Brothers (and Sisters) in Farms: The Pros and Cons of Joining a California Cannabis Cultivation Cooperative

Our firm’s cannabis practice group represents licensed cannabis cultivators of all sizes, ranging from the small artisanal grower to the medium/large farm with a country farmhouse to the mega farm jumbo operation. Common problems permeate cannabis cultivation operations of any size in this state: California’s cannabis taxes are high; traditional financing is unavailable; licensing and environmental compliance fees are burdensome; and the black market is still too strong a competitor. However, those challenges hit the little guys much harder, which is why we see stories about legacy farmers being forced out of business or back underground because they’re just unable to compete in the regulated environment. Then came the new emergency state regulations, which paved the way even more for mega farms through a loophole that allowed growers to “stack” small cultivation licenses to get around the 1-acre cap per licensee.

The little guys fought back, and sued the state arguing that the emergency regulations were contrary to the intent of voter-approved Prop 64 in 2016, which was intended to limit grows in the short term to allow smaller farmers to get back on their feet after expending initial capital investments and having to come into compliance with state environmental laws. But earlier this year, the plaintiffs dropped their lawsuit against the state, soon after the final regulations came out affirming the state’s position would not change.

But now the farmers are starting to explore a new tactic: joining forces as cannabis cultivation cooperatives to better compete with the bigger players. But didn’t cooperatives get phased out by the new regulations? The short answer is that yes, the traditional cooperative model that existed under the Compassionate Use Act is now gone, but a new model exists under current law, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). Generally speaking, under MAUCRSA a cannabis cooperative association is a group of 3 or more cultivator licensees, each farming no more than 10,000 square feet of outdoor canopy, and collectively not farming more than 4 acres total. But cooperatives have advantages and disadvantages as a potential vehicle for ownership and operation.

Advantages

When cannabis cultivators join a cooperative association, the members are able to spread fixed costs from the services that the association is able to provide, such as access to land and financing, equipment leasing, bulk purchase of supplies, group insurance plans, hiring and recruitment services, security and property management services, and marketing and advertising resources. Associations are also allowed to merge or consolidate with other cannabis cultivation associations, allowing even greater economies of scale.

Members are able to enter into collective marketing agreements, which allows them to offer purchasers a steadier and larger supply of more uniform products. This creates a more competitive market position than growers could attain on their own, while still allowing them to devote the time and attention required for producing high-quality appellations and artisanal strains. The cooperative model also eases the pain of licensing and regulatory compliance through group access to consultants, accountants, and attorneys familiar with the group’s operating model.

Disadvantages

To be a member or stockholder in a cannabis cooperative association, a person or entity must be a licensed cannabis cultivator, meaning that opportunities for outside investment in the cooperative itself are lacking. Members also cannot hold cannabis licenses in any other state or country, and their operations are limited to 4 acres in total. And if you’re thinking that members could get around that by contracting to operate as a single entity, think again: members shall not “conspire in restraint of trade, or serve as an illegal monopoly, attempt to lessen competition, or to fix prices in violation of” California law.

Whether or not it makes sense for a small grower to join a cooperative association depends on the risks and benefits it has to weigh for each of its options, and each grower has unique circumstances it must consider. But as long as the black market continues to thrive in California, even with the cost savings and other advantages available under a cooperative model, the state will have to continue coming up with creative solutions for incentivizing illegal operations to join the licensed community.