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San Diego Cannabis Growers Grappling With A Changing Marijuana Market

As more growers enter the cannabis cultivation business in California business are getting ready for a changing market.

Show transcript

Speaker 1: 00:00 Now that marijuana is legal in California, the economic realities of growing cannabis are changing. KPBS reporter Matt Hoffman tells us how growers in San Diego are trying to meet the demands of a new market.

Speaker 2: 00:14 Well, that's a good one. I mean, obviously there are a lot of questions. What strain is it? You know, what's the flavor going to be and so forth. But in Lincoln, fish is CEO of out colabs in east county, which grows hundreds of cannabis plants at a time. OUTCO isn't your typical cannabis business. It grows manufacturers and sales, cannabis products at its own dispensary's Outco also wholesales cannabis to retailers across southern California. We sell the 60 dispensary's plus. We'll be in over 200 by the end of the year. OUTCO has its own line of products including concentrates and vapes. Items that fish says are growing in demand. As you get new entrants to the market, they typically go to concentrates that go to vapes or other concentrated products or they go to edibles. That's, that's the direction that they're going to go. You're not going to create people who didn't smoke before and suddenly going to take up smoking because cannabis became legal, you know, and we're seeing that we're seeing the flower as a percentage of the total sales.

Speaker 2: 01:04 We're seeing that drop. So what you're gonna see is a lot of plants that are grown to maximize how they might come out in an extraction. For example, growing cannabis indoors allows for a higher quality product, but it's expensive. You're basically creating a natural environment in a highly controlled way. There's lighting, air circulation, filtering, water pest and labor considerations. Fish believes as more growers come in, the cannabis growing process will change. I think we're going to see a lot of price compression to grow indoors. And you'll hear different numbers from different people, but let's call it between five and $600 a pound. Is your cost to grow, to grow in a, uh, sophisticated light deprivation, light supplementation, greenhouse, where are you using the power of the sun is more like $250 a pound. Right? Um, I think that's the future of the industry.

Speaker 3: 01:49 [inaudible]

Speaker 2: 01:55 houses or how Mike Mulatto plants to grow cannabis where we will have hard walls, clear roof, uh, light deprivation. So we'll be able to block out the light completely. Well, I know his family owns and operates a flower farm in Oceanside. Two years ago Malano left his position as CEO to pursue growing cannabis. I just saw it as an opportunity that I don't think we'll see. Again, it's just a brand new industry and it intrigued me. It interested me. There's way more gross margin and cannabis than there is in couple of hours. Well, I know has been in the agriculture business for most of his life and says cannabis is just another crop. I have a background of running large scale ag operations, right? Cultivation of cannabis is just an ag operation, right? The fact that we're growing the taboo plant of cannabis is irrelevant. You just said it's the environmental controls, pest control, pest management, process management, labor managers,

Speaker 3: 02:51 man

Speaker 2: 02:53 taken two years, but Mulatto just received the permit from the city of Oceanside to start growing cannabis. It's been a challenge to, to work through the political process of all this. Now he faces a state licensing process. Belato says it's a huge investment to start a cannabis growing operation. I think it's really difficult for a smaller, uh, group that just wants to jump in now or just an individual's like, hey, I want to grow cannabis. I'm like, okay, well do you have seven or 8 million laying around to get it done? Or do you have a year or two to do the political process? It's when you start asking the questions around what it actually takes a good luck [inaudible] got to keep the air circulating. The air circulating helps really keep the plants healthy out. Coast fish agrees. He says the cannabis industry isn't the cash cow it's made out to be.

Speaker 2: 03:36 It's far more difficult to make money in cannabis than most people realize and ultimately it's going to be just like any other business in terms of, in terms of you have to, you know, you have to do things efficiently. You have to watch your margins. You have to, you know, create a, a real business infrastructure. Then there's the whole issue of competing with the black market. Illegal grows aren't under any regulation and are avoiding taxes that legal operators face. I'm happy to pay those taxes. I'm all for it, but it's gotta be, it's got to coincide with making it more difficult for the other guy. The problem with that whole black market pieces, they're using stuff all over the place where they're making products that don't care about things like how much lead is in a vape cartridge or you know what, what the pesticides when they wouldn't, they just don't care. Fish says he hasn't seen a lot of enforcement from the state on cannabis. Just recently, California found it received lower tax revenue than originally projected free assess to see that revenue grow illegal operators need to be shut down.

Speaker 1: 04:35 Joining me is KPBS reporter Matt Hoffman. Matt, welcome. Thanks Maureen. You know you say California received less tax revenue from cannabis sales than it was expecting. How much less.

Speaker 4: 04:47 So the, the canvas excise tax was forecast to generate $288 million in 2018, 2019 and another 359,000,020 19 and 20. Now that's a combined 223 million less than originally projected. Now, if you ask the governor or the state why that is, they say that's because there's some cities and counties that are not allowing for the sales or cultivation of canvas. So they're missing out on that revenue. There

Speaker 1: 05:10 are the entrepreneurs that you spoke with making less money than they expected to.

Speaker 4: 05:14 You know, the one I talked to, um, outco of the CEO says, you know, every legal operated will tell you that they're hurting because of the black market. Um, it's unclear. You know what exactly that hurt is. I mean, it seems like they're still making money. Um, but just that black market, you know, they don't have to follow these regulations. They don't have to pay taxes. It's severely undercutting, uh, the legal market, especially when the canvas products are so much cheaper.

Speaker 1: 05:35 So how big a problem is this? I saw last week in the news authorities say three men were injured when a cannabis growing operation in a mere Mesa home caught fire. Are there any estimates on how many on authorize black market growers there are in San Diego?

Speaker 4: 05:52 We talked about black market growers. You know, I don't really think that there's an estimate for that. I mean they have these rates like that happen. That incident happened, there was that big fire. Then all of a sudden they found this one. I hear that it's a lot up in northern California, like up in humble, there's a lot of outdoor illegal grows, but it's not as prevalent as you would say. Like an illegal dispensary. Like where you see them. Like you go down to Chula Vista and you see them literally right there on the street. Um, these black market grows. They seem like they're more, you know, trying to keep way off the radar and they don't want anyone to know what they're doing.

Speaker 1: 06:20 Um, tell us a little bit more specifically about why they can sell for less. Is it because their overhead is really sort of a fraction of the legal growers? Is that right?

Speaker 4: 06:29 It, it's, it's, it's a few things really. I mean, the CEO that we talked to have outco Lincoln Fish. He says they cannot use certain pesticides. Um, when they do their, grows these black market people, they can do whatever they want. I mean, you don't know what, what exactly is going into the cannabis that you buy from them. That's one piece of it. Also the sales tax, I mean they, these guys have to pay state and local tax when they grow, when they sell these illegal growers that they don't have to pay at literally any, any tax. Um, and it's also an interesting note. I mean, uh, outco they have two dispensary's their medical only, um, the average age of their customers, 58 years old. Um, so that's, you know, that's kind of a telling thing. Or another girl we talked to WHO's hoping to start growing operation up in ocean side says he thinks that a lot of younger people are getting their weed or their cannabis from the black market so that they aren't paying high dollar and it shows at least to the medical side, the average age of the customer is 58 years old.

Speaker 1: 07:22 How has the state supposed to monitor illegal marijuana? Okay.

Speaker 4: 07:25 Variations, right. I mean, so there's, there's three state agencies that oversee all of the legal cannabis in California. They're supposed to be doing enforcement, whether it's on grows, whether it's on retail sales or what have you. But California Governor Gavin Newsom, we had a chance to talk to them last Friday. You know, he says that the state relies heavily on its partner agencies. So that's county law enforcement, city police. They rely heavily on them to do some enforcement. They say they want to see that enforcement step up. But there's also something called track and trace, which the state has implemented, but just not a lot of, uh, cannabis businesses are using that right now. And basically track and trace is supposed to um, help, uh, basically, you know, for when you grow a plant to when it winds up on the shelf, you know exactly where it came from. Um, and the goal of that is to reduce getting some illegal product on a shelf. We had a chance to ask, uh, the governor about that last Friday and he says that to get the whole legal system at this speed, it's gonna take a while.

Speaker 1: 08:17 I just got here, I'm inheriting this, we're going to fix this and it's going to take five to seven years. I've said this for the last two years. I said, everyone be patient here. No one is patient. No one is patient because their, their business is being undermined,

Speaker 4: 08:32 right? Yeah. I mean if you talk to guys like the management over at Outco, you know, they say, hey, we haven't seen a lot of enforcement. If any enforcement on, on the legal grows. Um, sometimes if you say, hey, there's an illegal dispensary over here, it'll take a month. They say to eventually go in and shut them down. So the State California Governor Gavin Newsome, he says he's working on and he said that he promises that there is going to be more enforcement on this. Um, I guess that's going to be yet to be seen though. Now the CEO of Outco says there are not a lot of new marijuana smokers, even though it's legal, but what kinds of cannabis products are they using instead? Right, so we're talking about vapes and concentrates. These are things that come from plants where you don't necessarily have to have the highest quality bud outco.

Speaker 4: 09:13 They'd grow cannabis, they grow hundreds of plants at a time and they have some that they use where they sell the actual flower, the bud, and then they do. But a lot more in concentrated as you heard in the story. And basically they say they only sell that the top bud, the highest quality bud that you're able to get. And he said that they're gonna start growing plants because they're seeing a trend in the market where people are buying a lot more concentrated and a lot more vapes than they are flowers, at least on the medical side. For them. And so they're going to start growing plants that maximize the amount, um, of, of like vapor amount, amount of juice that they can get out of it. Um, and it's just, it's a different process where they have to extract the juice in terms of, instead of just cutting the bud and using the buds.

Speaker 4: 09:49 Now I understand it was difficult for you to find legal cannabis growers who we talk with you. Yeah. Um, you know, we, we sit on the story a few months ago and we put out a lot of feelers. Just really didn't hear back from a lot of people. Um, had to rely on some other contexts that had worked in the PR business to kind of get us in. And we talked to a couple of dispensaries that we'd done stories with in the past who said, hey, try this person died, this person. So it's just hard to find those businesses. I mean, they're not, you know, most of them outco being the, one of the exceptions here locally, they don't really have a strong web presence. You know, they don't say, here's our website, here's where we're located. Come by and say hi. Um, I think a lot of them want to stay kind of in the shadows.

Speaker 4: 10:26 You know, there's various reasons for why that could possibly be, but I don't think a lot of them want to say like, Hey, we had this big warehouse and put a sign outside saying we're growing cannabis perhaps because it's still a cash business. Right? Yeah. It is a cash business, especially on the retail side. I'm not sure exactly how the growers handle that, but yeah, definitely on the retail side it is still a cash business. Another thing that to touch on as well too, um, when we talk about growing cannabis in general, outkast fish, the CEO, he said it pretty well. Um, he says, you know, the market's changing and he's the, he thinks that indoor cannabis growers aren't just going to be feasible to do. It's so expensive to replicate basically outdoor environment and the highly controlled way, and he thinks that it's going to be a lot more of these, like greenhouse kind of grows where they can grow it for cheaper and sell it for, you know, a little bit cheaper as well. He thinks that is going to be the future of cannabis. I've been speaking with KPBS reporter Matt Hoffman. Matt. Thank you. Thanks Maureen.

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Maureen Cavanaugh and Jade Hindmon host KPBS Midday Edition, a daily radio news magazine keeping San Diego in the know on everything from politics to the arts.