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July 3, 2018 MJ Shareholders
The employees at vertically integrated Caliva have been working around the clock at their San Jose facility this week, filling wholesale orders from Arcata to San Diego and confronting the sudden California cannabis shortage of July 2018. For business owners across the state, this latest chapter in the saga of regulatory compliance is an opportunity to take stock of the blooming industry and gather a sense of what’s working—and what’s not.
California’s new cannabis rules went into effect on July 1. Up until this week, licensed dispensaries had been allowed to sell products that weren’t quite up to what would ultimately become the state’s testing, packaging and labeling codes. Non-compliant products needed to be sold off in fire sales or destroyed by the deadline, though; Wired called the event a “Marijuanapocalypse.”
Now, though, the state mandate to meet testing requirements reinforces the pressure on every link in the supply chain to ensure that safe, compliant products are being sold to consumers. For Caliva, the sudden wave of wholesale orders eclipsed expectations.
“I really didn’t anticipate a large change in July,” CEO Dennis O’Malley says, “simply because the [Bureau of Cannabis Control (BCC)] had done such a great job at signaling what they were doing.”
In the last week of June, though, the industry chatter grew louder. The headlines grew dire.
On June 29, the United Cannabis Business Association sent a letter to Gov. Jerry Brown, urging the state to reconsider and delay its July 1 deadline. “Forcing the industry into compliance without the necessary resources will further cripple the already struggling regulated market and will inadvertently favor the illegal and unregulated market,” the UCBA letter stated. (The BCC responded by reminding companies that they’ve known about this deadline since last November.)
“I really paid credence to that and said, ‘Wow, this might be a bigger issue,’” O’Malley says. As the phones started ringing the next day, the company issued an email to prospective clients who might need compliant flower. The email conveyed a simple message, advertising six fully compliant strains of flower. “Wholesale inventory updated daily,” it stated.
The response was urgent and swift.
“That caused us to work throughout the entire weekend, just taking in orders,” O’Malley says. “We’re still processing those today (July 2). We have a pretty good backlog of them, [and] we’ll be able to fulfill all of them. I was extremely surprised at how many people were short of compliant flower.” As of July 3, the company was still listing wholesale pounds of Alien OG (113 lbs.), Blue Dream (27 lbs.), Dream Queen (8 lbs.), Sour Lemon D (25 lbs.) and Hurkle (a cross of high-CBD sativa Harlequin and indica Querkle, 12 lbs.) on its website.
“We’re happy to help people through that transition,” O’Malley says, “but it was as-advertised that there really was a true shortage of flower. … Luckily, we have enough compliant inventory to service them all, but I’ve never seen that much demand so quickly on a weekend, saying, ‘Hey, we need flower kind of A.S.A.P.’ That has led us to work our full two shifts through Saturday (June 30), Sunday and now through this week, through the Fourth of July holiday to fill all orders.”
Whether the current cannabis shortage is simply a flashpoint in a burgeoning industry or something indicative of a broader trend is a matter up for debate. To those companies that are not vertically integrated, the new state regulations have exacerbated supply chain issues.
As of mid-June, the BCC had licensed 412 brick-and-mortar dispensaries and 116 “non-storefront” retailers (delivery services like Eaze, of which Caliva is a partner). Meanwhile, the California Department of Food and Agriculture had licensed 3,784 cannabis cultivators.
While those numbers may suggest the opposite problem—an oversupply—industry observers point to the crux of the July 1 rule changes: the testing requirements. As of mid-June, the BCC had licensed 28 testing laboratories across the state. All flower from those 3,784 licensed cultivators (and all cannabis products from the state’s hundreds of licensed manufacturers) must pass through a lab before hitting the shelves at a licensed dispensary.
“I think many of the dispensaries that we know and work with have planned ahead,” O’Malley says. “I think it’s probably a good reminder for all of us in the industry in terms of working with the BCC, who had signaled this. The reality is that it’s difficult for somebody like a dispensary owner who is trying to do their best to plan ahead—but [also] buy the right product at the most economical price.”
On the flip side, at Caliva’s own store, O’Malley says they’re seeing a different type of shortage—of edibles. In late June, products had been pulled due to packaging and labeling compliance issues in preparation for the July 1 turnover. (“Just like other people are asking for flower that’s compliant, we’re asking for compliant edibles,” O’Malley says.)
July 1, 2018, has been a centerpiece topic of conversation in the state’s cannabis industry for months now, and it will continue to be.
“The folks who actually modeled that out and predicted it knew what they were talking about,” O’Malley says. “As an industry, I think, it behooves us to make sure that we can provide trust to the consumers. Hopefully they’re seeing that. … I think it’s a call for the industry to just come together and say ‘Hey, if you’re not vertically integrated, if you actually had product that you had to destroy, if you’re having trouble on the supply chain, let our resources in place help you out.’”
According to the Los Angeles Times, growers in California produced 13.5 million lbs. of cannabis in 2016. That predates the legal adult-use market, of course, but it’s a data point that shows just how expansive the cannabis cultivation space has become over the years in California. Wrangling that production into a regulated marketplace is work in progress, though stakeholders have indeed warned of the many problems—the “emerging crisis”—that may linger throughout the process.
O’Malley echoes an oft-repeated question in California: “What are the issues around why there truly was a compliant flower shortage in state dispensaries? I don’t have the answer for that, but I think that’s one thing to continue to pursue—and how that unfolds will be interesting.”
Top photo courtesy of Adobe Stock. Dispensary photo courtesy of Caliva.
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