California Doesn’t Need to Impose More Regulations on Marijuana Growers — Big or Small
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Commentary

California Doesn’t Need to Impose More Regulations on Marijuana Growers — Big or Small

Business face significant compliance burdens and the black market is still thriving.

The California Growers Association (CGA) recently published a report, An Emerging Crisis, which, in many ways, provides an excellent analysis of the current state of the cannabis marketplace. Among other insights, it highlights the massive remaining black market, as well as the significant compliance burdens facing operators.

The report’s call to “systematically review and reduce barriers to entry wherever possible” is important and laudable.  Among the report’s many good points includes noting the distinctiveness of cannabis versus other crops, the uniqueness of California’s situation, and the challenges of local zoning laws. Some of the general conclusions are also spot on, such as a need for balance between “green rush entrepreneurialism” and existing small business owners.  Among the report’s 46 detailed recommendations, some of the best suggestions are policies like tiered compliance timelines (#1), combined premises options — especially shared kitchens (#5), free samples (#10), and testing flexibility (#18).

Unfortunately, however, the report also has weaknesses. Despite the positives noted above, elsewhere in the report, it advocates for more limitations and more barriers to entering the cannabis industry. In fact, CGA’s very first suggestions are “limiting the size of business that can operate” and enacting “exclusionary zoning…to prohibit cultivation” (p. 33). Such inconsistencies make it difficult to make sweeping conclusions on the report. There is quite a bit of quality insight, along with numerous contradictory and troubling claims that wouldn’t help consumers or entrepreneurs looking to enter the marijuana industry.

Complicating things further is the circuitous legislative history of California cannabis, which included a state legislature bill on medical cannabis (the Medical Cannabis Regulation and Safety Act, or MMRSA) and a voter-approved initiative on adult-use (Prop. 64), which was similar but with a few changes. And then a state bill which combined the two, taking the side of Prop. 64 wherever there was a difference. For this reason, several specific mandates that were in MMRSA (such as distribution mandate, limits on holding multiple licenses) were eventually repealed.

As an industry association representing a group of mostly small cannabis farmers in Northern California, CGA would be expected to have a policy agenda aimed at helping that group. Nearly everyone in the industry would agree that many state and local regulations are costly and burdensome to large and small growers alike.

So CGA’s support of many of the restrictions in MMRSA and its calls for governments to implement an “ultra-cautious ‘cottage only’ strategy” are aimed at protecting that group of small farmers and/or giving them competitive advantages.

CGA notes that cannabis is unique in that it is primarily grown by small farmers. First, that may be true currently in the early stages of legalization process and in a narrow snapshot among California licensees. But we know that there are still many illicit or gray market marijuana activities taking place, which actually continue to constitute the bulk of the market. Second, this size distortion is likely directly a result of prohibition itself. Criminalization (and even under medical cannabis, federal illegality and banking issues) incentivized “staying small” by imposing harsher penalties for larger quantities of substances.

That history, unique as it is, has no bearing on the market structure that will best supply the new legal marijuana marketplace in California in years or decades to come.  The report’s call for policymakers to somehow ensure that small operators “can holder [sic] their own against large, vertically integrated businesses” runs counter to what we know about developing markets. Competitive, open markets will allow all businesses to target customer groups — large or niche — and innovate their products to serve them.

The CGA report also claims that the entire state marketplace “probably requires a few thousand acres [of cultivation],” (a figure asserted without any evidence or citation, and more than likely several orders of magnitude too low).  Based on discussion with several existing licensed businesses, they are unanimous in estimating a figure at least 10-20 times higher. Most likely, the figure assumes cannabis flower as the primary consumption method, though market trends (especially given additional medical research and adult-use maturation) make it likely that concentrates will become the primary means of consumption — and therefore increased yields will be required accordingly. If this trend is correct, it may favor larger-scale or well-funded enterprises. If large businesses invest heavily in the wrong technology or are wrong about what products customers will want, they’ll lose money and be punished by the market.

Similarly, the report concludes that the priority of the California cannabis market should be “stabilization and transition… not growth.”  That would be bad news for consumers. If demand grows and supply is artificially “stabilized” prices will rise. And if the price of legal marijuana is too high due to regulations aimed at stabilizing the industry, customers will return to the black market, which has obviously been thriving for decades.

Keep in mind that CGA is currently suing the California Department of Agriculture over industry participant size restrictions. The report claims that “Prop 64 promised a five-year prohibition on large-scale cultivation businesses,” which it calls ‘cumulative one-acre cap.’ However, this is a mischaracterization. Prop. 64 simply authorized a large premises license in 2023 (of over one acre) (BPC § 26061(c), and already authorized an owner to hold multiple licenses (BPC § 26053(c). The conflation of “premises” with “businesses” is wrong.

When the CGA report urges the government to reduce burdensome regulations, decrease barriers, speed up the licensing process and lower taxes on small growers, it is correct — all of those things should be done. When CGA urges the government to create barriers aimed at hurting large businesses or to set up rules that favor small growers, it is asking the government to make regulations that prioritize the interests of a small number of growers ahead of all of the consumers and patients in the state, which shouldn’t happen.

Matt Harrison is a senior fellow with Reason Foundation and author of California’s Proposition 64.