A ROADMAP TO CANNABIS LEGALIZATION IN NEW YORK – PART II
Opportunity. It’s a word thrown around a lot during the political season. In this case, it’s right on the money. 2021 is filled with opportunity in the Empire State as a result of Governor Cuomo’s vocal support of adult-use legalization. At this juncture policymakers, advocates, patients, medical professionals, law enforcement and industry must focus on designing a brand new, job-creating, wellness-promoting, best-in-class adult-use marijuana program.
If you read my first piece on Empire Report, I discussed some fundamental principles to lay the groundwork for success. Issues like social equity and tax rates are addressed to varying degrees in other states where adult-use already exists. Good or bad, there are lessons to be learned for New York policymakers from states that have taken their swing at the plate.
While critical, taxation and social equity are not the only factors that need to be ironed out. Who, what, and where are also important issues that need to be top-of-mind over the next three months. In this second piece, we take a look at statewide supply metrics, and how critical lessons learned in other states can inform New York’s regulatory framework over its licensing structure and production capacity.
CULTIVATION LICENSING
The need for revenue is a paramount concern. So, the number of companies producing marijuana needs to be sufficient to promote competition, but not so many as to make the industry unprofitable and too costly to enter. If that happens, unqualified operators and aspiring entrepreneurs will pour resources into creating anemic entities that will quickly fail.
Illinois used a phased approach, licensing the 20 existing medical operators to transition into and stand up its adult-use market, with a secondary phase of 40 “craft grow” licenses to supplement supply thereafter prioritized for social equity applicants. These “craft grows” can mature into larger operations as these operators gain experience and the market requires more production. Thereafter, the stage is set for an objective, transparent market study from the state, which will lead to the issuance of new production licenses, if necessary to balance the marketplace.
While the final details are still being negotiated, New Jersey proposes to grandfather its nine existing medical operators as well, with an initial cap of 37 grower licenses for the first two years of adult-use. Like Illinois, the state’s regulatory agency is then authorized to issue additional grower licenses based upon a transparent analysis of market demand.
On the other end of the spectrum, California did not place market caps on its 18 separate categories of grower/processor licenses, and by 2018 had issued more than 3,400 disparate production licenses. This made it impossible for regulators to properly oversee production, and as oversaturation drives down profitability, many businesses are unable to survive due to the oversupply of licenses.
Also uncapped, Oklahoma’s medical regulators authorized more than 6,000 grower licenses, with many operators unable to use the licenses due to unfettered, race-to-the-bottom competition.
CULTIVATION PRODUCTION CAPACITY
Finding the right balance for production capacity (also called “canopy”)[1] will be critical across the permitted cultivation licensees in New York. Capacity limits per license need to be large enough to provide for an attractive investment opportunity, while avoiding a scenario where one or two license holders monopolize the market. In part, this drives up product costs to the customer, potentially driving them to Massachusetts or New Jersey.
If capacity per license is capped at anything below “large-scale” (i.e. 200-300k sq. ft. of flowering canopy), production costs will be too high to compete with the illicit market. In contrast, if uncapped, the commoditized portion of the market will be supplied by one or two companies, and the viability of smaller new entrants will be low.
There should be a measured limit on canopy size in New York State, simply for economic modeling purposes.
As examples of state regulations that settled on the low end, driving up production costs unnecessarily: Michigan placed a maximum of 1,500 total plants per grower license; Massachusetts placed a 100k sq. ft. flowering canopy limit on its largest cultivation production license.
Arizona did not place any caps on cultivation canopy limits and plant count. Because there are no limits, there is also no visibility or manner of measuring the capacity of the marketplace. Additionally, the uncapped canopy limit creates a ripe environment for market domination by a single or small number of companies.
Illinois struck a good balance, with limits of 210k sq. ft. of flowering canopy on its large-scale cultivation licenses. This measured approach will help drive down production costs for cultivators, ultimately passing savings along to customers to help offset a relatively high tax rate in that state.
RETAIL LICENSES
Policymakers need to ensure there are a sufficient number of retail licenses to allow for convenient access, and that those operators can quickly scale to meet the demand of a regulated marketplace. Similar to an uncapped number of licenses for growing and production, an oversupply of dispensaries can result in a greater likelihood that many will fail. Moreover, issuing too many licenses will make it harder to effectively inspect and regulate the myriad compliance issues entrepreneurs will face, particularly where there is not any existing regulator in place to strategically harness this growth.
In this instance, Illinois started its adult-use program on the low end, with only 55 retail licenses initially. Due primarily to unforeseen legal and implementation delays, the state has continued to struggle to approve and scale up the roughly 130 additional adult-use dispensary licenses that were authorized to help meet statewide adult-use demand in the first year of the program. Illinois had impressive adult-use sales in the opening year, but did not reach its full revenue or employment potential due to the lack of accessible retail locations.
California allowed for an uncapped number of adult-use retail licenses. While the state had issued thousands of licenses by its second year of adult-use sales, compounded by runaway taxes and municipal prohibitions on adult-use retailers, only a small fraction actually opened for business. The result was lost revenue, by virtue of an estimated 80 percent of cannabis sales remaining in the illicit market.
Many of the issues I’ve raised aren’t going to lead the nightly newscasts, and in many cases are not among the first priorities people think about when discussing adult-use, but they are vitally important if New Yorkers are going to have safe, reliable and affordable products for consumers. New York’s medical program has always been based on reducing harm and improving the wellness of its citizens. We know we can help continue that standard in adult-use. It’s an opportunity that’s too important to pass up.
Jeremy Unruh is Senior Vice President of Public Affairs at PharmaCann.
[1] The term “canopy” refers to the square footage of growing plants in a cultivation center. During the growing cycle, plants can be loosely segregated into three general phases: First, propagation. This is the nursery, including newly-cut and rooted clones. Second, vegetative. This includes plants that are in the growth phase. Third, flowering. Flowering plants are in the final phase of development before harvest.
In a traditional production cycle, about 20% of the plants are in propagation; 20-25% in flowering, with the rest in the vegetative state. So, “flowering canopy” is about 20-25% of the total canopy size of the operation.
