Cannabis growers prepare for a price crash if Prop. 64 passes

Prop 64 California Marijuana Legalization Initiative
Prop 64 California Marijuana Legalization Initiative

By David Downs

On a recent morning, as he does every morning, Eric Battuello gets to work in San Francisco’s Dogpatch by 8 a.m. to check on “Maui” — a room full of potent, profitable marijuana flowers.

Walking through the crowded, pungent rows of strains named Gorilla Glue and Cookies, Battuello looks at ease. “It’s feeling good,” he says. “We’re a little warm, and starting to break a sweat, but the air conditioning will kick on.”

But nowadays, it’s the business climate outside the grow room that’s the bigger issue for the founder and CEO of Butterbrand, a high-end cannabis farm. If Californians legalize pot Nov. 8, prices could eventually collapse 90 percent, according to data from the Rand Drug Policy Research Center. Such a dive would dramatically affect who grows cannabis and where, who profits, who stays in the black market and who drops out entirely.

California’s multibillion-dollar cannabis agriculture sector promises to be upended by the historic drawdown of prohibition. The passage of Proposition 64 would legalize personal use and growing of marijuana and would license and tax cannabis commerce. By Jan. 1, 2018, licensed retail stores and farms would be open in many cities. It would bring huge changes to pot producers.

One of the most significant changes would be economic: The price of cannabis would inevitably drop, as it has in Washington and Colorado, and that alone would upend the industry. That’s a boon to consumers, but a bust for all but the best, most efficient growers.

For the first time in decades, Battuello’s green thumb is less useful than his undergrad studies in Building Construction Technology from Purdue University. Says the 41-year-old Sonoma County father of two, “These days, I’m completely using my education.”

Butterbrand hopes to stay in San Francisco and produce high-grade indoor flowers, despite rising costs and thinning margins. Battuello anticipates prices for top-shelf flowers will tumble 35 percent in the coming years. “Below that and we’ll see. There’s going to be a bottom [price] for indoor[-grown cannabis], if people want high-quality indoor. The price bottom will be much lower in other sectors.”

A major consequence: Growers are rethinking who their customers are. No longer will young men with a high tolerance for risk and marijuana drive the market. As prices for flowers fall, Butterbrand’s trendiest products will become higher-margin, value-added, highly processed goods for those Californians with no marijuana tolerance whatsoever. The vast majority of the state cannot handle modern high-grade cannabis, Battuello says.

“If these newbies were to smoke a bong hit of our trademark Butter OG — it’s goodnight Irene. They might be lying in bed for a few hours with the covers pulled over their heads.”

By contrast, the company’s new disposable cannabis e-cigarettes have almost no euphoria, no “highness,” dizziness or altered senses — but lots of the therapeutic pot molecule cannabidiol (CBD), which can still treat pain, inflammation and anxiety. Says Battuello, “It just leaves you in a better mood.” That appeals to old stoners for whom modern pot is too strong, as well as legions of pain and anxiety sufferers willing to try a newly legal alternative to opioids and sedatives.

All across California, even before Tuesday’s vote, a great winnowing has already occurred. Twenty years of steady price declines, plus the state’s year-old medical marijuana regulations, have forced perhaps 30 to 40 percent of small-time growers to quit the game over the last five years, Battuello estimates. A similar proportion plans to stay the course in the black market, exporting to prohibition states and selling without a local or state license. That black market might exist for only a generation.

“I feel bad for them, but they won’t change, and they will get passed by,” Battuello says. Outlaw farming isn’t something to teach your kids. “Teach them to code,” he suggests.

Pot prohibition may have been one of America’s most effective small business programs, notes cannabis historian Dale Gieringer, director of California NORML. Prohibition punished large-scale operators with prison time and kept prices and profits high for the smaller guys. First criminalized in 1913, California made more than 100,000 pot arrests in 1974, after President Richard Nixon declared a nationwide war on drugs. In the ensuing four decades, police made hundreds of thousands more arrests while, at the same time, California became the No. 1 domestic supplier of pot to the country, second to Mexico. Medical marijuana legalization in 1996 helped created a licit industry worth about $2 billion today, according to estimates from The Arcview Group, a cannabis angel investment network. The recreational market could be five times as big.

But as much as 90 percent of the cost of street pot is the markup from the risk of prohibition, researchers conclude. As prohibition collapses, so does that markup. For example, pot prices peaked in California just before medical legalization in 1996 and have slid ever since. Consumers once paid $20 per gram for high-grade cannabis flower. In newly legalized Washington, the average wholesale cost for flower currently is $2.97, reports Danielle Rosellison, from Trail Blazin’ Productions, a Washington producer. Many growers are struggling.

“It’s really difficult for farmers to make ends meet,” Rosellison says. “There are a million issues all the time — from an entrepreneur level, from a local government level, from a regulatory level and from a state level. We’re losing a lot of good people.”

Battuello believes that, in California, less than a fifth of medical or black market growers will try to go legal. Those staying the course will try to double down on their crops, take on capital, beef up legal counsel and spend on marketing. But many lack the capital and business acumen to adapt.

The smaller farmers are already facing bigger competition under medical laws. And in five years, Prop. 64 allows for new, mega-scale indoor farms, likely in the Central Valley. High-quality herb from such farms stands to undercut expensive urban indoor farming.

Battuello, however, remains optimistic about adapting.

“It’ll affect us. There’s no doubt about it.” In his home county of Sonoma, he notes, “the third- and fourth-generation apple orchards of Sebastopol are now corporate-controlled wine vineyards.”

Today’s cannabis farms are already facing similar disruptions. “It’s sad, but it’s change. And it’s a part of being human.”

Post-legalization, Butterbrand would need to get, in addition to a medical license, a local recreational cultivation license, or it would be game over. Without that, the company would not be able to obtain a state license — the other half of a mandatory dual state-local licensing structure.

So Battuello is encouraging the San Francisco Cannabis State Legalization Task Force to fast-track local licensing.

The county’s supervisors won’t be opposed to cultivation licensing, says task force Chair Terrance Alan, but they might not seize on it either. If Prop. 64 passes, the task force will deliver to the Board of Supervisors on Dec. 12 recommendations for steps to implement its local licensing component, he says.

“I’m sure there will be some cultivators who’ll make a market for themselves,” Alan says. But as for the growing of cannabis in the city, “I don’t think it’ll be as widespread as people think. I think the fate of indoor cultivation has very little to do with the regulatory system and everything to do with economics.”

Prop. 64 is designed to overlay 2015’s new medical regulations — but even those medical regulations are just now being drafted. All new local and state regulations for recreational use will have to be created, largely from scratch, and each one could greatly impact growers and retailers.

If Tuesday’s vote passes, The Bureau of Medical Cannabis Regulation evolves into the Bureau of Marijuana Control, which has powers to issue new, emergency rules. Virtually overnight, regulators could, in theory, cap marijuana product potency, mandate child-safety packaging, or limit advertising. In the medium term, new restrictions on worker safety and labeling could bite down first. Longer-term, the entire cannabis supply chain must pass quality control testing at licensed labs.

So Butterbrand must track those draft medical regulations through 2017 and try to stay ahead of the legal curve. “The big thing is, will the recreational regulations be different from the medical ones, or the same?” Battuello says. “We don’t know.”

Next door to the “Maui” grow room sits a barren office area. Butterbrand had planned to build out another flowering room, but has reconsidered. The empty space will now be a marketing showroom. Battuello points toward a freshly painted white alcove. “That whole area behind you will be filled with branded flowers, and extracts. Plus T-shirts, lighters, beer koozies, art — you name it.” A public-facing pop-up showroom in the Mission District could follow. Butterbrand is also looking at advertising on the sides of Muni buses. “It’s pretty expensive, but you make a good splash.

“We’re in the marketing think tank right now,” Battuello says with a smile. “You’re going to see some fun stuff coming out.”

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