Handful of California cannabis growers control 30% of ‘small’ grower licenses

Sacramento Business Journal [February 5, 2018]

A disproportionately small group of cannabis cultivation businesses in California control a large share of the licenses intended for “small” farming operations, a Business Journal review of state data has found.

Since Jan. 1, the California Department of Food and Agriculture has awarded about 540 temporary licenses for so-called “small” operations — that is, for cultivation that takes place on less than one quarter of an acre outdoors or less than 10,000 square feet indoors or in “mixed-light” settings. These temporary licenses last four months and are seen as a first step toward a permanent license.

Approximately 250 businesses have been awarded licenses for small cultivation. However, 10 of those businesses control about 30 percent of the licenses awarded. Two cultivators — Honeydew Farms LLC and Central Coast Farmer’s Market Management LLC — have been awarded about 30 licenses each.

The top 10 license holders control 29 percent of the total number of licenses issued.

Cultivators that hold a large number of licenses may be stacking them to run large operations. A trade association that represents the cannabis industry has filed a lawsuit arguing that this is a threat to the new recreational marijuana industry that voters meant to encourage when they passed Proposition 64.

“We’re trying to ensure that as many cultivators as possible can succeed in the regulated market,” said Hezekiah Allen, executive director of the California Growers Association, which represents about 900 cannabis cultivators statewide. “There’s a practical and moral imperative to ensuring as many farmers as possible participate.”

The Growers Association argues that Proposition 64 — the 2016 ballot measure that legalized recreational use of marijuana in California — was passed with the intention of supporting small and medium-sized cannabis businesses. However, a regulatory loophole has allowed large farming operations to proliferate at the expense of smaller ones, the association claims in its lawsuit.

Larger cultivators, meanwhile, say that they are simply following the regulations imposed by the state. Additionally, some cultivators who were able to expand in previous years under medical marijuana permits issued at the county level argue that it would be unfair if the state required them to scale back their operations.

“All of the sudden, we (would) have to scale back to an acre,” said Alex Moore, founder and owner of Honeydew Farms in Ferndale. “That would be a tremendous loss to us.”

In November, the state Department of Food and Agriculture published final regulations for cannabis cultivation licenses under Proposition 64. They specified how the state would award licenses based on the size of the cultivator. Licenses for “medium” cultivators — which measure up to 1 acre outdoors or up to 22,000 square feet indoors — would be limited to one per person or entity. Licenses for “large” cultivators — which measure over 1 acre outdoors or over 22,000 feet indoors — would not be awarded until 2023.

The regulations, however, specified no limitations for accruing licenses for small cultivation.

In late January, the California Growers Association filed its lawsuit against the state Department of Food and Agriculture, claiming that the regulations violate Proposition 64.

“One of Proposition 64’s expressly stated purposes is to ‘ensure the nonmedical marijuana industry in California will be built around small and medium sized businesses by prohibiting large-scale cultivation,’” the lawsuit states.

The loophole regarding small licenses, the Growers Association argues, “eviscerates” this provision of the ballot measure by allowing cultivators to accrue small licenses and effectively run large operations.

“Authorizing large cultivation operations prior to 2023 will have a devastating effect on small and medium cannabis businesses,” the Growers Association argues in its lawsuit.

The association cited a report commissioned by the Department of Food and Agriculture that found small cultivators would be at an unreasonable disadvantage if forced to compete with large cultivators when recreational marijuana became legal at the start of 2018. The Growers Association adds that smaller cultivators may opt to operate in the illegal market instead, which would deprive the state of tax revenue.

In Sacramento County, approximately 20 small cultivation licenses — all for indoor growing — have been issued to cultivators. The business with the most licenses has only three.

Moore, of Honeydew Farms, said that limiting the number of licenses held by an individual business would hurt established cultivators and choke the product supply to manufacturers and distributors. This echoes warnings recently voiced by Lori Ajax, the chief of the California Bureau of Cannabis Control.

In July 2016, Humboldt County awarded a permit to Honeydew Farms to cultivate on over 6 acres of land. Today, Honeydew Farms is growing on about 3 acres and plans to expand to over 6 acres by the summer.

If the state imposes limits on stacking small cultivation licenses, according to Moore, his business would be forced to reverse course.

Moore said he and other established cultivators were caught off guard by the Growers Association’s effort to compel the state to limit small licenses. Last summer, according to Moore, the association had been pushing the state to implement a 4-acre limit on cultivators until 2023, which would allow established growers to stack several licenses and not have to scale back operations.When the state finalized its regulations, Moore said, the Growers Association did an about-face and began pushing for limitations on stacked licenses.

Allen acknowledges that the Growers Association initially supported a 4-acre limit for medical marijuana cultivation. But when the state released its new regulations in November, he said, the Growers Association advocated for a limit on licenses to give small cultivators a fair opportunity to succeed.

If license limits are imposed, according to Allen, established cultivators could utilize excess land for purposes other than cultivation. They would have the option of leasing the land to other growers or forming co-ops, according to Allen, that could cultivate on up to 4 acres.

Moore said that the licensing debate has left established cultivators feeling unfairly vilified.

“I have a lot of admiration and respect for these guys trying to help small farms navigate these changing laws,” Moore said. But “we’re being portrayed as ‘big ag,’ and that’s just not the case…We’re a single-family-owned company.”

Representatives of Central Coast Farmer’s Market Management, the other business that’s been awarded about 30 licenses, could not be reached for comment. Central Coast Farmer’s is based in Buellton.

Scott Rodd

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