Blunt economics: Is a strong local cannabis industry viable?

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The Sonoma County cannabis industry is continuing to falter despite a recent cut to local cultivation taxes which, experts say, is outweighed by the longstanding challenges facing the industry.

“Is it a lifesaver? The answer is ‘no,’” says Robert Eyler, a professor of economics at Sonoma State University. The 45% tax reduction in April “is good in that it does reduce the cost of cultivation. But it’s still a very, very hard market in which to stay afloat.”

A plethora of problems—a supply glut, taxes, competition, onerous regulations, resident resistance—plagues the industry, says Eyler, who conducted a study of the economic impacts of cannabis on North Coast county economies in 2023.

“There is more supply than demand and it’s forced a reduction in prices that may not be economically viable for small producers,” Eyler says.

The chief executive of a nonprofit focused on small North Bay cannabis farmers seems to agree.

“In 2018 at the dawn of legalization, a pound of [outdoor-grown] cannabis was selling for around $2,000 wholesale and now it’s selling for $300 a pound, which is the cost of production,” says Genine Coleman, the chief executive of Origins Council.

Recreational cannabis was legalized in California in 2016 with the passage of Proposition 64. Starting on Jan. 1, 2018, the sale and taxation of recreational marijuana that was set in place by Prop. 64 became effective.

Competition is another challenge facing the industry. Since illicit cannabis operators don’t pay legally required taxes and fees, they can undercut legitimate operators in price, giving them an unfair advantage.

Illegal operations are not the only competition faced by Sonoma County cannabis businesses, says Coleman, whose organization is a California 501(c)(4) nonprofit advocating for independently operated small farmers cultivating half an acre or less.

For decades, the so-called Emerald Triangle—the cannabis-heavy counties of Humboldt, Mendocino and Trinity—was nationally known as the center of California cannabis. Sonoma County served as a kind of gateway to those counties.

For decades, the so-called Emerald Triangle—the cannabis-heavy counties of Humboldt, Mendocino and Trinity—was nationally known as the center of California cannabis.

“In 2018, at the dawn of legalization, big corporations with a lot of money invested in Santa Barbara County and now Ventura,” a seismic shift that hit Northern California cannabis businesses with unexpected competition, Coleman says.

These competitors have ample capital and can utilize economies of scale not available to the mom-and-pop growers Coleman represents.

Another factor: State, county and local taxes have long driven up the cost of doing business, cutting into profit margins. A new state excise tax increase scheduled to kick in July 1, exacerbates the problem.

“The excise tax increase up to 19% starting July 1, 2025 would likely reduce the size of the licensed cannabis market,” says Seth Kerstein of California’s Legislative Analyst’s Office.

The nonpartisan office has provided fiscal and policy advice to the legislature for the past 75 years.

“The increase would raise prices by around 4%,” Kerstein says. “The metric we tend to think of in this context of forecasting tax revenue is a tax that’s a percentage of the retail sales, so we think about it is in terms of what effect it would have on the total number of retail sales,” Kerstein says.

Genine Coleman, chief executive of Origins Council.

Coleman adds, “We’re already struggling to have consumers purchase in licensed dispensaries when there’s a lot of unlicensed choices out there. This will drive even more businesses out of the market.”

‘The regulatory nightmare’

Next to taxes, regulations are some of the most daunting challenges the North Bay—and statewide—cannabis industry faces.

Applicants face literally years of paperwork, fees, back-and-forth with officials, delays and frustration, Coleman says.

“It has taken some people as long as 10 years to get set up,” Coleman says.

The regulatory nightmare doesn’t stop there, according to Robin Goldstein, director of the Cannabis Economics Group and a UC Davis economist in the Department of Agricultural and Resource Economics.

Once a grower finally gets going, “Every cannabis plant has to be tagged with its own RFID tag,” Goldstein says, referring to Radio-Frequency Identification, which tracks objects. “You have to enter it into the track and trace system every time you transfer from the farm into a batch that’s going to be packaged and it moves through the supply chain you have to enter every minute detail.

“Cannabis businesses across the street have to hire dedicated employees and have high labor costs,” Goldstein says. “There are safety and health regulations in all industries but there is no other agricultural industry where you have to track the origin of every plant back to where it came from.”

Also, “Basically, the state requires that every single cannabis project be subject to the California Environmental Quality Act,” Coleman says, referring to environmental review of outdoor cultivation. Many such projects are legacy projects, meaning they either were operating illegally or operating as medicinal products for years.

“Normally under CEQA if you have a parcel that already has been cultivated, you are mitigating environmental impacts. But the state ignored that and is basically treating everything like a brand-new development project,” Coleman says.

Neighbors raise concerns

Cannabis cultivation projects have been subjected to a higher level of discretionary review, which also invites more engagement from neighbors, she says.

Along those lines, some residents have formed the Neighborhood Coalition of Sonoma County, a 501(c)(3) nonprofit that has a website, an email list, a newsletter and a blog. Its members attend county government meetings, write letters to the editor and elected officials and otherwise advocate for their goals, which include excluding cannabis cultivation from certain areas.

One of its most active members is Craig Harrison, a resident of Santa Rosa’s Bennett Valley neighborhood who acts as a representative of Bennett Valley Citizens for Safe Development.

Harrison, a retired attorney, says he would like Bennett Valley and about half a dozen other areas in the county to be deemed exclusion zones where cannabis could not be grown outdoors.

Harrison says the group’s concerns include water supply and odor.

“We’re in a Zone Three water supply here. Groundwater is limited, and cannabis is a thirsty crop, so we have some concerns about that,” says Harrison.

Harrison’s assessment of cannabis as “thirsty” is shared by some, but not all, in the field.

According to a UC Berkeley adjunct professor whose work explores the effects of water management activities on freshwater ecosystems, “our research hasn’t found cannabis to be particularly thirsty relative to other crops,” says Ted Grantham in a 2021 blog post by the Public Policy Institute of California.

“Legal outdoor production uses about the same amount of water as a crop like tomatoes,” says Van Butsic, an adjunct fellow at the institute’s Water Policy Center.

Harrison says, “We also have Matanzas Creek going through our valley and it’s got five threatened or endangered species in it. When is the water used the most? August and September when the water level is at its lowest, which challenges the creatures living in the creek.”

According to the county’s draft environmental impact study released in May, if federally protected wetlands or other waters are present and fill of any state or federally protected wetlands would result from implementation of the project, then a buffer of 100 feet around these features will be required.

If the project can’t be redesigned to avoid all federally protected wetlands and other waters, then the application will be denied.

Another concern is odor, Harrison says.

“The things you are smelling are terpenes, and there’s one in particular called beta myrcene, and the state considers it to be a carcinogen,” Harrison says.

According to a December 2024 newsletter from the Neighborhood Coalition, “Cannabis—An Imminent Threat to Our Bucolic County,” proposed changes to the county’s cannabis ordinance shrinking minimum lot sizes to 5 acres “means the stench from outdoor grows will be unavoidable and intense. …spewing airborne carcinogens into our unprotected neighborhoods and homes.”

“It’s a health problem,” Harrison says.

As part of the draft environmental impact study, Sonoma County commissioned Trinity Consultants to perform a study of the potential impacts of beta myrcene.

Based on the work performed in the study, “which was developed by experts that relied on substantial evidence (i.e., scientific research), emissions of beta myrcene would not be at a concentration high enough to cause the community harms related to pharmacological and other adverse effects (e.g., sneezing, itching, nasal congestion and irritation, drowsiness, moderate skin and eye irritations).”

The report concluded, “Therefore, with reliance on data and analysis based on scientific evidence, the general public would not experience adverse health effects due to exposure to beta myrcene emissions from an outdoor cannabis cultivation site that could be allowed under the proposed Cannabis Program Update.”

Aside from the issue of health effects, there’s no doubt the odor is offensive to some.

Sonoma County’s interim health officer noted, “While current research doesn’t definitively show that beta-myrcene or other chemicals from a cannabis farm are harmful to nearby residents, the odor can certainly be bothersome to neighbors, and that’s an important consideration.”

The study, which will guide the development of a revised cannabis ordinance, proposes mitigation measures to offset the odor.

The report calls for structures containing cannabis to be equipped with filtration and ventilation systems to control odors, humidity and mold, except for structures containing only prepackaged cannabis products.

“The air filtration systems are to be sufficient to prevent internal odors from being emitted externally and must rely on activated carbon filtration, negative ion generation, ozone generation, or other odor control mechanisms demonstrated to achieve the same odor reductions so that odors are not detectable outside the structure,” according to the report.

Another concern expressed by the Neighborhood Coalition is aesthetic. “Don’t take up our ag land and mess up our scenic corridors with white plastic hoop houses everywhere,” Harrison says, about the covered structures for growing plants.

The draft environmental impact report proposes as mitigation that if a hoop house is visible from a public vantage point, any covering must be non-reflective; weed block materials shall be made of non-reflective and non-plastic materials; and installation of solid fencing, such as wood, masonry and chain link covered with privacy cloth, is prohibited within County-designated scenic landscapes, scenic corridors and community separators.

The draft environmental impact report contains a number of changes the county is proposing to its cannabis program. The report proposes making operational and zoning changes and removing caps on the number of businesses that can operate in the unincorporated area of the county.

Is a strong, local cannabis industry viable?

One of the biggest updates being considered would be designating cannabis as “controlled agriculture,” rather than a controlled substance, which would allow for expanded land use and other regulatory relaxations.

Sonoma County is contemplating the changes in hopes of stabilizing the industry, though by now it seems likely that the vast riches from cannabis tax revenue that municipalities were envisioning when it became legal in California will never materialize.

Given the weight of regulations, supply glut, taxes, competition and resistance from neighbors, it’s hard not to wonder whether the Sonoma County cannabis industry will collapse under the weight of all the obstacles. The number of cultivators has plummeted from 155 in May 2023 to a mere 66.

One relatively positive note seems to be that this fiscal year’s “taxable canopy,” or cannabis crop, is similar to that of the fiscal year 2023-24, McCall Miller, the county’s cannabis program coordinator, said in an April report to the Sonoma County Board of Supervisors.

Miller said this suggests that the market is stabilizing. Outdoor cultivation is about the same as last year at around 13 acres in unincorporated Sonoma County.

Eyler says, “I wouldn’t say it’s a dying industry, because the demand is still there.”

Echoing Eyler’s comment, Coleman says, “One thing I can say with confidence is the consumer base is never going away. There will always be demand.”

She points to the tenacity of the business owners as another major asset.

“I think the severe challenges with getting licensed means those who have made it this far are strong, determined people,” Coleman says.

Also, she adds, “Our organization’s mission is sustainable rural economic development. We’re not interested in large-scale production; we’re interested in craft production.”

Along those lines, Goldstein says, “I think there is and will continue to be a market for local artisanal product, just as there is for craft beer or vegetables you buy at the farmers market.”

Robin Goldstein, director of the Cannabis Economics Group and a UC Davis economist in the Department of Agricultural and Resource Economics.

The challenge is that it’s a smaller part of the market, the UC Davis economist says. Craft products made locally are more expensive and more costly to produce, so they will cater to a small audience of wealthy people.

“That market will continue to exist, but to be realistic, if a lot of brands are competing for that segment, there’s going to be a lot of winners and losers,” Goldstein says.

Goldstein notes that California and Sonoma County have reputations as high-quality places that grow some of the world’s best cannabis.

“In the future when we have national legalization and even international trade, California growers will have opportunities to export their cannabis to other places that place a premium on weed that comes from Sonoma County, just as they do on Sonoma County wine,” Goldstein says.

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