Licensing, News

LCB Producer License Roll-Back May Encourage Black Market Growers

The restriction of Production licenses to one-per-entity will prevent growers from leveraging economies of scale in production and business management, putting further downward pressure on Producers’ profitability. At some point, the balance of Costs and Benefits associated with “going legit” will, unfortunately, tip back toward continued illegal operation.

Michael Corleone: Just when I thought I was out… they pull me back in.

The Washington State Liquor Control Board (LCB) recently decided to reduce the number of licenses any entity can initially obtain from 3 to 1 AND reduced the allotment of square footage under any license to 70% of the requested volume. Production enterprises that were previously planning for grows approaching 90,000 square feet of plant canopy (three Tier 3 licenses of 30,000 square feet each) are now restricted to growing no more than 21,000 square feet (70% of 1 Tier 3 license allotment).

Current large scale cannabis growers–either gray market “collective gardens” or black market participants–might have seen producer licensing as an opportunity to “go legit” while continuing to do what they’ve proven very successful at doing. The benefits of becoming a licensed enterprise are clear. Licensed enterprises need no longer fear state law enforcement intervention and they can openly and securely rely on enforceable contracts. For many experienced producers, the benefits of building legal large-scale operations outweigh the costs associated with regulation (i.e., excise taxes, compliance with LCB regulations, compliance with the general requirements to conduct a business in Washington state, etc.). Still, that advantage may be waning, as many growers are becoming concerned about the impact of excise taxes on the sale price (and therefore, profit margin) of regulated cannabis. The LCB’s extreme reduction of the available production volume will prevent growers from leveraging economies of scale in overhead and build-out costs, which will create downward pressure on producers’ profitability.

At some point, the balance of costs and benefits associated with “going legit” will be such that some hesitant-to-emerge growers may retreat back into the shadows of unlicensed, unregulated (i.e., illegal) production.

In other words, we fear that the LCB’s solution to the “over-subscription” problem may have significant unintended consequences as the legal cannabis industry unfolds in Washington. There’s been plenty of attention to the impact the solution will have on producers’ business plans, but the LCB’s decision may have a hidden consequence as well: the re-entrenchment of black-market growers, whose continued operations will pose a significant threat to the competitive ability of legal producers and to the overall success of Washington’s legal cannabis regime.

The success of Washington’s regulated marketplace rests heavily on encouraging the most skilled, most experienced, and most business-savvy growers to give up their highly profitable but illegal operations in favor of participating in Washington’s sustainable and secure legal marketplace. The strength and health of Washington’s legal cannabis industry also requires weakening black market competition. The LCB’s recent move may have the opposite effect.

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