Examining California's Recreational Cannabis Supply Stream

Examining California's Recreational Cannabis Supply Stream

California’s cannabis market is a behemoth. Its market is unlike any other legal state market at this time. According to a report from Arcview Market Research and BDS Analytics, California's cannabis market value is expected to exceed $5.1 billion by the end of the year.

The analysis expects sizable growth in the market. Much of this growth could come from investors who have an interest in companies with connections to the Golden State.

California alone represents roughly a third of the North American cannabis industry. Additionally, analysts at Cowen & Co. believe that the state could account for $25 billion of the country's $50 billion market by 2026.

An array of industries are now firmly entrenched in the California cannabis market. They include holding companies, private equity firms, pharmaceuticals and a slew of other high earning industries.

However, when talking about the power of the industry, cultivation always reigns supreme. Recently released data from MarketWatch finds that cultivation is fueling the growth of the sector. $718 million of investment money went into farming and retail in 2017. The most significant names in the market find their earnings soaring. That includes a nearly 79% jump for Canadian cultivator Tilray, Inc. This boost in revenues has major cultivators branching out its branding and customer acquisition efforts.

In California, its access to fertile cannabis cultivating land and other significant names in marijuana give it an advantage little to any other state can tout. Additionally, its history from the outlaw cannabis days continues to this day. However, the shift to a more legitimate market is well underway. So much so, that some of the early names in the black market are finding it difficult to transition to a legal marketplace.

Some of the most well-known destinations for this black market came from the Emerald Triangle - comprising of Humboldt, Mendocino, and Trinity Counties. Yet, when legalization came into effect, much of California’s state-approved consumer cannabis came from Santa Barbara County. Data recently released by Marijuana Business Daily found that Santa Barbara County accounted for 22.1% of the state's annual cannabis crop production. While Humboldt came in second with 20.4%, and Mendocino in fourth with 9.2%, Trinity County did not make the top five.

In all, Santa Barbara and Humboldt Counties held more than half of the state's cultivation licenses. Together, these licenses combined to account for 42% of the state's total crop production. Additionally, the report found that Santa Barbara County was the home to 13 of the 20 largest cultivation operators in California. Even more telling, the average license holder possessed 13 grower licenses in the country, with the rest of the state averaging 1.4 licenses per holder.

Beyond county by county contributions, the data found that 80% of the state's current annual estimated production came from indoor or greenhouse grows. This comes despite 41% of the cultivation licenses in the state going to outdoor grow operations. Greenhouse grows were noted as one of the key selling points Santa Barbara County can offer a venture that others may not.

The area often regarded for its wine cultivation is fast becoming the destination for California's cannabis. While not producing as much pot as the Emerald Triangle Counties, Santa Barbara is in the prime location to distribute significant tons to the Southern California consumer market. Founder of Central Coast Agriculture, John de Friel, recently told Leafly that the area “represents the pinnacle of modern agriculture.”

Kristin Nevedal, chair of the International Cannabis Farmers Association, explained to MJ Biz Daily why this is such a selling point. “We’ve seen cultivation really blow up because those facilities are plug-and-play, ready to roll,” Nevedal said. “They have discharge lighting, they have curtains and plenty of square footage.”

Hotbeds for cannabis like the remote Trinity County may not crack the top five thanks to cultivators focusing more on growing product than going legit. However, 205 licensed farms are in the county struggling to find a place a supply chain which that continues to take form. However, many are stepping out of the black market and into the mainstream, helping form the potential model for national supply chains. This model would include reliable logistics for mass distribution.

Meanwhile, the final rules for California's cannabis industry likely won't be made public until early to mid-January. Over the past year, numerous revisions have been made. Until the state's Office of Administrative Law approves the permanent regulations, the market will continue to operate under emergency regulations which were re-adopted in June.

The latest draft of proposed rules came in mid-October and served as a "bomb" to some businesses. The regulations include prohibiting licensing and branding agreements with legacy operators which could make obtaining permits even more difficult. A look at all the proposed rules for cultivation can be found here.


David Kani

David Kani is a Newport Beach, California based business lawyer with a focus on cannabis companies, their investors, employees and cannabis-related litigation.
To connect with David: [hidden email] or 714-907-0697.

To learn more about Hochfelsen & Kani LLP: hockani.com
To learn more about David's book Pot Inc.: suttonhart.com
For media inquiries or speaking engagements: [hidden email]

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