CFN Insider Looks at Recreational Legalization in California


Ryan Allway

November 29th, 2017

Feature Stories, Policy


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You’re listening to CFN Insider, your inside access to the business and financial world of marijuana. Whether you’re new to the cannabis industry or a savvy investor or a business leader, CFN Insider uncovers the industry’s most current and critical insights, the very information you need to succeed. In each episode, you’ll hear straight up from top insiders and thought leaders in the cannabis industry. Brought to you by CFN Media, the leading digital media network dedicated to the world of cannabis business and finance since 2013. Visit us a cannabisfm.com. Now, here’s your host, Alexander Lawson.

Alexander Lawson

Before we get to those stories, I want to talk with Matt Karnes about the elections earlier this month.

Matt Karnes

Given that it was an off year in the election cycle, I would say that the cannabis industry faired very well this year.

Alexander Lawson

Matt is our CFN Insider, as well as President and CEO of Greenwave Advisors in New York. He says the election was especially encouraging for the cannabis industry when you look at the returns in New Jersey, where Phil Murphy won out over Lieutenant Governor, Kim Guadagno. This in a state where the current governor, described as wildly unpopular, Chris Christie, was dead set against legalization.

Matt Karnes

Primarily because of the fact that Phil Murphy, the democratic nominee, was successful in winning the election. With that he had pledged to legalize recreational use cannabis within 100 days, I believe that will be a catalyst for other states in the tri-state area, to rethink their policies, primarily New York, with Governor Cuomo in office. I think now that we have a couple of years of medical marijuana in tow, and the world has not fallen upside down in New York State, he may hopefully give consideration to legalizing recreational use and realizing potential revenues.

Also, Pennsylvania, they’re our neighbor too, perhaps they will take note of New Jersey. Then we have Connecticut kind of lingering on the heels of other New England states. I just think that this is a catalyst that might set the ton for this whole area.

Alexander Lawson

Then, says Karnes, “Consider the victory of Democrat Ralph Northam over Republican Ed Gillespie in the race for Virginia Governor.”

Matt Karnes

The winner of that state has also indicated his support for fully legalizing marijuana in the state of Virginia. Time table is not certain, I’m not sure that that will be as soon as New Jersey’s plans are for implementation, but we’ll see.

Alexander Lawson

That’s not all, consider Michigan.

Matt Karnes

Detroit and some of the municipalities in Michigan passed to enable the expansion of their medical marijuana programs. Perhaps that will also set the stage, for a successful ballot initiative next year in Michigan for recreational use.

Alexander Lawson

Then there’s California.

Matt Karnes

The local municipalities’ support of marijuana further underscores that this election wasn’t just about the state realizing the revenues, but how that these revenues could impact local communities as well.

Alexander Lawson

So, Matt, let’s step back for a moment and look at the bigger picture.

Matt Karnes

This is really boding well for our thesis on the industry as a whole, in that by 2021, we expect that every state will have either a medical only or fully legal market implemented. What we’ve seen in this election is a catalyst for change in this area that will spur other areas, and so forth, and so forth. I don’t think it’s unlikely that that’s what we’re going to see in the next five years, with every state having some form of marijuana legalization. I’m not calling for an end of federal prohibition, I think the states will continue to evaluate and make their own decisions and policies, but I think it’s not unreasonable to expect near $30 billion overall by 2021.

Alexander Lawson

How does that translate into opportunity for investors?

Matt Karnes

Well, certainly there’s going to be more investment opportunities, there will be more job creation and the investment opportunities more capital will be deployed in the industry. There will be more innovation and technical prowess. I think that these will spur additional investment opportunities. Entrepreneurs that would have never stepped into this industry, are now rethinking that, hey, I have this great mind and this great idea, let me put it to use if I think that will create more opportunities for everybody.

Alexander Lawson

What does this latest election mean for the much bigger issue of getting cannabis off the list of Schedule 1 drugs? That is, the ones that have both, a high potential for abuse and no medical redeeming value.

Matt Karnes

I would say taking it a step further to delist pot, because it really depends on how they reschedule it. Going to Schedule 2 won’t really solve any problems. It’s very similar to what we’re seeing in same sex marriages, where a few states started and then the momentum starting building until finally it was recognized at the federal level. This is very much the same thing. But, the only caveat to the difference here is, there’s money to be made. You’re not making this kind of money with same sex marriages. There’s significant revenues to be realized here. And, not only that, the rest of the world is moving forward with legalization, whether we like it or not. Are we going to sit in the backseat and watch our neighbors and our allies and whoever else, reap the benefits of exporting and legalization? I don’t think that’s very prudent. So, we’re going to be forced to participate in this economic activity.

Alexander Lawson

We will hear more from Matt Karnes in just a moment.

Alexander Lawson

California’s tragic, deadly wildfires have not only taken a toll in human lives, there are no major questions about the affect those fires have had in wine country. Where pot plants and grape vines in adjacent fields soak up the bountiful sunshine and wave in the otherwise gentle breeze. Erich Pearson is a legal grower near the town of Glen Ellen in Sonoma County. He’s been growing medical marijuana under the trade name SPARC. Now, he tells CBS News, he just harvested his first crop, a bumper crop.

Erich Pearson

This was a 40,000-square foot barn, which is an acre in size.

John Blackstone

And not just a barn, you had processing in there.

Erich Pearson

That’s right, there’s processing and packaging for cannabis in here.

Alexander Lawson

That was before wildfires raced across his property, devouring his barn and the crop that was stored inside.

Erich Pearson

If it wasn’t metal, it’s not here anymore.

Alexander Lawson

The Grower’s Association says, tens of millions of dollars’ worth of cannabis have been destroyed or damaged beyond savage in the fires, and that’s just the legal crop. Sean Hocking is the founder and editor of the Cannabis Law Report, based in Portland, Oregon. He’s been looking at damage to cannabis crops in the so-called Emerald Triangle, made up of Mendocino, Humboldt and Trinity Counties in Northern California.

Sean Hocking

If you refer to Fortune, for example, they are estimating a one-billion insurance bill across the board. And, Moody said the losses are four, almost five times that actually, at $4.6 billion. At the moment, there’s 601 claims for commercial property and obviously none of those claims relate to the marijuana business because it’s nearly impossible to get insurance at the moment.

Alexander Lawson

That’s because of the legal bonification that surrounds marijuana in the U.S. Hocking says that creates a legal no-man’s land, somewhere between legal at the state level and illegal at the federal level. In that land of legal limbo, Hocking says, insurance companies loathe to operate.

Sean Hocking

You’ve got to end of the coin. You’ve got the big boys and girls going national, but they’re not going to touch it until Congress and the Senate say it’s okay. Then you have local ones operating within state bounds, they’re equally worried about the federal issue because obviously a lot of their business touches upon that. But, also, they simply just can’t manage. Essentially, insurance is very thin on the ground.

Alexander Lawson

So, where does that leave growers like Erich Pearson? He tells CBS News Reporter, John Blackstone…

Erich Pearson

It’s definitely a setback. On the other hand, we’re trying to make lemonade out of lemons.

John Blackstone

You’ll find some way for the business to survive this?

Erich Pearson

We’ll figure it out, yeah.

Alexander Lawson

The massive fires that charred so much of California’s Cannabis Country, give rise to another potential problem.

Matt Karnes

It’s very possible that we don’t have enough product on shelves.

Alexander Lawson

That’s Insider, Matt Karnes.

Matt Karnes

I would be worried, yeah. For sure. Because you don’t know how long it’s going to take to get everything up and running again.

Alexander Lawson

As far as the supply of legal cannabis in California. . .

Matt Karnes

By January 1st, there could very well be a shortage. But, as these grow facilities are replaced, or other existing legal grow facilities are expanded, eventually we’ll be able to accommodate the demand, but it could be suppressed for a little bit of time. It will take some for it to normalize again.

Alexander Lawson

Short-term, the key to normalization may be in the way cannabis is distributed in California. That’s Eric Spitz’s business. Spitz is the Founder and CEO of Golden Systems, a marijuana distribution logistics firm based in California.

Eric Spitz

The analog for us is the alcohol industry, specifically the beer industry. All of alcohol works similar, in that it is a regulated market with a set of rules laid down by the State, that is overlaid against a set of local ordinances.

Alexander Lawson

Similar to beer distribution, but not the same.

Eric Spitz

Beer is served in a glass bottle, filled with liquid that weighs a lot, and is hard to transport. Marijuana flower is sold or distributed in a turkey bag, broken down, put into a package and put on the shelf. That is the biggest difference between beer and marijuana from a distribution perspective, it affects the warehousing. The pricing, interestingly, is slightly higher, which makes the density significantly greater in marijuana, from a value perspective.

Alexander Lawson

Then, there’s spoilage. Pot tends to spoil after a short period of time. As a distributor, Golden Systems and other similar companies are pondering both up and down the farm to market ladder.

Eric Spitz

We very much consider ourselves a service company. We serve producers behind us in the supply chain, and retailers ahead of us in the supply chain. To the producers, we are their eyes and ears and team on the street. We represent them to their main customers who are the retailers and ultimately to the consumers. To the retailers themselves, we serve as consultants and advisors and reliable partners, who do what we say we’re going to do: Accept payment for product that we provide, give credit, etc., etc.

Alexander Lawson

And, for investors:

Eric Spitz

I think the biggest companies will be distributors, by far, because they will aggregate the multiple brands, as opposed to just their own. I think the biggest individual opportunities to start something from scratch would be in the processing/branding area. I think that the cultivation side of this business is fairly well combed over. What I mean by that is, every time I go to a City Council meeting where they’re discussing marijuana, every time I see a building that somebody wants to move into, there’s a whole bunch of growers and manufacturers running around, already in place, ready to go.

Alexander Lawson

In the end, Spitz says getting into the cannabis business isn’t that much different these days than getting into any other retail oriented product chain.

Eric Spitz

The most significant thing I would tell them is, don’t think of this as a different industry. Think of this as just retail, or just alcohol, or just beer. Then figure out the differences. The way that you asked me the questions about what is different about this than beer, those are the right questions.

Alexander Lawson

With that, you have the insider scoop on the worldwide cannabis industry.

Alexander Lawson

Business support for CFN Insider comes from Frank Lane at CFN Media and John Karne at Human Factor Productions. Our music is composed by Brittan Hayes. If you’d like more information on this program, if you have a question, or suggestion, contact us. Our email address is info@humanfactorproductions.com. You’ll find us on Apple’s iTunes, on Google Play and at Cannabisfn.com. Please subscribe to CFN Insider and don’t forget to rate us. I’m Alexander Lawson, from all of us here, thanks for listening. We’ll be back soon with another addition of CFN Insider.

Ryan Allway

About Ryan Allway

Mr. Allway has over a decade of experience in the financial markets as both a private investor and financial journalist. He has been actively involved in the cannabis industry since its inception, covering public and private companies.


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