There is an 800-hundred-pound gorilla in the middle of a room filled with cannabis, confounding myriad stakeholders’ plans to revolutionize the industry, make significant strides toward health and wellness, and generally improve the versatility of this clever little plant whose surface we’ve only begun to scratch. What is this big, hairy beast? It’s the unspoken but serious need to limit the number of licenses distributed on a state level.
This isn’t a new topic, but the need to address it is increasingly urgent as the likelihood of national cannabis legalization grows more real. Before that happens, every single state that legalizes cannabis must limit the number of licenses it awards. The legal cannabis industry must answer the question: When is enough, enough?
Michigan legalized recreational cannabis in 2018. Once fully matured, estimates suggest the state’s adult-use market will generate $3 billion in retail sales and create about 24,000 jobs annually. By comparison, Colorado’s adult-use industry, approved by voters in 2012, generates about $2 billion in retail sales and creates about 40,000 jobs annually, according to Colorado Department of Revenue data.
State-licensed companies in Michigan’s medical and recreational markets may grow up to 511,500 plants. The figure accounts for a quickly escalating number of grow licenses being approved in both markets. That translates to approximately 400,000 pounds of usable cannabis. Supply will far exceed demand if states don’t run the numbers to determine exactly how many licenses they require to support existing or expected consumer needs. Officials could be setting cannabis companies up for a crash before they ever harvest a single plant.
States can prevent a looming disaster if they take four steps.
1. Limit cannabis licenses
Enough reliable data exists to suggest states can destroy their entire industry by failing to limit the number of licenses at the cultivation and retail levels. Look at Oregon and Colorado. The two states are considered pioneers, and both can teach us about the perils of oversaturation. Market saturation in Oregon and Colorado already has driven prices below a cultivator’s ability to be competitive. This negatively impacts the cannabis industry, because many novice companies look to pioneer states for a blueprint of what to do—without always noting what not to do. Oregon has had well-documented difficulties managing its growing industry. In 2019, the state’s growers produced 1 million pounds of surplus plant material, causing prices to fall to the lowest in the country and several growers to go out of business. Newly legalized states like Michigan need to be cautious in their approach to cannabis supply.
2. Prevent consolidation
Competition is good for all businesses, but too much competition can be harmful. Without limits, no one should be surprised when cannabis companies become unprofitable, which could lead to mass consolidation in the years to come. Michigan’s influx of cannabis providers, if it continues at the current pace, could lead to the same oversaturation Oregon experienced. Without a doubt bigger guys will enter the market and knock out the little guys. Yes, the process technically may be capitalism, but is it really creating a competitive market? No. More correctly, the situation is called commodification. If we allow that to happen, many enterprising, fledgling cannabis businesses will topple or be gutted before they have a chance to reap the rewards of their efforts or contribute to the emerging market in any significant way.
3. Regulate before federal legalization
The licensing issue is a symptom of a much larger issue. It’s impossible not to put a cap on licenses if you’re trying to regulate growth. Take Oregon again: To say the state has an oversupply issue is an understatement. Authorities estimate demand in the adult-use cannabis space is running at just 50 percent of the supply from legal producers. Legalization without the correct regulations will allow only black-market operators to thrive while burdening the emerging legal market. We could end up with the greatest, unpoliced black-market industry in the world, which will severely hinder the legal recreational industry’s growth.
A laissez-faire approach to regulation will result in an explosion of unregulated cannabis oversaturating the market. Now is the time for policymakers to listen to industry leaders and regulate appropriately before federalization opens the floodgates.
4. Curtail the biggest threat
The negative stigma surrounding cannabis no longer poses the greatest threat to operators. That honor now belongs to the black market. The anticipated consumer shift from illicit to legal markets is not happening as fast as many predicted it would. State regulators must start thinking in longer terms. Create regulations and standards that allow safer production and distribution and an overall easier acceptance of compliance requirements. Regulators have an important task beyond enabling legal access to cannabis: They must remain consistent when enforcing industry compliance. This will help new and existing consumers understand the benefit in legal products, further improve education around the market, and facilitate safer, controlled, market-driven expansion.
In December 2019, the first adult-use cannabis stores opened in Michigan. One of the state’s goals was to move cannabis off the black market. But illegal sales haven’t stopped, and licensed stores are having a tough time getting enough cannabis to meet demand. Limiting licenses could alleviate that situation.
Limits could lead to endless possibilities. Without them the industry faces significant, interrelated challenges. The simple act of creating licensing limits will solve one of the aforementioned issues, and the others naturally will improve as well.
Joe Ori has been a trial attorney for more than twenty years and was named an Illinois Super Lawyer for seven consecutive years. He founded what is now Angelini, Ori + Abate Law right out of law school, representing clients with catastrophic personal injury and wrongful death cases. In 2019, Ori turned his passion and advocacy for cannabis into a business, Michigan-based Six Labs.