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Growing pains: Cannabis profit-margin has become too narrow

If the cannabis market — legal and illicit — was looking risky before, the industry’s countenance is now straight hostile.

“We’re seeing a lot of flower selling plus or minus $300 a pound — that means it could be as low as $200 or as high as $400,” said Basil McMahon of Elevation Distro. “It’s hard to make a living to sell flower at that price.”

The oversaturated market eliminates any sort of financial incentive one might have had to go legal, according to licensed cultivator Brad Peceimer, who noted that the state’s cultivation tax alone requires the grower pay $161 per pound of the product.



That is “separate and in addition to the effective 27% excise tax” assessed at retail, McMahon said.

Daniel Batchelor, owner of both the dispensary and the distro, said that each tested batch — separated by strain — is subject to a $500 Certificate of Analysis charge.



Peceimer said many growers will take a loss in the current market’s conditions given the government’s sizeable and guaranteed cut of the product before cannabis seeds, or clones, can ever take root.

“That’s before you pay for the water in the ground, the fertilizer or soil amendments, the labor,” Peceimer said, adding that there’s little relief for small time farmers looking to scale up. “There is no return. If you were growing barley and it cost you $1 a pound to grow but it sells for 50 cents, growing more doesn’t make you twice as rich, it makes you twice as poor.”

Peceimer said he has heard of pounds selling for as low as $150 on the black market. Even tax free, Peceimer said the profit margin is hardly worth pursuit.

BY THE NUMBERS

The May 2021 Nevada County Grand Jury report investigated the county’s success at converting an estimated 3,500 to 4,000 illegal cannabis growers into permitted operators.

According to a press release, the grand jury found that the current conversion rate of 2% to 3% per year requires county operations to accelerate conversion, and recommended “a combination of higher fines, lower fees, greater sheriff’s enforcement and heightened surveillance techniques as opportunities to explore.”

Craig Griesbach, director of the county’s building department, said he has issued 147 permits for legal cannabis cultivation. Ninety-five permits are still in review, or deemed incompleted, Griesbach said, meaning they require corrections and need to resubmit.

“Supply has gone up and demand has stayed constant and that’s why price has gone down,” Elevation 2477’ and Distro owner Daniel Batchelor said.

Batchelor said his house brand continues to source exclusively from Nevada County farmers, and pays them more than other dispensaries whose relationship with contributing growers is much more institutional.

Batchelor said consumer interest in extracts and edibles has actually increased, fortunately for those with means of production on site.

McMahon, who brokers cannabis across the state through Elevation Distro, said they’ve tried to offset the lowered market price by paying local farmers more than the going rate, but the large scale supply of cannabis seen now is what happened in other legal states within their first few years of legalization.

“We could have mitigated the issue of the price dropping dramatically as a result of the oversupply,” McMahon said. “There was a restriction in the regulations that would have limited the amount of canopy you can grow on a property for the first five years, but the restrictions were effectively eliminated.”

McMahon said the distro is working hard to market and sell wholesale product, but “a lot of small farms are having a tough time defeating on scale.”

Contrary to Peceimer’s concerns, cultivator Graciella Vazquez said scaling up can offer some respite to the industry’s pessimistic forecast, provided the grower has the necessary business connections.

“People will survive if they have the contacts,” cultivator Vazquez said, adding “if you don’t, you will be super screwed.”

Vazquez said those who grow organic, specifically, may have to sacrifice their ideals in order to stay in the industry because of material cost.

CULTURE SHIFT

Peceimer has skillsets, degrees and ongoing projects outside of cannabis that are viable means of making a living, he said, but the economic impact is bigger than the bureaucracy realizes and he hates to watch the culture shift.

Peceimer said a Cornell doctoral student who studied the size and contributions of the marijuana industry in Nevada County — for which there are 18 total permitted acres, according to Supervisor Sue Hoek — determined that the county’s profits from the industry go far beyond the $1 million to the county and another $1.5 million to Nevada City annually in tax revenue.

“(The doctoral student) was able to document that cannabis was a $250 million economic input into this county,” Peceimer said. ”All other sectors of agriculture — horses, grapes, everything else — was about $25 million input into the county, therefore cannabis was 10 times the economic input of any other product in this county.“

Peceimer said five to seven years ago, the county had a lot of “neat stores that catered to a lot of people that had a lot of extra money.”

“The people who came to trim on an annual basis, or what’s now called the ‘trimmigrant’ — those people also had an economic input into the county,” Peceimer said. “Money flowed into rent, gas stations, restaurants — all the economic services provided through a normal community.”

Now, one of the side projects Peceimer just saw to completion will industrialize the cannabis industry through mechanization.

The Triminator, available online for $4,995, is just one viable alternative to paying trimmers $160 a pound two years ago, $125 a pound last year and $100 this year.

Vazquez said she is looking into outsourcing to cheaper laborers, and was informed of a contingent of trimmers from Asia charging $80 a pound, sometimes less.

Peceimer said a 10,000-square-foot hypothetical farm would yield $25,000 in current market conditions.

“Right now, it’s about breaking even,” Peceimer said.

Batchelor said the price of indoor flower has remained the same.

“The perception is that indoor cannabis has a higher quality, when in reality sun-grown cannabis receives much more of the solar exposure that indoor people are trying to formulate,” Peceimer explained.

Batchelor said that consumer bias, or perception, is particularly unfortunate for Nevada County growers, known to create quality product under the natural sun.

“The best weed grown outside is from Nevada County because we have this great outdoor season,” Batchelor said, “but now companies can turnout all year long with greenhouses.”

Vazquez said she knows many people who have bowed out of the industry altogether given the plummeting prices of outdoor cannabis.

“A lot of people stopped growing,” Vazquez said.

McMahon said he does not know how many of the originally permitted retailers in Nevada County are still in operation, but said he knows a lot are not.

Vazquez said she does not know what to expect, or how the culture will shift going forward.

In the meantime, the grower is focusing on her plants.

“We need to finish the crop in June,” Vazquez said. “The first, fresh units will catch the best price.”

Rebecca O’Neil is a staff writer with The Union. She can be reached at roneil@theunion.com

ADVOCACY

Brad Peceimer said he’s never smoked a day in his life. His relationship with cannabis began in 2000, when his wife was diagnosed with — and died of — cancer.

“She dropped from 135 pounds to 82 pounds in six weeks,” Peceimer said, adding that he became part of Americans for Safe Access when he saw how cannabis brownies helped his wife sleep a proper night for the first time since her diagnosis.

 


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