California: Surviving Legislation

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AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA


We were prompted to write this note by the article “Cannabis Regulation: The Struggle of Small Farmers,” written by Lance Griffin and published on February 21, 2020, in Terpenes and Testing Magazine. We were prompted to write this article not for what Lance Griffin’s article says but for what it does not say.


The article starts with The New Yorker’s May 2019 description of the devastating impact of legalization on the Emerald Triangle. This starting point is old news. Mr. Griffin asks, “So, what happened when California voted to legalize adult-use cannabis in 2016? According to The New Yorker, “. . . legalization generated for these farmers ‘not only an economic crisis but also an existential one.’” Mr. Griffin notes that thousands of small Emerald Triangle growers have been forced out of the industry, and then states


“The practical repercussions of shutting out small farmers are catastrophic. As of 2019, it was estimated that 80% of cannabis sales in California were still from the black market, significantly reducing projected market growth and creating an uncertain future for the state’s regulated program.


“Incidentally, roughly 20,000-30,000 cannabis cultivators were estimated to operate in the Emerald Triangle pre-legalization. As of 2019, about 1,000 possessed a license.


“The black market in California is even referred to as the ‘traditional market.’


We must mention one point in passing that Mr. Griffin and many others seem to miss. The underground market, the “traditional market,” is growing, but the Emerald Triangle is dying. The underground market is thriving in California but in new locations in California.


Humboldt County is the epicenter of the Emerald Triangle. Most commentators have attributed 50%-60% of the cannabis production of the Emerald Triangle to Humboldt County. Humboldt County is ground zero for the devastation that legalization wreaked on California’s underground cannabis industry. We concluded in our analysis over two years ago that 40%-50% of the gross annual economy of Humboldt County was based on cannabis cultivation. Of course, this is an economic estimate that is somewhat speculative. Those involved growing cannabis in the Emerald Triangle kept their activities as underground as possible for obvious reasons.


The Humboldt County Sheriff’s Office estimated there were 6,000-10,000 cannabis cultivators in Humboldt County in 2017. If we take the lower number of cultivators, 6,000, and assume each is backyard grower with an annual production 25 pounds of flower, each of these growers would produce approximately $25, 000 of revenue from cultivation in the County. The total revenue is only $150M. However, Humboldt County has less than 150,000 residents.


This revenue comes into the County from elsewhere in California. No one in Humboldt County buys because everyone knows, or is related to, a grower. Not surprisingly, some of the revenue from cannabis cultivation that flows into Humboldt County comes from outside California. A substantial portion of this revenue will be expended each year in Humboldt County. Most of the cannabis revenue spent in the County will turn over multiple times each year before this money leaves the County to be spent on vacations in Hawaii and four-wheel drive vehicles.


For purposes of illustration, we will assume this money turns over four times in a year. The $150M of revenue from cannabis grown in Humboldt County becomes $600M of gross revenue generated in the County in a year. The per capita income of Humboldt County is only a little over $10K. The total annual revenue generated within Humboldt County based on a per capita income of $10K is approximately $1.5B, or $1,500M. If the preceding analysis is reasonably accurate, 40% of the pre-legalization economy of Humboldt County was based on its underground cannabis industry. Anyone who knows anything about the underground cannabis industry in Humboldt County will very likely argue the financial significance of cannabis to the County is greater than 40%.


The population of Humboldt County represents approximately 0.075% of the population of California. Sacramento is not concerned about the residents of Humboldt County as voters. The smallest identifiable minority populations that concern California politicians are larger groups of voters than the residents of Humboldt County. As a financial force in California, Humboldt County is even less significant. By comparison, the City and County of San Francisco have six times as many residents, and each San Francisco resident has over ten times the financial clout of a Humboldt County resident based on per capita income. Sacramento simply does not care what happens to Humboldt County.


Legalization has been a disaster for Humboldt County, but not necessarily for all Humboldt County growers. Some of the biggest cannabis cultivation operations in Central and Southern California are based on the expertise of Humboldt County growers financed in some instances with money from Canada, Texas, or New York. A number of Emerald Triangle cannabis cultivators relocated and expanded their operations in areas better suited to, and more welcoming of, high volume agricultural production.


We decided to write this article because a significant share of the responsibility for the disaster the legalization of cannabis has produced for Humboldt County can be attributed to the Board of Supervisors and the Planning Commission. Few will recall that a very substantial percentage of the first hundred cultivation issued in California were issued to Humboldt County cultivators. A few Humboldt County growers managed to secure State and County licenses before most cannabis cultivators knew the rules.


It is unfair to heap too much blame for this financial disaster on the Board of Supervisors and the Planning Commission. These bodies are elected. The members of these bodies are elected by Humboldt County residents. The entire population of Humboldt County – growers, elected officials, and residents – share in the responsibility for allowing the legalization of cannabis in California to create a financial disaster for the County. Humboldt County was on its own to address the impact of cannabis legalization. It was foolish to think otherwise. The growers, the elected officials and the residents of Humboldt County are wholly responsible for their failure to realize the County was on its own.


If there is one group that should be singled out as having the greatest responsibility for allowing the legalization of cannabis to create a financial disaster for Humboldt County, it is the cadre of consultants, experts and advisors who took so much money for knowing only a little more than their clients, and for not knowing nearly enough to provide the level and quality of advice was required, and still is required, to address the financial chaos cannabis legalization has created for Humboldt County.


It is not too late to salvage a significant portion of California’s cannabis industry for Humboldt County. The County must not look to Sacramento for help. The County must salvage what it can of its cannabis industry through its resources. There are far more resources available than most realize. These resources are not utilized.


In this regard, Cannabis Cooperative Associations (“CCAs’), which the Legislature enabled in SB 94, gave small cannabis cultivators a competitive advantage over large cultivators. Unfortunately for Humboldt County and similar enclaves of small cannabis cultivators, CCAs are not properly utilized.

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