Business and the Economy Coverage: Cannabis operators say they're not profitable

Survey: 37% of U.S. cannabis operators say they’re not profitable

North Bay attorneys, court officers welcome relaxed state rules

By SUSAN WOOD

The North Bay Business Journal

A new study blows any assumption that the U.S. cannabis industry is an easy business to make a profit — with 37% reporting they’re operating without one.

The survey was of 396 U.S. cannabis operators by the National Cannabis Industry Association.

Conditions were among the worst in the Golden State. Only 26% of the survey respondents said their businesses are profitable. Over half said they’re not; while 17%, like North Bay grower Mike Benziger of Glentucky Farms in Glen Ellen in Sonoma County, feel like their businesses are breaking even. Twenty percent across the nation identify with that group.

“I think we’re in the business where it’s the toughest and the profit is the hardest to get,” he told the Business Journal. “When we became an industry driven on price rather than quality, that’s when it became tough.”

Benziger, whose family name comes from an established wine label, added he’s unsure how most growers are making ends meet and predicts dire consequences for the ones who have become overextended without prior wealth propping them up.

“This business is designed to take big hits. But the only way small growers will be able to survive is if they already have money or can make sales on-site,” he said. But the latter is illegal. “We need to raise the boat.”

He notes his marketing prowess has helped. Diversifying the plants he grows represents the other saving grace. Besides cannabis, he also grows savory and dandelion used for wellness products.

Benziger said things would be different for legal businesses, if there wasn’t an overabundance of product coming from illegal producers undercutting prices.

The competition with illicit growers represents one in four challenges cited in the survey. Other obstacles include over taxation, price volatility and the lack of the ability to open bank accounts.

Others include:

Lack of investment capital

No ability to do interstate commerce to trade across state lines

Large corporations dominated small craft operators

Market oversaturation

Negative impacts of no federal legalization

Substandard cost structure

Unfair criminal justice concerns

“This is no surprise,” said Beau Whitney of Whitney Economics, which completed the survey. “The narrative out there is that everyone is swimming in cash because of cannabis. But for many, unless you have $2.5- to $3 million, you’re not able to cover a loan or rent or health care.”

Legal cannabis business operators, facing what they view as overzealous compliance rules, have coined a new term — “prohibition through legalization.”

California businesses may operate — but with the blessing of local government, which imposes its own rules through ordinances. And when less than half the jurisdictions throughout the state throwing out the welcome mat, the lack of access to sell the plants and products is a sticking point. The lack of retail space to sell the plant is having a negative impact on sales for legal operators.

The study found the illicit and legal markets combined generate $100 billion in national sales. Looking ahead, the legal industry is forecasted to total $45 billion in revenue by 2025 — with 39 states now allowing for medicinal use and 18 opening up to adult recreation. The industry employs more than 400,000 workers.

But when businesses leave, local economies suffer.

“Companies are going out of business,” said Matt Mayberry of Novato-based Trym, a computer services company that provides growers with programs to track the quality of their strains and quantity of their harvests.

Mayberry has seen conditions are very difficult on small growers operating on shoestring budgets.

Like many industry insiders, the technologist believes legislation needs to change to make things more profitable for cannabis businesses. For example, lower taxes and fewer rules would be a start.

Beyond cultivators, other legal cannabis businesses in the supply chain are feeling the pinch.

When asked in the survey about their confidence level over the next year, over 12% of testing facility operators said they expect to be “outta here.”

The reason lays in the business model.

Oakland cannabis industry consultant Adam Mintz, formerly of Steep Hill Labs, said the start-up costs are “enormous,” especially when factoring in the instruments.

Testing labs are vulnerable in a competitive market because customers will change companies when they don’t get the results they want.

“The way to survive is they have to do a volume of tests. It’s a lose-lose situation

By SUSAN WOOD

The North Bay Business Journal

California Chief Justice Tani G. CantilSakauye announced March 11 an order to rescind emergency measures that delayed civil jury trials and resulted in more remote court hearings.

The removal of the measures will go into effect on April 30, two months before they would sunset. The changes on courtroom procedures ordered March 2020 came about a week after Gov. Gavin Newsom announced a rollback of statewide executive orders put in place as the state’s response to the pandemic.

“These events mark an important and hopeful change as the residents and government of our state transition to a semblance of pre-COVID-19 California,” the chief justice said in a statement.

Napa County Superior Court and Sonoma County Superior Court officials said they have experienced a backlog of civil jury trials during the pandemic.

“The most substantial impact of the rule rescissions will be seen in our civil division as we again return to jury trials,” Sonoma County Presiding Judge Shelly Averill told the Business Journal.

When the winter surge of the Omicron variant hit over the holidays, jury trials were in progress. Criminal trials were conducted in person eventually during the flurry of reopenings, but civil trials were done virtually under the state order.

As the courts move toward an endemic stage of the virus, Averill intends “to continue to permit the use of remote appearances as permitted under existing law outside of the emergency orders.” An example would be if someone due in court lives a distance from the courthouse.

“It has been a tremendously useful tool throughout the pandemic,” she said, further stressing how the pandemic has made the technological advances viable options.

These courts have also endured a shortage of court reporters returning since

The California chief justice has rescinded the rules effective April 30

In California, figure doubles as industry navigates threat of market collapse

CHRISTIAN KALLEN / SONOMA INDEX-TRIBUNE

Glen Ellen’s Mike Benziger drives home a point about biodynamic farming at his Glentucky Family Farm, which produces garden produce, herbs and cannabis in Sonoma Valley, California.

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for an entrepreneur every time,” he said. Because cannabis operators along the supply chain aim to get the best results from lab testing necessary to be compliant with the state, CannaCraft Chief of Government Affairs Tiffany Devitt said many resort to “lab shopping” to achieve the highest level of potency.

CannaCraft, a large producer based in Santa Rosa, endures its own type of compliance issues that makes it hard to do business in the industry. Because that industry is so scrutinized, the cannabis producer

swallows up reams of paper to provide the government to prove it is operating within the guidelines. Devitt said her company figured it consumes up to 4 million pages a year printing documents to meet California government regulations.

“It’s environmentally ridiculous,” she said.

Still, there’s a resiliency and optimism behind the industry. Devitt believes things will improve as the authorities and government officials notice their struggles.

For example, the state Department of Cannabis Control just tweaked some guidelines, including a passage that now eliminates the need for growers to weigh

each individual plant.

“I am guardedly optimistic. It seems like they’re listening more closely than they did in the past,” she said, citing a number of tax reform bills circulating in state government.

Susan Wood covers law, cannabis, production, tech, energy, transportation, agriculture as well as banking and finance. For 27 years, Susan has worked for a variety of publications including the North County Times, Tahoe Daily Tribune and Lake Tahoe News. Reach her at 530-545-8662 or susan.wood@busjrnl.com.

RULES

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the pandemic, forcing the courts to post bulletins of what rooms they’re working in. Before the pandemic hit, the court employed 15 full-time court reporters. Then, two retired and others have been absent quarantining and staying home with their children, among other reasons. Now the court is averaging nine or 10 full-time court reporters available on any given day, but it needs 18. And freelance reporters have been difficult to line up as well.

“It’s drastically impacted us,” said Arlene Junior, court executive officer.

Because of the shortage, attorneys have been forced to go out and get their own court reporters.

Marin County Superior Court declined to comment on the changes.

State judicial leaders meeting March 4 are also poised to restore in-person criminal trials but also may expand a defendant’s right to waive their appearance.

In addition, the California Judicial Council will receive a report on how to spend $25 million from this year’s state budget to modernize court operations. That could include expansion of electronic filings, hearing reminders, court records access and other online services.

“All (these changes) I see is an attempt to move things to normalcy,” Santa Rosa Attorney John Friedemann said.

He noticed settlements in lieu of trials — which have always dominated the courts — have increased during the pandemic and so has the cost of litigation. A handshake on the courtroom steps proves much less expensive than a full slate of electronic evidence now expected in trials.

“This adds another ($1 million) to a case,” Friedemann said.

David Berry, the Sonoma County Bar Association president, would like to see masks tossed in the courtroom in the interest of justice.

“Masks have been difficult because you lose that non-verbal communication,” he said, adding he’s also seen a concentrated focus on settling cases.

“If you look back a year, we’ve done very few civil trials since the pandemic in Sonoma County. It has encouraged litigators to find creative ways to create a deal. We do almost everything on Zoom.”

To Berry, it’s all about eye contact.

“In my world of Zoom depositions, I try to look at the eyes,” said the legal veteran of 26 years.

But with all the innovation, tech tools and experience, the process during the pandemic was not perfect in his eyes, compromising “the delivery of justice” in some respects.

“I’m hopeful the pandemic will become an endemic, and we’ll all get back to business,” he said.