ON THE FARM: CANNABIS BOWL OF THE WORLD?

Marijuana legalization promises challenges
as well as opportunities for the
Monterey Bay agricultural community

cannabis-bowl

PHOTOGRAPHY BY KEN PAYTON

With the presidential campaign having held many local residents’ attention hostage during the 2016 election cycle, the passage by a margin of 56% to 44% of Proposition 64, the Adult Use of Marijuana Act, came as a surprise to many Monterey Bay area residents. But for those in the local agricultural community, Prop 64 was a little more on the forefront of their minds, raising questions such as how it would affect land prices, whether they should consider moving to cannabis production, how many local food producers would do so, and how the newly legal crop would be regulated.

In Monterey, Santa Cruz and San Benito counties, which some say are well-positioned to exploit the passage of Prop 64, local agriculture agencies have been waiting and watching, as have some local farmers who are considering a switch to this potentially more lucrative crop. And investors have been busily positioning themselves to get in on the ground floor of the many millions—perhaps billions—of dollars that will be generated by cannabis cultivation, processing and recreational sales.

“I’m sure that people are putting together business plans and getting ready to make their move,” said Nesh Dhillon, Santa Cruz County Farmers’ Markets operations manager, just before the November election. Although Dhillon says he has no personal knowledge of farmers looking to jump on the marijuana bandwagon, he’s sure that it’s being discussed in the local agricultural community, and “you’d be foolish to show your hand at this point.”

Jamie Collins, owner of Serendipity Farms, which cultivates organic row crops in Monterey and Santa Cruz counties, says it wouldn’t surprise her at all if some small local farmers decide to grow cannabis to supplement their income. In casual conversations at area farmers’ markets, she’s heard it discussed between the stalls.

“They won’t just stop growing food,” says Collins, who envisions small farmers adding a marijuana greenhouse or two to complement the rest of their crops. “It’s hard to make a decent living (as a small farmer)…a lot of growers have it on their minds.”

But she herself chose to vote against Prop 64 because of various concerns about how cannabis cultivation would be regulated under the new rules, and where resulting tax money would be spent.

California—the first state in the nation to legalize medical marijuana, in 1996—was one of four states, including Massachusetts, Maine and Nevada, to vote in November to make recreational use legal, following similar moves in recent years by Alaska, Colorado, Oregon and Washington.

Under the terms of the initiative, which took effect immediately after the vote, Californians 21 and older are able to possess and use small amounts of cannabis legally as well as grow up to six plants per household. The next phase, according to the California Legalized website, is enactment of regulations, and then licensing, which kicks off lawful commercial activity—commercial cultivation, distribution, processing and sales by licensed non-medical entities—in January 2018.

Businesses involved will have to be licensed, regulated, and most importantly, taxed. In fact, six local measures were on the ballot for taxation of marijuana in Monterey County, with the potential of raising millions for cities and counties that approve such taxes. Santa Cruz County has taxed medical marijuana since 2014, putting some $2.4 million annually into its general fund.

cannabis-bowl-2
Cannabis attorney Gavin Kogan

Prop 64 will also create two new state excise taxes on marijuana, with revenue used to cover costs of administrating and enforcing the measure, as well as funding drug research and treatment. According to the California National Organization for the Reform of Marijuana Laws (NORML), as much as $1.2 billion per year could be raised from these taxes at the state level. Retail sales of cannabis could run from $3 to $4.5 billion a year; spinoff industries could generate as much as $18 billion, studies say.

Needless to say, it’s all pretty complicated, or as Dhillon puts it, “a whole big sticky mess.”

There will be a variety of issues to work out between now and January 2018, and looming over all of this is the fact that according to federal law, cannabis is still illegal.

And despite all the talk about legalization, most of those involved in cannabis businesses are not anxious to discuss what they do. Requests to several local businesses were turned down or calls not returned; one reply says, “Looks like we have to pass this time around…after the vote, perhaps?”

Local counties have been preparing for the passage of AUMA, bolstered by the state’s passage of the California Medical Marijuana Regulation and Safety Act last year, which lays out licensing parameters and a regulatory framework for medical cannabis that will segue into licensing and regulation for recreational marijuana sales.

Santa Cruz County is already far ahead of the curve, with an online step-by-step guide to help existing cannabis farmers and pot-related businesses get a local license. The county even has its own designated cannabis licensing office.

Santa Cruz County communications manager Jason Hoppin says that a cultivation ordinance is now under review and will be put into place next year, which will spell out the time, place and manner of cultivation. Unlike Monterey County, Santa Cruz County allows cannabis to be grown outdoors, with most pot farms found in the mountain areas where the climate is most suitable.

Bob Roach, assistant agricultural commissioner for Monterey County, points out that the county board of supervisors recently passed ordinances for zoning and permits for growing medical marijuana, and included language in these ordinances that could be applied to expansion into growing on a larger scale for recreational use.

And taxes are necessary because there will be a lot more work involved: “It will be a huge regulatory burden for the county,” says Roach. “There will be a lot of ongoing work that needs to be done for this new industry.” Every city and county in the state has local control regarding medical cannabis cultivation, and that will continue under Prop 64. For instance, the city of Salinas is currently considering 24 applications for medical marijuana business permits, eight of those for cultivation. San Benito County, on the other hand, has a moratorium on commercial cannabis cultivation, according to agriculture commissioner Karen Overstreet.

“It’s really hard for me to predict what will happen at this point,” said Overstreet before the vote, noting that the county would look to the state for regulatory guidance if Prop 64 were to pass.

Another great unknown in all this is what economic opportunities will open up for ag businesses, and indeed, for business in general. On the agriculture side, not just cultivation and harvesting are involved, but also growing seed and clones, Collins notes. Salinas cannabis attorney Gavin Kogan points out that there’s also the potential for many more jobs to be created over and above the agriculture side—for instance, in security, electrical work, construction, water delivery, fencing and transportation: “There will be very, very significant effects on the local economy… it’s the ancillary services that boost the economy, not necessarily the growing.”

Kogan should know. A former cannabis attorney who co-founded a cannabis law practice at L+G, LLP, he left the law to become a cannabis entrepreneur in 2014, when he co-founded Indus, a Salinas maker of cannabis edibles. Last year, he cofounded Grupo Flor, a commercial real estate firm which leases greenhouses and manufacturing and distribution properties to Monterey County’s budding cannabis industry. In 2017, he and his partners will launch the Ag Pistil Fund, a $25 million private equity fund aimed at financing promising local cannabis ventures.

Kogan says Monterey County is poised to be one of the greatest beneficiaries of Prop 64: “We have the regulatory and political will to develop this industry ahead of the rest of the state. And it’s located on Highway 101, between the two largest consumer centers of Los Angeles and San Francisco.”

The existing agriculture infrastructure and expertise in this area will also help, Kogan says—not to mention that there is any number of vacant greenhouses available in the tri-county area for investors to snap up, due to the decline in the cut flower industry here.

But it does take a significant investment to set up a commercial cannabis growing operation, Roach points out. In addition to fees, taxes, permits and insurance, growing operations require greenhouses in Monterey County—no outdoor cultivation is permitted there yet—and the greenhouses typically need expensive capital improvements such as special shade and lighting setups, heating and cooling equipment, and of course, security. “It’s perhaps not as lucrative a business as many hope,” Roach says.

And that initial investment might be beyond the scope of what small would-be growers can muster.

Prop 64 was specifically designed to prevent licenses for large-scale marijuana businesses until 2023 to prevent unlawful monopoly power, but there’s no doubt that big investors are very interested. And that’s what worries Collins the most about all this, that “big corporate ag,” in her words, will come in and crowd out small growers.

Dhillon agrees, saying that he foresees small operations being “gobbled up by big business. “There might be a short little window in there when small growers can make some money,” he says. “There’s going to be a real fight to keep it artisanal.”

Hoppin says most existing pot farms, legal or illegal, farm five to 10 acres or less, and Santa Cruz is working to bring them all into the fold of being officially licensed. So far, though, only about 100 have registered, the first step toward obtaining a license.

For small farmers who decide against marijuana cultivation and just want to grow food, a likely adverse impact of recreational cannabis legalization will be increased ag land lease and sale prices—a phenomenon that some people believe has already started to happen.

“We have had a couple of (cannabis business-people) come our way, looking for greenhouses,” says Mika Maekawa, Central Coast program coordinator for California Farm- Link, a nonprofit organization that matches independent organic farmers and ranchers with landowners.

Maekawa says it’s hard to tell how much of the recent ag land price increases are simply due to the overall rise in Central Coast property values.

But she suspects that cannabis business investors with deep pockets will be able to out-price what many local farmers will be able to pay, and has heard of a few instances of land going for “four to five times the asking price,” making her think the purchases have been for cannabis cultivation.

Like others, though, she doesn’t envision a mad rush by small farmers to cannabis cultivation if they’re not already in it.

“Our hope is that (cannabis cultivation) doesn’t affect standard agriculture, which is the backbone of our economy,” Santa Cruz County’s Hoppin says. “I don’t believe it will affect standard agriculture.”

Kathryn McKenzie, who grew up in Santa Cruz and now lives on a Christmas tree farm in north Monterey County, writes about sustainable living, health and horticulture for numerous publications and websites

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