How Will Washington State Provide Marijuana for Its Medical Market?

Washington State MarijuanaIn December, the Washington State Liquor and Cannabis Board (LCB) announced it would increase the number of retail stores in Washington from 334 to 556 as part of its implementation of the Cannabis Patient Protection Act (CPPA), which mandates that the LCB regulate medical marijuana in addition to recreational marijuana. Starting this July, medical marijuana will be sold at retail stores that have a Washington State medical marijuana endorsement. The LCB increased the number of retail stores to ensure patients would have access to medical marijuana. It is clear that the demand for marijuana has increased with the passing of the CPPA and will increase further with the addition of 222 retail stores. It is unclear though how, exactly, the LCB will ensure sufficient supply to meet this demand.

Washington has a closed marijuana marketplace, meaning legal marijuana never enters or exits the market other than from the licensees that produce and sell it. WAC 314-55 dictates that licensed marijuana businesses may only sell marijuana to other licensed marijuana businesses until a licensed retail store sells that marijuana to a consumer. Now that the LCB has increased the number of retail stores in Washington State, its likely next step will be making sure that producers and processors can meet the demand posed by the increased number of storefronts.

What we know. Over time, the LCB has adjusted the amount of marijuana that can be grown state-wide. In February 2014, the LCB determined that producer licensees could only operate one marijuana production license (as opposed to the maximum of three licenses allowed by law) and that producers were also limited to growing only 70% of their total production capacity. Nonetheless, in September 2015, the LCB issued emergency rules that increased canopy space from 2.5 to unlimited square feet statewide (but the emergency rules state that the LCB may set a canopy cap at a future date if it sees fit to do so). And the LCB now allows producers to grow 100% of their total growing capacity. Still, the LCB has not allowed producers to invoke their other production licenses that have been on hold since 2014.

The LCB’s website contains the following language on how the CPPA impacts the expansion of canopy space:

  • Licensed producers must state whether they intend to produce marijuana for retailers with a medical marijuana endorsement, and the amount/percentage of canopy space to be committed to growing plants for medicinal marijuana (including marijuana concentrates, usable marijuana and marijuana-infused products).
  • The CPPA directs the LCB to reconsider canopy space limits for production of marijuana, and increase the percentage of space for producers who intend to grow plants for medicinal marijuana.
  • If current marijuana producers do not utilize all the canopy space, the LCB can re-open the licensing period for marijuana producers intending to grow plants for medicinal marijuana.

What happens next. The LCB can likely address the supply issue through two different methods: (1) grant additional producer licenses, or (2) allow existing producers to grow more marijuana (probably by allowing them to invoke their second and third licenses that have been in abatement since February 2014). The LCB has already begun using the second method by allowing producers to go from 70% to 100% of operational capacity. However, there’s a chance there could be another producer license application window where the LCB may accept applications for producers if the full canopy space is not utilized.

Both methods have advantages and disadvantages. Additional licenses would allow for new businesses to emerge and operate in the cannabis industry. Reopening the producer license window could also allow growers who once ran MMJ dispensaries (which will all shut down on July 1 of this year) to ply their trade by coming into the regulated marijuana marketplace. On the other hand, allowing existing producers to take over the additional medical market would allow those business owners who already have experience growing marijuana under the LCB’s regulated regime to expand.

Bottomline. Industry stakeholders should keep a close eye on how the LCB deals with these canopy issues. Marijuana production  is going to continue to expand in Washington, and the big question is who will benefit most from that growth. Will it be the existing producers who will have many new retail stores to which they can sell their cannabis? Or will it be new producer licensees who will get to try their hand at running a licensed production facility? We expect the LCB to act in the next few months once it fully wraps up the recent round of retail applications. Addressing the production issue is the logical next step in preparing for the full implementation of the CPPA on July 1, 2016.