Just because California legalized cannabis doesn't mean everyone in the pot industry will participate in the state's highly regulated, above-ground market. While many businesses will participate in the legal marketplace — estimated to be worth $4.3 billion by 2018 — those who remain in the black market may take a financial hit.
“Expanding the regulated marketplace in California and expanding the number of businesses that have access to the regulated marketplace in California will do good things to reduce diversion and out-of-state sales,” says Hezekiah Allen, executive director of the California Growers Association. But though regulation will discourage black-market dealings inside California and exports outside it, Allen says Proposition 64 leaves many questions unanswered.
The total scale of California's grow sites, for instance, has yet to be resolved. “How many acres being used to grow cannabis in California right now is probably three times too many,” Allen says. But will all those acres of grow, many on trespass land, be eligible to enter the regulated market (via one of Proposition 64's dozen-plus license types), or will they remain criminally unregulated?
“It's our highest priority that existing growers who want to play by the rules have the opportunity to sell their products in state,” Allen says. “With all the focus Proposition 64 has put on new operations, expanding and going big, in a lot of ways, California needs to scale down production if we're going to keep products in state. We don't need bigger growers; we need more, smaller growers.”
About 60 to 80 percent of the black-market cannabis consumed nationally is from California, Allen says. A lot of the biggest grows, many of which may currently trespass on public land, produce several thousand pounds of bud products that will never be able to enter the regulated market in California, he says. These operations exist to grow and export. “That 60 to 80 percent has nothing to do with the average growers we think of — they're not local farmers,” Allen says.
California itself has about 50,000 grows in state, he adds. The operations aimed at diversion maybe account for less than 10 percent of California's total grows, but their products could account for up to 40 or 50 percent of what's circulating around the state, Allen says. “It's something a lot of us don't think about because it happens away in the wilderness. It's really a separate system. They're not moving toward getting a permit or license.”
Oliver Summers, who operates a legal dispensary in Sun Valley, echoes the fact that many underground growers are not interested in registering with the state. “They have watched prices drop from $6,000 a pound 15 years ago to less than $2,000 a pound today. The fact that they are now supposed to add hassles onto their already busy workload, making sure each plant is numbered, and that they also get charged taxes on top of it … these guys just aren't going to do that,” he says.
For example, Summers points to the more than 800 illegal collectives that exist in Los Angeles alone, operating outside the Proposition D model. “There is more money to be made out-of-state,” Summers says. “When it comes down to it, there is a lot of cannabis in California, and not all of it can be consumed by Californians.” When that $2,000 pound in Los Angeles is worth $4,000 in Arizona, $6,000 in Michigan and almost $8,000 in more remote areas, Summers says, black-market operators “don't feel like they have anything to lose.”
However, now that President-elect Trump has appointed Jeff Sessions as attorney general, marijuana operators in green states may be more at risk of federal interference. Sessions is an opponent to marijuana law reform. “I think anyone who brazenly breaks the law in the next four years probably doesn't remember what the war on drugs was like when we had an administration that looks like this one,” Allen says.
Meanwhile, shipments to the East Coast may not garner more than a net $200 profit, according to an anonymous black-market dealer interviewed by VICE. With the spread of illegal grow operations, plus legalization in Maine, Massachusetts, Washington, D.C., and elsewhere, national shipments may not be worth the risk.
“In terms of exports, black-market cannabis from California does face more challenges with the recent wave of legalization gaining national momentum,” says Brendan Hill, co-owner of the dispensary Paper & Leaf in Washington. California, unlike Colorado for instance, is surrounded by other legal states, including Oregon and Nevada. Arizona has its own medical marijuana program. “While California bud reaches further than just the state next door, as more local cannabis becomes available to consumers through sanctioned sources, the black markets that rely on California cannabis will dry up as well. We've already seen decreases in the amount of cannabis imported from Mexico, and that's a good example on an international level of what we expect to see happen as more states vote yes on ballot initiatives.”
With seed-to-sale tracking, it will be difficult to hide from or take advantage of the law. “You'll be operating with the regulation or not,” says Erik Hulstrom, president of the Cultivators Alliance and on the board of the Southern California Coalition. There will be no ambiguity, he says, no gray-market confusion like that which exists today. “And as long as the regulations and taxation are sufficiently business-friendly, I think the illegal market will eventually be squeezed out. Of course, if regulation becomes too overbearing, with too high of a tax structure, it will create space for the illicit market to thrive.”