In an unexpected move that has small cannabis farmers and some state lawmakers up in arms, California regulators have created a licensing loophole that could allow large-scale cannabis growers to operate farms of unlimited size.
Under the new regulations announced last month, only small and medium-size grow licenses will be issued between 2018 and 2023 (for up to quarter-acre and one-acre grows, respectively). While medium-size licenses are limited to one per person or organization, however, there is now no limit to the number of small-size licenses any person or commercial entity may obtain. That, say some concerned cannabis farming advocates, opens a way for larger commercial operators to effectively stack small-size licenses into commercial-scale farms.
The abrupt shift took many in the industry by surprise, and it comes on the heels of costly, intensive lobbying on behalf of some of the state’s most powerful cannabis businesses.
It also undermines part of the pitch used to sell voters on marijuana legalization.
Under Proposition 64, approved by 57% of state voters last year, small and medium growers—who provide much of the economic lifeblood in rural areas like the state’s Emerald Triangle—were promised they would not face competition from giant marijuana “megafarms” for five years. The idea was this: Beginning Jan. 1, 2018, growers could apply for “Type 3” licenses, which are capped at one acre. Not until 2023 could growers apply for “Type 5” licenses, which allow for grows of unlimited size.
This nod to small growers was added to Prop. 64 in order to win support from existing cultivators and in regions where the economy is reliant on cannabis. Prop. 19, a failed 2010 effort to legalize in California, fared poorly among those groups. The provision was also consistent with rules passed by California lawmakers in 2016 to regulate the state’s medical marijuana industry, which also included an acreage cap.
Regulators appeared to be sticking to this plan as recently as Nov. 14, when the California Department of Food and Agriculture’s draft environmental impact report around cultivation included a one-acre cap on farms.
Two days later, however, emergency regulations released by the department included no limit on the number of quarter-acre licenses available to persons or companies.
Two legislators from California’s Emerald Triangle region, state Sen. Mike McGuire and Assemblymember Jim Wood, expressed their dismay in a Dec. 4 letter to CalCannabis Cultivation Licensing Director Richard Parrott:
“We support the protection of small family cannabis farmers—the backbone of California’s Cannabis industry—and are deeply concerned that a lack of a cap on small cannabis cultivation permits is undermining the desires of California voters expressed through Proposition 64. This last minute revision rolls out the red carpet for large corporations to crush the livelihood of small family farmers who should be given a fair chance to succeed in a regulated market.”
The new regulations, wrote McGuire and Wood, “contradict CDFA’s Final Environmental Impact Report issued on November 13th, just before these emergency regulations, which stated that no one licensed individual would cumulatively cultivate more than 1 acre.”
Megafarms won’t be allowed everywhere in the state. Many counties have banned cultivation completely, while others limit outdoor grows by size. Cannabis-friendly Mendocino County, for example, limits outdoor grows to no more than 10,000 square feet. Still, the prospect of competition from massive operations anywhere in California has agitated growers and even rankled some lawmakers.
“This type of policymaking leads one to suspect (involvement) from a high-price-tag influencer.”
“It was my understanding during the campaign that the larger cultivation would not be happening at the outset. I know that others had that understanding,” state Sen. Scott Wiener (D-San Francisco) told Leafly News.
“I don’t agree with the results. I’m concerned that the small operators may be driven out,” he added. “It’s unclear to me why this happened.”
Tawnie Logan, who chairs the Sonoma County Growers Alliance, which advocates for small and medium-size growers, said the change means the rules puts forth by the state Department of Food and Agriculture are in “in direct violation” of what was reflected in the department’s own environmental impact report.
“This is somewhat unprecedented,” she said.
At least part of the explanation for the change appears to be that the California Department of Food and Agriculture was targeted during an expensive and lengthy lobbying campaign on behalf of large-scale marijuana cultivators.
One such operator, FLRish, spent more than $300,000 to lobby lawmakers and public officials since the beginning of 2016, according to public disclosure forms. The company is already cultivating as many as four acres of cannabis in converted greenhouses in the Salinas Valley.
FLRish’s $300,000 spend is sizeable even in the high-stakes game of influencing public policy in California. For context, FLRish spent more on lobbying during the past two years than corporations such as Airbnb or Facebook.
To be sure, other groups and growers may have lobbied state agriculture officials to enact a “no-limit” policy regarding how many small-size grow licenses can be obtained. State public disclosure documents only track spending on registered lobbyists, not on contacts made by stakeholders.
Steve Lyle, a spokesman for the agriculture department, said the cap was “left out” after the department received “input from stakeholders.”
The firm leaning on policymakers on FLRish’s behalf is California Strategies, one of Sacramento’s most prominent political consulting firms. Among the public agencies the firm contacted on FLRish’s behalf was the California Department of Food and Agriculture, according to public records. (There’s some irony here. Operatives with California Strategies served as the main political consultants for Prop. 64, and spent much of the 2016 campaign defending legalization as a boon for the same small farmers now crying foul.)
Jason Kinney, a partner at California Strategies, declined to comment. “We don’t discuss client work product,” he said via e-mail. [Editor’s note: Privateer Holdings, the parent company of Leafly, is a client of California Strategies.]
In comments to the Santa Rosa Press Democrat, Steve Lyle, a spokesman for the agriculture department, said the cap was “left out” after the department received “input from stakeholders.”
The identity of those stakeholders is unclear. The CalCannabis Cultivation Licensing department opened a 45-day public review and comment period for the draft Environmental Impact Report during the summer of 2017, but there were no public hearings or comment periods prior to the release of the emergency rules on Nov. 27. Following the release of those rules, the agency enacted an extremely limited one-week public comment period, which ran from Nov. 27 to Dec. 4.
Observers of the process, however, say the interested parties are obvious.
“There are clear winners here,” said Hezekiah Allen, executive director of the California Growers Association, which strongly supports a size cap. “This type of policymaking leads one to suspect [involvement] from a high-price-tag influencer.” His association is circulating a petition to reinstate the one-acre cap, he said, and is also weighing other options.
Sonoma County-based attorney Omar Figueroa told Leafly that some small and medium-size growers are weighing the possibility of a lawsuit.
“The EIR and the regulations do not match. There’s a big disconnect—the regulations need to be modified to get rid of that disconnect,” he said. On top of that, he added, the change will have real consequences for existing businesses. “When megagrows are allowed, it’s going to squeeze the mom and pops out of business and drive them into the black market.”
According to public records, FLRish’s acting CEO is Steve DeAngelo. DeAngelo, the cofounder and CEO of Harborside, California’s largest marijuana dispensary, is a prominent public ambassador for the marijuana industry, with frequent appearances in mainstream media. In 2011, for example, Harborside was the subject of a short-lived Discovery Channel series, Weed Wars.
In an interview with Leafly News, DeAngelo suggested that representatives may have reached out to the Food and Agriculture Department. “We talk to every [regulatory agency],” he said. And while none of his organizations took a public position on the cultivation cap, he said he supports the emergency rules as currently written. “Time is already very short to prepare for the [Jan. 1] transition to adult use,” he said.
But did FLRish advocate against a size cap on state-licensed cannabis cultivation? DeAngelo has yet to respond to a Nov. 24 message asking that very question.
To be sure, there are other large operators in the Salinas Valley who stand to benefit. Grupo Flor, headed by attorney Gavin Kogan, claims to have “over 2.6 million square feet dedicated to cannabis” activities, including cultivation and extraction. Last summer, Grupo Flor sponsored the annual Forbes AgTech Summit, a gathering of the biggest names in corporate agriculture, such as Monsanto and DuPont. Leafly News found no recorded lobbyist contacts on behalf of Grupo Flor on file with the California Secretary of State.
In California’s cannabis country, the prospect of megafarms has raised alarm among longtime growers already struggling with low crop prices. Small farmers in the Emerald Triangle “are panicked,” said Michael Steinmetz, CEO of FlowKana, a Mendocino County-based craft cannabis brand that sources its product from local farmers who cultivate small crops.
“We’re looking at a massive economic crisis for the state of California.”
“We’re definitely strong supporters of the cap,” Steinmetz said, “but to be honest, I don’t think the policy would have ever stopped people from doing [large grows]. They’ve always had a loophole.”
While moneyed interests may have lobbied regulators to remove the licensing limit, it’s not clear how much damage it would have actually do to FLRish or other large growers. Some contend that megagrows were already legal—even taking into account the one-acre cap.
A four-acre plot could be cultivated legally by “stacking” four one-acre licenses together, some industry observers argued. State law allows operators to obtain multiple licenses so long as none are for laboratory testing. In this way, a deep-pocketed company could in theory obtain an infinite number of licenses meant for small-scale production, then turn around and cultivate hundreds of acres.
Even Prop. 64 backers—such as Kinney at California Strategies, who was the campaign’s chief spokesperson—said on the campaign trail that the measure would allow such stacking, despite the apparent contradiction with the campaign’s stated goal of protecting small farmers.
Legalization’s most prominent political backer, Lt. Gov. Gavin Newsom, spent years railing against the notion of “Big Pot.” Now a favorite in the run for governor, Newsom said in a 2015 report that the state should “prevent the growth of a large, corporate marijuana industry dominated by a small number of players, as we see with Big Tobacco or the alcohol industry.”
Since then, however, Newsom has raked in hundreds of thousands of dollars in campaign contributions from the cannabis industry through fundraisers organized by a small number of players, the Los Angeles Times has reported, including DeAngelo’s FLRish as well as Indus Holding Company, where Grupo Flor’s Gavin Kogan is an executive director. (Indus appears to have spent no money on lobbying in California during the past year, per public records.)
Newsom “appears fine for now with allowing for big growers,” the San Francisco Chronicle reported last month after reaching out to the lieutenant governor during a visit to Mexico City to talk about cannabis.
A statement Newsom sent to the Chronicle said that “Legalization is a process unfolding over many years,” and regulations will need “constant re-evaluation.” But “I’m not ideological about this,” he added. “I’m watching closely to ensure that the rules are being applied with tough anti-monopoly standards that create favorable market conditions for small legal businesses.”
Not every advocate for small cannabis growers believes megafarms are a dealbreaker.
Kristin Nevedal, the Humboldt County-based chairperson of the International Cannabis and Hemp Farmers Association—which also uses California Strategies as a lobbyist, according to records—believes a cap would be a huge disadvantage for small farmers who rely on the sun as their source of power.
With a one-acre cap, outdoor farmers harvesting once a year would be out-produced by indoor farmers by “eight times,” she said. Far from protecting small farmers, a cap “disadvantages the seasonal cultivator more than anyone.”
With state-licensed cannabis cultivation less than a month away, it’s unclear how many of California’s estimated 50,000 cannabis cultivators have the interest or ability—financial or otherwise—to join the legal marketplace. But the prospect of going toe-to-toe with well-capitalized behemoths, the worry goes, might squelch whatever interest there is—and wreak financial havoc on areas that depend on cultivation.
Some in the industry say opening the door to megafarms too quickly threatens to hobble California’s legal cannabis market before it’s on its feet—and may make economic waves even outside the cannabis industry.
“The fastest way to destroy the success of the program would be give authorization for single corporations to have hundreds of acres in production in year one,” said Logan, of the Sonoma County Growers Alliance.
“If you have tens of thousands of existing operators that want to come into compliance but are pushed out of the market by a few single corporations,” she said, “then we’re looking at a massive economic crisis for the state of California.”
Editor’s note: This article was updated for clarification on December 11, 2017.