Michigan Wants Marijuana Moratorium

This was reprinted with permission from Crain’s Detroit and written by Dustin Walsh.

Michigan’s largest marijuana operations are plotting an offensive to stop competitors from entering the market in an attempt to buoy falling weed prices in the state.

At the request of a lobbyist for some of the state’s largest recreational and medical cannabis growers, the Legislative Service Bureau has drawn up new legislation to prohibit the Michigan Cannabis Regulatory Agency from approving new grower licenses, according to draft legislation obtained by Crain’s.

The draft legislation effectively calls for a moratorium on licenses for an as-of-yet undetermined period of time.

“During the period that begins on [Date] and ends on [Date], the cannabis regulatory agency shall not issue a marihuana grower license if issuing the license would result in the total number of marihuana grower licenses that are unexpired exceeding the total number of marijuana grower licenses that are unexpired on [Date],” the legislation reads.

A source close to the matter that asked to remain anonymous said the draft legislation has no legislative sponsors yet but is expected to be introduced after the November election. It’s also unclear whether the language in the draft legislation will make the final bill.

The industry has been battling falling prices for more than a year due to oversupply and limited retail outlets, and investors are getting worried.

As of Aug. 31, the legal industry had nearly 1.5 million marijuana plants growing, compared to just 404,000 a year earlier. The average price of an ounce of marijuana flower in Michigan is down nearly 70 percent in the last 12 months to just $116.84 in August, according to CRA data.

The result is withered margins. There’s simply too much product being grown and processed and not enough places to sell it as municipalities have to opt-in to allow marijuana retailers to operate in their communities. Many have not and Detroit, the state’s largest city, just began taking applications for retail outlets this month.

“Nobody is making a lot of money and many are losing money,” Lance Boldrey, partner at Detroit-based law firm Dykema Gossett PLLC and part of the legal team that designed the legalization framework., told Crain’s in August. “We are seeing a ton of consolidation out of necessity. We expected that as the industry matured, but now that it’s been here a while it’s just tough. We’re starting to see outright business failures. Cannabis (firms) cannot avail themselves in bankruptcy, so we’re going to end up with some of these failing businesses selling for pennies on the dollar if they can be sold at all.”

Marijuana remains a Schedule 1 narcotic under the federal Controlled Substances Act, leaving marijuana businesses without the benefit of protection under U.S. bankruptcy code. Those that can’t flex their muscles in a vertically-integrated manner like large marijuana growers — who also sell direct to their own retail establishments — are faced with returning to their investors for a handout to continue operations or liquidate a product that may have cost more to grow than can be achieved in the market. The result is major losses.

For many growers, it costs roughly $1,500 to produce a pound of marijuana, Andrew Sereno, CEO of Manchester-based marijuana grower Glacier Farms, told Crain’s in an August interview. Current retail prices equal $1,869.44 per pound. That meager profit margin then must cover growing expenses, taxes, fees and distribution — before it can make a profit for retailers.

“Unless you can reach scale and find efficiencies to lower your costs, you’re not going to be able to survive at that margin,” Sereno said. “Many grows can’t even grow at $1,500 a pound.”

So the industry is putting pressure on regulators to tackle competition.

In August, the state’s top regulator Andrew Brisbo departed the role amid rumors top industry players were unhappy with his unwillingness to find ways to limit licenses and be more aggressive against the illicit marijuana market.

The Michigan Cannabis Manufacturers Association issued a statement after the Brisbo announcement directing Gov. Gretchen Whitmer that the next director should be tougher on the illegal market.

“At the MCMA, we stand ready to partner with and support the Whitmer administration and the CRA’s new director in ramping-up enforcement in the regulated market to help ensure consumers have access to safe, quality product,” Mark Fisk, MCMA co-executive director, said in the release. “We look forward to supporting the new CRA director’s efforts to address Michigan’s massive illicit market, which poses an immediate threat to patients and consumers and threatens to destabilize the regulated market.”

Perhaps unsurprisingly, Whitmer earlier this month named former Michigan State Police crime analyst Brian Hanna as the CRA’s acting executive director. He previously spent more than four years at the CRA as an investigations manager before departing in March of this year.

Earlier this month, the CRA held a public hearing about the matter and industry filled the room to support a moratorium. The CRA posed this question for consideration — “Would you support a change in the law to place a moratorium on the issuance of grow licenses? If so, under what conditions? If so, for what period of time?”

“The agency has been hearing concerns that the supply of marijuana produced by licensed growers exceeds, or may soon exceed, consumer demand,” the CRA said in a statement ahead of the hearing. “The concerns include that the wholesale price of flower is lower than the cost of production — or will be when harvests are highest in October.”

So it’s clear the agency is amenable to a moratorium, but the legislation to at least temporarily suspend the state licensing process will be a tough lift. Voters overwhelmingly approved the 2018 ballot proposal to create an unlimited license market in the state, meaning the CRA is required to approve any applicant that meets the state’s standards regardless of how many existing licenses are in the market.

Changing that law would require three-quarters of Michigan legislators to vote in favor of the moratorium. It’s not clear how many legislators would sign on to challenge the will of the voters, but introducing the bill after the upcoming election is likely designed to potentially alleviate those concerns.