When Washington established the framework for its commercial cannabis industry, the low barrier to entry created an opportunity for smaller companies to compete in the emerging legal market, enticing thousands of hopeful entrepreneurs to apply for licenses.
But now, nearly six years after the first producers received their state licenses, the highly competitive landscape has forced hundreds of growers to shut down their business. Some of those licenses have been sold to existing operators looking to expand their operations; others have been sold to new operators looking to try their luck. Like most American industries, the biggest businesses have grabbed the biggest slice of Washington’s cannabis market.
And Micah Sherman doesn’t like the direction it’s headed.
“We’ve seen a massive amount of consolidation,” says Sherman, the co-owner of Raven Grass, a Tier II producer/processor based in Olympia.
Sherman hopes the antidote could be legislation that would create a craft cannabis production license, available to independently owned producers. He’s been working on the legislation for about three years. Its most recent iteration — House Bill 2279 — is sponsored by state Representative Laurie Dolan.
“We’re working right now to find a Senate sponsor to push a companion bill through the hearing process in both chambers,” he says. “It’s a matter of pushing it across the finish line, making sure it gets a hearing in the House.”
Growers qualifying for the craft cannabis designation would be allowed no more than 10,000 square feet of canopy indoors (the same limit as a Tier II license) or 30,000 square feet of sungrown canopy (the same limit as a Tier III license).
While the bill would create the framework for an official craft cannabis industry in the state, it would also deconstruct one of the cornerstones of Washington’s adult-use regulations — the outright ban on vertical integration — by giving craft producers the opportunity to sell cannabis direct to consumers.
Marijuana Venture: Why do you think this legislation is important?
Micah Sherman: Small farmers came into an industry that we were told was going to be focused on keeping the small farm as a viable business model. I think that was ignored pretty early on, and we’ve seen a lot of people go out of business and lose everything they have.
A lot of people pointed to this being the result of market economies, which it is, but it’s a market that was created whole cloth by regulators. I don’t think there was another way to do that, and I’m not saying it was possible to turn an illicit market into a legal market without really strict rules, but policymakers haven’t been willing to acknowledge the substantial impact that their decisions have made.
We need an honest conversation about why things have shaken out the way they have, and what we want to see the industry look like moving forward.
Probably the single biggest factor of who has succeeded and who has failed in the cannabis industry — other than having the most money to start — is how the rules were written. It shaped the window of what was allowed and what was not allowed. We’ve seen that play out differently in all these different states, and it doesn’t seem like anybody has taken the time to look at all the different rules and all the different outcomes and say, “We want to see more success for small farmers versus more consolidation.”
MV: Do you have an idea of how many farms would qualify for the craft cannabis designation under this bill?
MS: That’s tough, partly because in the bill, one of the rules to get a craft cannabis license is that the farm would need to have independent ownership. Nobody that is part of a craft cannabis farm would be able to be an owner or manager of another farm.
If I had to guess, I would say it’s between 100 and 150 farms that might meet the definition, but again, it’s really hard to know who owns some of these companies.
When I first talked to my reps about this idea, three years ago, I was estimating there were 300 to 400 producers that would have fit the definition. Now, I think it’s closer to a hundred. Every year we’re losing people.
We’re trying to mimic the outcomes we’ve seen in craft brewing and micro-distilling. It’s a business ecosystem that has proven itself to be a benefit to people looking to sell small-batch products, and by creating protections, exemptions and differentiations both in taxation and in how those businesses are able to get their products to market, it’s given businesses a model to succeed on quality and differentiation, rather than just scale.
Right now, the only differentiator in Washington’s cannabis industry is who can scale the most efficiently. And that’s only going to be exacerbated as we move into a national marketplace.
MV: What are the specifics about this bill that you think will do the most to help small farmers economically?
MS: We’re looking to do three things with this bill: define a craft cannabis license; create a framework to make differentiations in rules for what those craft cannabis companies can do compared to a non-craft company; and then also to create an advisory board of craft production farmers to work with the Liquor and Cannabis Board in an ongoing capacity to further refine rules around production and the craft industry.
The first thing we’re doing is allowing craft producers to have on-site sales, just like a micro-brewery or micro-distillery. That is going to give small farmers an immediate path toward higher-margin sales. For Raven, for example, if we can sell about 20% of what we produce, which from my research is about what craft breweries sell on-site, that’s going to allow us to have enough profit to actually make money in the year, while still selling the rest of what we produce at the same wholesale rate to our retail partners.
If we can create a situation where small producers can make sales at higher-margin retail prices, now all those retail stores are going to have stable, long-term partners that have the ability to continue to exist.
And for consumers, people are going to be able to engage directly with small farmers and start to have a better understanding of the variables that define value in the cannabis industry.
MV: Do you have any concern that allowing a certain number of producers to sell directly to the consumer could be a slippery slope toward allowing full vertical integration, which could ultimately lead to even more consolidation?
MS: I don’t see that concern, because we’re talking about modeling ourselves on a craft industry that has existed in liquor without that outcome for decades. I think there’s a proven model we can look to. Craft brewing is a success of industry and regulation working together to produce an outcome that is beneficial for everybody.
I’m not worried about this being the thing that lets in big, out-of-state money. Big, out-of-state money is already in Washington, whether it’s through a licensing agreement or through hidden ownership. We are already seeing the effects of that money, and we’re doing it in a way that obscures it, rather than making it understandable.
For me, personally, I’m supportive of removing restrictions on out-of-state funding and ownership in the broader Washington cannabis industry. I don’t think that restriction is a meaningful or effective arrangement. For me, as a small craft producer, it’s a lot easier to have an honest conversation about how I’m differentiated from a multinational, global cannabis investment fund.
MV: How closely does this mirror micro-distillery or micro-brewery laws?
MS: I looked at the law that was passed in Washington in 2005. One of the things I found interesting while investigating that was that the size of a craft brewery and the size of a craft distillery are based on how much product they can produce and what the average market price for that product is. This produces a similar size company in revenue, so we looked at putting craft cannabis companies at a similar size for annual revenue.
That part is basically the same principle. The direct sales are based on the same concept. The idea of being able to buy something directly from the person who made it isn’t exactly a revolutionary idea.
It’s a similar idea, this Swiss cheese approach to limits on vertical integration, that created the California wine industry, with similar, targeted exemptions to the rules regulating alcohol production. If you look at the history of California wine law, there are all sorts of very specific, very targeted rule changes that sometimes affected a single producer or a single place that needed something to make their business work.
Looking at the history of alcohol is helpful, but there are also some very large differences.
MV: The subject of producer-to-consumer sales is interesting and there are arguments both for and against that model. To play devil’s advocate, having a producer-to-consumer sales model obviously requires a bigger staff to handle retail and the producer’s location is a big component of how much they might be able to sell. Producers located in cities would still have a much better opportunity then a company based in a rural part of the state.
MS: Yeah, but look at Walla Walla (Washington’s wine capital with more than 140 wineries, tasting rooms, wine bars and several major wine festivals). Look at what being a destination for wine production has done for that area. I could easily see in five years Okanogan County having an agri-tourism business based on destination cannabis farms, hotels, restaurants, etc. All of that could be a reality for that part of the state. It’s not that far from Seattle. It’s beautiful. It’s a struggling area (economically).
Direct sales tomorrow? That’s not what this is about. Nobody’s going to be up and running a direct sales business any time soon. Direct sales are a component, but just as important is creating the framework for differentiation and opportunities from establishing craft cannabis and saying small production is important and we want to maintain that. I don’t think we’re talking about more than 100 people doing the direct-sales component of this. This is not going to help everyone — but it is going to help some.
MV: What can people do to make their voice heard on this legislation?
MS: The most effective thing people can do is to reach out to their representatives in the state House and Senate and encourage them to support the bill. Also, keep an eye on the schedule for hearings in the House Commerce and Gaming Committee and the Senate Labor and Commerce Committee and come to Olympia to show support and testify at the hearings.
We don’t have an organization that’s raising money or anything like that. It’s just a grassroots effort to push this thing through.
This interview has been edited for length and clarity.