The state of California has suspended the permits of nearly 400 marijuana firms that failed to comply with the mandatory requirements for the obtainment of a definitive license. According to experts, this measure will temporarily reduce the number of legal cannabis shops in the state, which could lead to an illegal market increase, especially if retailers are forced to stop commercial operations.
This suspension affects approximately 5% of the legal cannabis supply in California, and it has occurred after dispensaries, distributors, and delivery services failed to follow the required track-and-trace steps so that state regulators can keep an eye on cannabis' commercial flow.
In accordance with the provisions of Proposition 64, the 2016 voter initiative that legalized recreational cannabis in California, firms licensed to operate in the state's legal cannabis market must participate in the seed-to-sale tracking system to prevent product deviation to the black market.
The participation in this tracking system (a software called METRC developed by a firm with its headquarters in Florida) is an essential requirement for obtaining a provisional license, which is the step prior to obtaining a permanent annual permit. All temporary licenses expired last summer, so those lagging behind who did not implement the METRC regulatory cannabis tracking system have just had their permits revoked.
The evolution of the cannabis sector in California
Just over a year since adult recreational cannabis was legalized in California, it seems that the state and city agencies are still attempting to fine tune the details of this industry.
The first year was far from perfect for retailers and regulators. The first six months of recreational sales served as a transition period in which products that did not comply with the new manufacture and packaging regulations could still be sold. This was beneficial for retailers as compliant products were still scarce.
But the Californian cannabis market did not live up to expectations for many reasons. Despite being portrayed as a free-for-all haven for cannabis rights (and a state packed with smokers) the reality in California is somehow worrying: in December 2018, less than 20% of Californian cities (89 out of 482) authorized the opening of recreational cannabis retail stores.
In the first year, cannabis sales worked under a temporaty set of rules, but early this year the Bureau of Cannabis Control approved the final regulations, which have produced a change in the cannabis scene that is beneficial to cannabis retailers.
At present, California has 7,392 licensed cannabis businesses. The Bureau of Cannabis Control supervises 2,630 firms with provisional or annual licenses, whereas the state's Department of Public Health supervises 932 cannabis manufacturers. In addition, the Department of Food and Agriculture is in charge of overseeing the work of 3,830 cannabis growers.
New regulations that make license requirements stricter
One of the most important and difficult issues regarding the legal cannabis market is guaranteeing the safety and authenticity of its supply chain. Given that the black market is still a huge competitor, regulators have arduously been working to find a solution so that consumers feel confident to opt for the legal market. According to research from the consulting company New Frontier Data, as much as 80% of the marijuana sold in California comes from the black market, and generated $3.7 billion in 2018, more than four times the size of the legal market.
The solution originally proposed was a state system that would register the inventory and movement of cannabis through the commercial cannabis supply chain. METRC (Marijuana Enforcement Tracking Reporting Compliance) tracks cannabis plants and products with RFID (Radio Frecuency Identification) tags, adding a $0.25-0.45 charge per product.
However, putting this into practice proved more difficult than previously anticipated, mostly because this technological requirement is connected to the licensing process. And with thousands of firms waiting to be approved by the state, this means that many of them are still operating outside of this inventory tracking system.
Beside the changes at state level, retailers also have to contend with the changes in the law and licensing procedures at municipal level; thus the statutory requirements to transition into the legal market seem endless.
Los Angeles, for instance, is currently undergoing a Phase 3 license interchange to combat the countless regulatory issues caused by an excessive emergence of cannabis firms. Phase 1 and Phase 2 took longer than expected, and it is suspected that the implementation of Phase 3 will take even longer.
One of the most controversial topics is cannabis statewide delivery. According to the final drafts by the Bureau of Cannabis Control, cannabis firms can now deliver their products even to the many state areas where commercial cannabis is still illegal. This can be beneficial to the firms and increase their sales, but it has also brought unrest to groups like the League of California Cities, who claim that this decision infringes the local governments' right to prohibit non-medical cannabis sales.
The Californian cannabis market is a complex matter, but, despite all the obstacles, still has a bright future ahead. As regulations become clearer and the licensing system becomes more dynamic, the black market should start getting smaller. And when federal legalization finally takes place, this legal market will undoubtedly become much stronger.