Small Cannabis Farms Face Daunting Future

For almost seven years, David Drips has weathered a variety of obstacles to make his Petaluma Hill Farms viable to grow legal cannabis.

There has been licensing red tape from Sonoma County, where he has not received his final permit and can only grow less than a half-acre though he could farm twice that amount.

When he looks over his shoulder, he worries about Big Weed competitors backed by tons of investors’ money so they can play the long game. Meanwhile, he scrapes by with major expenses, such as his annual land lease at $120,000 a year.

There are other costs in the highly regulated pot market that require distribution and product testing, notably the state cultivation tax that was raised last year to $154 per pound of dried flower.

The numbers add up. A co-owner, Drips has been in debt as much as $750,000, which brought on depression and factored in a divorce.

Now, he faces his biggest battle yet, as wholesale marijuana prices for the upcoming fall harvest are expected to drop by as much as half. That scenario has many North Coast farmers fearing for their future and the likelihood that some may not make it.

“It’s been a struggle to keep mental clarity and focus,” said Drips, a 41-year-old Navy veteran and former contractor who smokes weed to help ease his seizures from epilepsy.

“I was hoping that I should be above water this year finally based on projections of normal pricing. I don’t know ... we still might be in debt after this year.”

Small Northern California cannabis growers are uneasy as the anticipated price drop will have significant economic effects throughout the region and may put some of them out of business. It’s another curveball in an industry still in its infancy as the product becomes increasingly mainstream.

The North Coast region produces the most prized and expensive cannabis in the world with the counties of Mendocino, Humboldt and Trinity being part of the famed Emerald Triangle.

Meanwhile, Sonoma County is home to key processing and testing sites to turn the weed into such products as pre-rolled joints, oils and lotions, as well as edibles and drinks.

Through June this year, California generated $2.5 billion in sales of cannabis products sold through licensed dispensaries with more than $52 million coming from Sonoma County, according to the state Department of Tax and Feed Administration.

“This year looks pretty scary with some of the prices that I've been hearing,” said Mike Benziger, owner of GlenTucky Family Farm in the Sonoma Valley.

In past years, he noted, premium marijuana in the region has sold for as much as $2,000 a pound. But such weed may only fetch between $600 to $700 this fall.

“It's pretty disheartening for small growers, because you're starting to get close to the cost of production,” said Benziger, whose family ran Benziger Family Winery until they sold it in 2015. He later transitioned into growing cannabis and specialty fruits and vegetables.

The simple reason for the crash in prices is supply and demand, especially as large growers from less-restrictive areas such as Monterey and Santa Barbara counties have flooded the California legal market with their weed, according to growers and industry officials.

Cannabis farmers first became aware of the issue when there was not the typical uptick in prices in the spring, when there is no fresh marijuana to buy on the market. That problem was compounded in June when some growers brought their fresh weed to the wholesale market that was harvested through a light deprivation technique — known as “light dep” — that triggers the flowering phase much earlier in the cycle.

That weed comes before the fall harvest and typically sets the stage for what to expect later in the year. Current prices are still slumping because of the overall glut.

“It became clear that this was a crisis coming into focus with this year’s light-dep harvest,” said Hezekiah Allen, the former head of the California Growers Association who now lobbies for the sector.

Allen noted that many small growers had saved cannabis from the 2020 harvest that they now can’t unload either, making the situation more problematic.

“When you’re still holding onto product from last year and people are starting to harvest new fresh product, there’s a problem,” Allen said.

To make matters worse, the illegal pot market in California still thrives at an estimated value of two to three times larger than the legal market, and it offers even more profit to small growers who still can operate in the black market.

The wholesale price reduction comes as small cannabis growers increasingly feel let down in the aftermath of Proposition 64. That was the 2016 ballot initiative legalizing the recreational use of marijuana and established a new state regulatory system intended to finally bring cannabis growers out of the shadows and put them on par with other agricultural crops.

“We didn’t think it was going to be this bad,” said Ben Blake, co-founder of Esensia, which has farmed premium cannabis on a quarter-acre plot in Mendocino County for 15 years. “This is kind of a last battle for these growers.”

There were warnings throughout the years, especially in this region that has grown some of the best cannabis strains through the decades in a microclimate suited perfectly for the crop.

North Coast marijuana eventually gained a prestige similar to Napa Valley and its wine. That occurred when then-Lt. Gov. Gavin Newsom stopped by to meet with small cannabis farmers in Garberville in 2015, as he pitched passage of Prop. 64 as part of his quest for the governor’s office.

Those growers expressed their fears with one telling him: “I don’t have millions of dollars. Make it viable for all of us.”

A key moment came in 2017 when the state Department of Food and Agriculture scrapped a proposal to place a 1-acre cap on cannabis farms and issued regulations that opened the door to large-scale cultivation.

Local governments in California have the final say on the size and scope of cannabis farms and businesses. Some, such as Napa County, have fought against any significant cannabis-growing sector, while others have opened their areas more to the sector.

That includes Lake County, where Santa Rosa-based CannaCraft has its Kindness Farms on more than 100 acres that allows the processor to grow more than 40,000 plants.

There were 6,235 cannabis cultivation licenses in the state last year, with Humboldt County having the largest number, followed by Santa Barbara and then Mendocino counties. The latter has about 1,100.

Additionally, growers also noted the cultivation tax makes it harder to compete, when tacked onto other charges when cannabis eventually lands at the retail market. In past years, the tax would be around 10% of the revenue for regional growers. But with depressed prices, that percentage will go up much higher.

“Value is being extracted along the way by taxes and packaging and testing. And all of these regulatory costs that have been added onto the product is taking value out of the supply chain, so that the amount of value that farmers can get has plummeted,” said Allen of the state growers’ association.

Allen and others are asking for a suspension in cultivation taxes this year to help small farmers get through. But any reduction would affect state revenues as California took in more than $1 billion in overall state excise, cultivation and sales taxes in 2020 from cannabis.

A 2019 report from the state’s Legislative Analyst’s Office noted the trade-off.

“On one hand, for example, reducing the tax rate would expand the legal market and reduce the size of the (illegal) market. On the other hand, such a tax cut would reduce revenue in the short term, potentially to the extent that revenue could be considered insufficient,” according to the report.

Nicole Elliott, director of the California Department of Cannabis Control, said in a statement her newly formed agency was committed to helping small cannabis businesses and noted Gov. Newsom has allocated $100 million in grants to help small cultivators who “often have unique regulatory needs.”

Coincidentally, the wholesale price drop comes just as the movement for cannabis legalization is the furthest along it has ever been in Congress, making federal repeal not a question of if it happens, only when.

Senate Majority Leader Charles Schumer of New York has sponsored legislation that would remove all federal prohibitions on marijuana, and the House has passed a bill that would stop federal bank regulators from penalizing banks that work with cannabis-related businesses, which would make accessing capital much easier for these farmers.

Thirty-six states allow weed for medical use, while 18 states permit recreational use.

Small growers said if they were able to sell their prized crop across state lines or even directly to consumers like other crops, they would be able to have a sustainable business for the future.

“It’s just been snuffed out by a thousand cuts,” Esensia’s Blake said.

In past years, a pound of premium cannabis could sell wholesale after taxes from $1,000 to $1,500 per pound, he said. It will be much less for 2021 and could go as low as $700 per pound, though Blake said, “no one really knows for this fall.”

Blake said on some farms, “some (weed) may not be sold for any price.”

Esensia should be well-positioned as Blake thinks he has a good strategy: He built his brand name in the marketplace; worked closely with local retailers, such as Sebastopol’s Solful; and developed the company’s own top-shelf strains that it can sell to other cannabis farms.

“It’s going to be a real test,” he said. “I think we have built the ship strong enough.”