Commentary: Does Crime Pay in Regulated Cannabis Market?

Michigan's legal cannabis industry is all in on rooting out bad seeds.

This story was reprinted with permission from Crain’s Detroit Business and written by Dustin Walsh

Now that recreational marijuana prices have collapsed and margins have evaporated, Michigan’s legal marijuana industry is all in on rooting out bad seeds.

Pressure on the Cannabis Regulatory Agency (CRA) is on the rise from the state’s largest growers and retailers to identify and eliminate illegal marijuana making it into the legal market. That pressure boiled over when CRA founding executive director Andrew Brisbo “resigned” from the post earlier this year and was quickly replaced by a Michigan State Police crime analyst favored by the Michigan Cannabis Manufacturers Association, an advocacy group representing some of the largest marijuana operations in the state.

We’ve already seen some action being taken under new Director Brian Hanna. On Oct. 10, the CRA announced a 30-day license suspension of Detroit dispensary The House of Mary Jane after a random compliance visit discovered duffel bags and backpacks of suspected illegal market marijuana in the store.

“The concern for the industry is now even licensees are starting to participate in the illegal market,” said Shelly Edgerton, board chair for the MCMA and chief of legal compliance and government relations for Chicago-based marijuana company PharmaCann. “Illicit product is potentially unsafe product and it puts jobs and opportunities at risk. Everyone has an interest in making sure we don’t have illicit product entering the marketplace.”

The size of the problem, however, is completely unknown. It’s not unreasonable to think these large growers and retailers, who are investor-backed, are using the illicit market as an excuse for not turning the hefty profits they once were. They can’t file bankruptcy, as it’s a federal code and marijuana is still a Schedule I illegal drug, so they are likely returning to investors with hat in hand and a straw man.

But it’s absolutely clear some illegal marijuana is getting into the market. Lansing’s Anderson Economic group in 2020 estimated roughly $2.1 billion of cannabis sales coming from non-retail sources — either from home grows, medical caregivers and the illusive illicit market.

The number of active marijuana plants being grown in the licensed market grew 120 percent between August 2021 and August 2022, just above sales growth of 103 percent. Yet, licensed market inventory, by pounds, grew more than 400 percent during the same 12 months.

Some of that could be explained by an oversupply of marijuana in the market by growers simply getting better at growing marijuana, producing higher yields — the industry is currently pushing proposed legislation to tamp down growing through a license moratorium. But it’s likely unreasonable to assume that grower skills account for all of the large inventory growth. It’s most likely a portion of that total is not being grown in licensed operations and being folded into the legal market.

The problem is how illegal marijuana is getting into the regulated market is virtually unknown to regulators and the state police.

When asked about illegal marijuana activity, the MSP told Crain’s to ask the CRA and that “if anyone has illegal activity to report, they should contact authorities.” The CRA said in a statement it’s trying to figure out all this illegal activity stuff too.

“We have heard the complaints and the comments, and we are committed to determining if illicit marijuana is making its way into the licensed system — and if it is, how it’s happening,” David Harns, spokesperson for the CRA said in response to emailed questions. “Acting Director Hanna has been clear with stakeholders in his first few weeks that his two priorities are (1) continuing the CRA’s history of transparency and communication with stakeholders and (2) determining if and how illicit marijuana product might be making its way into the regulated system. Licensees who are not in compliance with the statutes and the administrative rules will be held accountable — it is important that consumers have faith in the legal market and that all businesses play by the same rules.”

Growers and retailers in the industry have plenty of theories on how it’s getting here.

Andrew Sereno, CEO of Manchester-based grower Glacier Farms, told Crain’s the variability of output, and skill, among growers makes it almost impossible for the state to determine how much product should come from a plant. Without a somewhat standard yield, how can regulators begin to know whether all the product coming from a grower was grown legally?

“It is very easy for a bad actor grower to “harvest” some plants and then have outside material enter in at that point,” Sereno said. “Who is to say whether they actually had a 20-, 40- or 60-pound harvest?”

The head of a large retailer, who asked to speak anonymously, said the amount of marijuana oils for sale in the state couldn’t possibly all come from the regulated market.

“They are trucking in this shit,” the retailer said.

The theory is that distillate — refined cannabis resins used in edibles, tinctures and vape cartridges — is being produced in illegal states without the interference of regulatory hurdles for much cheaper, such as Oklahoma, and then shipped in to be sold on the legal market at a higher price.

The anonymous retailer said a liter of illegal distillate is $500 but is retailing for about $1,700 in Michigan.

Where there’s money to be made, there will be those who are operating outside the confines of the law. After all, marijuana is a 200-plus-year-old industry in the U.S. This legal stuff is new and so are regulators’ and the law’s attempts at curbing the activity.

Agrify

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