquerque approves 25 retail cannabis locations and counting

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It’s no secret that California’s legal cannabis industry has been struggling to grow since the introduction of the commercial adult-use market in January 2018.

For Graham Farrar, Co-Founder and President of greenhouse brandsa Santa Barbara-based cannabis operator with more than half a million square feet of cultivation space, high taxes and a lack of retail outlets weighs heavily on the world’s largest cannabis market.

“Right now, survival is thriving in California, but I think the opportunity on the other end makes it more than worth it,” he says.

California’s two-tier licensing system has presented challenges to the market from the start, says Farrar. The state has not placed a cap on the number of cannabis licenses issued, but businesses cannot obtain a state license without first obtaining a municipal license — and more than 60% of California municipalities still prohibit cannabis operations in their jurisdictions.

Local bans on cannabis have resulted in a shortage of dispensaries able to supply produce to the state’s growers. Farrar says before California voters passed Proposition 64 legalizing adult-use cannabis, there were 3,500 to 5,000 dispensaries operating under Proposition 215, the state’s medicinal cannabis law. Today, he says, there are around 1,000 retailers.

“Oklahoma has twice the population of the state of California and has one-tenth the population,” says Farrar.

The state has allowed cannabis companies to operate with provisional licenses as they work to obtain more permanent annual licenses, but operators now face a June 30, 2022 deadline to switch to annual licenses or lose the license entirely.

RELATED: Sacramento plans to use state funds to help cannabis companies navigate the licensing process

The move to annual licenses may result in supply shortages, which Farrar says could stabilize the market over the long term.

“From a supply and demand perspective, it should help stabilize the market,” he says. “From an operator’s point of view, if you’re struggling through red tape, your clock will run out and you’ll be pretty upset.”

The state’s cannabis industry also continues to struggle with high taxes, Farrar adds, particularly the cultivation tax, which is based on weight. The current tax rate is $10.08 per dry weight ounce for flowers and $3 per dry weight ounce for leaves.

“As prices go down and the cost of cannabis goes down, the tax percentage actually goes up,” says Farrar. “For simple math, call it $150 a pound. If cannabis costs $1,000 a pound, that’s a 15% tax. But if cannabis costs $500 a pound, it’s now a 30% tax. This hits the smaller growers and the outdoor growers particularly hard because their product is usually worth less on the market but the tax is not adjusted for it at all.”

In short, Farrar says California cannabis companies need two things to be successful: less taxes and more retail.

Gov. Gavin Newsom seems to understand this, Farrar adds, having included a proposal in his state budget to reform cannabis taxes and increase the number of retailers.

In addition, State Senator Mike McGuire introduced Senate Act 1074legislation that would end the flat-rate cannabis cultivation tax on July 1st.

RELATED: New California law proposes end to cannabis cultivation tax

However, this bill would also increase the excise tax on cannabis starting in 2025.

To increase the number of dispensaries in the state, California regulators instituted a social justice fee waiver program, waiving license fees for social justice applicants who meet certain criteria.

Municipalities have also reduced or waived their local taxes to help operators launch their businesses and compete against California’s black market, Farrar adds.

“We follow all these rules and effectively pay a 100% mark-up tax, and then we have the illegal guys who really aren’t subject to any enforcement right now, who don’t obey any of these rules and can sell products for half our cost because they don’t pay taxes,” he says. “It’s really about these governments doing the smart thing, which is taking a smaller piece of a much bigger pie and [getting] all to the legal side of the market rather than trying to unduly burden the few of us who are already here. … One can only guess, but I would say that the illegal market today is two to three times the size of the legal market. So you can see where you could take a one-third tax cut and still make more money if you have an entire market on the right side of the law.”

Falling cannabis prices have also impacted California cannabis companies over the past year, Farrar says.

“We have had a difficult price market with large price declines over the past 12 months [and] Oversupply, I think, of people keeping a 2020 crop that was then stacked onto a big 2021 crop,” he says. “You have people growing hemp that was really cannabis in Oregon and that was imported into California. It’s been an uphill battle on price, but overall, California is the single most exciting market in the world.”

Despite the challenges, Farrar says there are many opportunities in the state’s cannabis industry. He predicts that in the future, eight of the top 10 cannabis brands will come from California and people will think of California cannabis the same way they think of tequila in Mexico or champagne in France.

Flowers are Glass House’s top-selling product category, accounting for 50% of the total California market, according to Farrar. Edibles have seen a sales surge during the ongoing COVID-19 pandemic, he adds, and vape cartridges remain among the top three most popular products in the state.

Among the company’s biggest goals this year are the integration of newly acquired edibles brand Plus and the opening of the four dispensaries under construction, says Farrar.

“We’re looking at retail building permits, and then I’m optimistic that the cultivation tax will go away this year, which is the second-biggest expense for our entire company,” he says. “I think we’re going to see a number of other retail doors open, which will be great for our brand. Really, I think 2022 is the year of execution and optimization, doing what we do and making sure we’re efficient.”

It’s going to be a challenging year for California’s cannabis industry as a whole, adds Farrar, but one that he hopes will drive consolidation in the market.

“We’re going to keep going through this because it makes us tougher, leaner and more efficient, and when we come out the other side we’ll be ready to take on the world,” he says. “We believe cannabis is making the world a better place, and we will eventually make more cannabis available to more people, on a national scale, so efficiently that everyone can afford it. That’s our goal and I think we’re making good progress.”

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