Succeeding in Times of Change

By Jonathan Collier – Executive Board, Nevada County Cannabis Alliance
Smaller, craft grow operations could be the best path forward for cannabis cultivators
Submitted photo |

“Is there hope for the small cannabis farmer?” It’s a question being asked as prices hit new lows and the glut of harvest season looms around the corner. It’s becoming more and more difficult to deny change is coming.

With the unleashing of regulation the illicit market is crumbling faster than many would’ve thought. Black market prices have consistently dropped over the last ten years and there’s little reason to believe that they will rise again.

Some will try to squeeze out whatever they can for the next couple of years, but others are realizing the real opportunity lies in the emerging regulated market worth billions of dollars.

Another genuine concern is, “how will we compete?” Conventional wisdom predicts industry takeover from big corporate interests. Savvy, multi-million dollar investors are entering the field in droves with vertically integrated proformas producing pounds for less than $400. At that price is it worth it?

The common answer is, “Grow more. If we can’t scale, we can’t compete.” The idea being that the drop in prices can be recouped by increasing production, but really this is an act of desperation driving overproduction and hastening the race to the bottom.

A bubble is forming around the cannabis industry and there are more ways to fail than to succeed, but there’s a way for our farmers to both prevail and prosper in the new marketplace.  It’s the middle class path.

Let’s take a cursory look at why a small farm may be a smarter investment and provide more opportunity than a large-scale operation. We’ll compare a Type 1C cottage license that allows for 2,500 square feet of mixed-light canopy to that of a Type 3B medium license that allows for 22,000 square feet of mixed-light canopy. This is the smallest and largest greenhouse cultivation license types allowed in the new state regulations.

First let’s examine it from an infrastructure cost standpoint. There is the usual cost of setting up a garden space: renting equipment, preparing the land, purchasing soil and amendments, nutrients, irrigation, tools, greenhouses, electricity, plumbing, fencing, and the list goes on. With a 2,500 sq/ft garden, depending on what already exists, this can range from $20,000 to over $100,000. Pricy but doable, and not unlike the cost of starting any small business, actually less in most cases. However, with 22,000 sq/ft we’re looking at nearly 10 times the infrastructure. Instead of one or two greenhouses we’re talking ten or twenty. In the case of soil, irrigation, nutrients, electricity, fencing, etc. there’s a tremendous amount of costs that can easily exceed $2 million, especially looking at the backend infrastructure of how the crop is going to be processed, and stored.  Most farmers here don’t have $2 million ready to invest.

Second, take into consideration fees from permits, licenses, and local and state taxes. Fortunately, a tiered licensing system exists that spreads the burden of regulation across a spectrum where smaller, less impactful operations pay less, while larger more intense operations pay more. Currently the fees proposed for the Type 1C cottage license include $285 application fee and a licensing fee of $2,560 annually. The Type 3B medium license has a $2,435 application fee and annual license of $21,915. There’s also the local permitting fees (yet to be determined), as well as State Water Board permits that range from $1,000 to over $10,000 depending on size and impact. Also, consider local taxes where we’ve seen tiered rates adopted by other counties and cities. The theme: the bigger you are the more you pay.

Third, we look at employment. Employment is often a considerable cost to any business and requires insurance, worker’s compensation, unemployment, benefits, etc. Human resources is complicated and burdensome. In the case of the medium license, hiring employees is a must to manage operations of that size. However, a cottage farm can be run by one or two people, and through a partnership agreement, as principals they can dodge the need for employees and ensuing costs. For many this is a very big deal.

Fourth, we can analyze the cost of failure. Every crop is susceptible to pests, disease, neglect, weather, or other dire consequences that can affect the quality and quantity of production. Smaller crops are easier to inspect and manage for problems. However, large crops have the potential for catastrophic failure; for instance, if there are russet mites they’re harder to control and can be much more devastating. The impacts on quality and quantity have direct effects on the bottom line.

Lastly, there is the payoff. Indeed, the 22,000 sq/ft license can produce one or two tons of product that generate a massive amount of revenue, if you can sell it. As it stands California has a substantial overproduction issue. Unless a business has a signed and certified contract with a retailer, distributor, or manufacturer, what good is it to scale up and produce thousands of pounds of product that can’t be sold? Meanwhile, bills are rolling in, payroll needs to be paid and investors are seeking their returns, leading to what seems like a major headache.

Now the middle class farmer will only produce somewhere between 100 to 500 pounds of product, but they can focus on delivering clean, artisanal quality, small batch cannabis that fetches a market premium. It’s much easier to sell a couple hundred pounds than several thousand. Granted, compared to the lucrative black market days, they will see a drastic reduction in income, and an increase in labor as well as regulatory hoops to jump through, but given the local job market what other choices are there?

If a farm can continue to gross between $50,000 to $200,000, that’s a good living in this county. Unless you’re a doctor, nurse, programmer or general manager where can you find a comparable wage? Perhaps down in the Bay or LA but then you run into dramatic increases in the cost of living. There’s the suburbs but who wants to live in tract housing and commute to a cubicle when the better option is the quality of life that brought so many people to the hills to begin with?

The days of lucrative payoffs are coming to a close, but for those who truly love and feel connected to our community there is a way to succeed. Leveraging farmer’s cooperatives, independent cultivators can team together to gain the benefits of scale and vertical integration, and remain competitive against the corporate giants. Through the appellation system we can define and differentiate our products as being  of superior quality that demands a premium price. There is a way forward for our farmers and it’s the middle class path.

This article was published in the Fall 2017 issue of Nevada County Cannabis.  To read the entire publication, CLICK HERE.

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