Home Business California cannabis market transition period about to end; price spikes, shortages may occur

California cannabis market transition period about to end; price spikes, shortages may occur

California cannabis market transition period about to end; price spikes, shortages may occur
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The end of the beginning is coming. The formal end of the six-month transition period for California’s newly regulated marijuana market, that is – and it could be a bumpy ride for some MJ business owners.

Come July 1, retailers will no longer be able to sell product that hasn’t passed testing lab standards mandated by regulators, which will be a serious shift for many companies and could be a major disruptor for retailers, growers and other businesses, such as edibles manufacturers.

Some retailers in particular could face supply shortages if:

  • They didn’t line up reliable supply chains with distributors that can guarantee product that will pass lab testing standards.
  • They failed to stock up on lab-tested product in advance of July 1.

That, in turn, could lead to some supply shortages and even price spikes.

“If you’re a brand out there and you haven’t been putting in the homework to get ready for this, July is going to be an incredibly rough month,” said Lucas Seymour, co-founder of the distribution firm Old Kai Logistics.

But for others it’s likely going to be business as usual because they’ve been preparing for the change for months, if not years.

“I’d say on a scale of a 1 to 10, it’s impacting us at about a 2 or 3, but that’s because we’ve been working on it for several years,” said Adrian Sedlin, CEO of cultivation company Canndescent.

That’s because Canndescent has been having its product tested by labs, prepped all its packaging to meet July standards and complied with all other regulations that will kick in.

By contrast, a lot of smaller operators probably haven’t had such foresight – or the money to make such preparations – and are likely going to suffer the consequences.

“There are some companies that have been diligently planning against July 1, and there are other companies that, whether they didn’t have the financial luxury or capitalization to deal with that, or just the temperament of, ‘If it comes, I’ll deal with it then,’” Sedlin said.

What’s happening

The California Bureau of Cannabis Control issued a transition fact sheet in recent weeks to help marijuana businesses with their prep work for July 1.

Many industry players were hoping for a delay in the implementation to give them more time to adjust. No such luck.

As of July 1, fully legal cannabis companies in California must:

  • Sell only product that has passed full compliance testing.
  • Ensure that all products are properly packaged and labeled, including child-resistant packaging.
  • Comply with edibles potency limits: 100 milligrams per edibles package, 1,000 milligrams per topical package for recreational cannabis and 2,000 milligrams per topical for medical marijuana patients.

What it means

One of the biggest hurdles for many retailers may be finding product come July that’s fully compliant, because the state currently has only 28 licensed labs and not all are fully up and running.

Lisa Selan, an industry attorney in Los Angeles, believes there will be a shortage of fully compliant product come July, because the handful of labs won’t be able to handle the testing workload.

“You’re close to 20 million square feet of canopy statewide. And if you have to get that tested at 28 different locations … it’s mathematically impossible,” Selan observed.

She and other industry sources also predicted fire sales in June by many retailers, because state regulations allowed for the sale of untested cannabis from 2017 until July 1. (Product harvested or manufactured after Jan. 1, 2018 was still required to be tested by labs.)

“There are many people right now that still have a lot of inventory that they got before Dec. 31,” Selan said.

“People stocked up, they wanted to not pay the cultivation tax … so that product is going to have to be fire saled or destroyed this month.”

There is a mechanism in the regulations for manufacturers or cultivators that also own a distribution company to be able to get untested product to a lab so it can be cleared for legal sale.

But for retailers sitting on product from 2017, they’ll either have to unload it this month or destroy it.

Then retailers will have to start looking for distributors that can get them legal and lab-approved product, which may be in short supply.

Old Kai’s Seymour predicted “the majority of brands and retailers are not ready” for July 1, which means there could be supply shortages and possible price spikes, at least in the short term come next month.

“A lot of my clients are extremely nervous about it, especially retailers, because they’re worried about, ‘How am I going to meet demand?’” Selan said.

Swetha Kaul, the chief scientific officer at Cannalysis Labs in Santa Ana, also agreed that any company not already prepped for July is going to have a rough time. Even her lab isn’t going to be fully built out and ready for testing until a few weeks into July, she said.

“As of July 1, there’s definitely going to be a shortage of labs for compliance testing,” Kaul said. “There’s maybe a handful of labs that have full compliance packages.”

Even those labs that do offer full compliance testing come July 1 likely are going to see their wait times increase dramatically, Seymour and others told Marijuana Business Daily, possibly from one week to three.

That means uncertain wait times for retailers looking to restock, and for edibles makers or growers whose products are awaiting approval.

Those who stand to gain

While there could be major disruptions in the coming months, there are also likely to be some winners – in particular, the ones that did most of the prep work by ensuring their packaging and testing results are compliant, since they won’t have to face a supply-chain interruption.

That’s because they’ll be able to fill shelf space at retail locations that have had to discontinue products – at least temporarily – that are unavailable because they can’t immediately meet testing or labeling requirements.

“There’s a small percentage of the industry that is ready and poised for some gains,” said Old Kai’s Seymour.

For companies that have all of their ducks in a row – whether those companies are growers, edibles makers, retailers, or another type of plant-touching business – July and August are likely to provide them with major opportunities to make inroads with customers as their unprepared competitors struggle to stay afloat.

“We’ve been preparing for this for a long time,” said Dennis O’Malley, the president of San Jose retailer Caliva. “What the regulations are doing, I think, are not affecting many of the well-established producers out there.”

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