By: Scott F. Roberts
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Looking to the Future of the Michigan Marijuana Industry: Five Predictions
While the future of the Michigan cannabis industry is bright, a lot of uncertainty remains in the commercial market. From news reports that the legislature may amend the ballot initiative, to the fact that the rules applicable to Medical Marijuana facilities and the MMFLA application seem to be in constant flux, it can be hard for a prospective Medical Marijuana business owner to look much pass the state and municipal licensing approval process, let alone try to predict the future of the Michigan cannabis industry.
As a Michigan Marijuana Business lawyer, I have a unique perspective on the industry. My job requires me to talk to dozens of medical marijuana business groups, investors looking at the Michigan marijuana market space, cannabis accountants, political consultants, and other Marijuana lawyers, many of whom are happy to speculate about the future of Michigan’s marijuana industry. This article attempts to translate my knowledge and perspective into 5 predictions about the future of the Michigan cannabis industry.
1.Michigan will “Regulate Marijuana Like Alcohol”
Perhaps our easiest prediction to make is that Michigan will allow the recreational sale, use and possession of Marijuana by the end of next year. How can we be so confident? Well, there’s a ballot initiative that would legalize Marijuana and current polling indicates that it will pass by a wide margin. Sometimes called the MiLegalize ballot petition, or the RMLA, the ballot initiative would legalize possession of marijuana by those over the age of 21, among other items. While the Michigan legislature did attempt to pass an amended version of it earlier this year, it was unable to do so. Now that the deadline for amending the ballot initiative by a simple majority has come and passed, voters will get the chance to enact the ballot in its original form.
The initiative allows the state licensing agency one year to create an application system and begin issuing licenses for commercial recreational cannabis licenses. We can therefore somewhat easily predict that by the end of next year, Michigan will allow the sale of recreational Marijuana to persons over the age of 21, or at the very least, start accepting business licenses for the sale of recreational Marijuana by then. Quite literally, Marijuana will be regulated like alcohol, with the added benefit that you would also be able to grow up to 12 plants in your personal residence.
2. Most Big Out-of-State Players Will Continue the “Wait and See” Approach
While there are companies from Colorado, California, Oregon and Arizona applying for Michigan Medical Marijuana licenses, there has not been a rush of big players jumping into the Michigan market. The Michigan marijuana industry, like the Michigan craft beer industry, is quite Michigan-centric. This contrasts with the experience of some of the West Coast states such as California and Oregon, where many of the companies that operate there have a national or even international footprint.
If you ask most people why this is, they will probably point to the “ban” on non-Michigan resident applications prior to June 30th, 2018 contained in the MMFLA, or the “ban” on applications from businesses that do not have an MMFLA license from applying for most recreational cannabis license types, but this only explains part of it. The ban on non-Michigan resident applications could easily be gotten around by including a 1% Michigan resident on the application. In addition, if LARA’s position on this provision is to be believed, all a non-resident group would have to do is create a Michigan LLC and not be subject to the ban (it is unclear if the Licensing Board shares this view).
If this isn’t the reason why, then why on earth would larger companies stay away from what is the second largest medical marijuana state in the country and likely to be one of the five largest recreational states in the country over the next several years? Especially given that if you don’t already have an MMFLA facility license, you won’t be able to apply for most recreational marijuana licenses for another two years after LARA starts accepting license applications, meaning if you don’t get in now you could be shut out for several years to come.
After posing this question to a couple larger out of state Marijuana companies looking at the Michigan Medical Marijuana market, the answer I got was somewhat unexpected but not unsurprising. The reason? The new Microbusiness license that is part of the ballot initiative, which allows the licensee to grow up to 150 plants, process them, and then sell directly to the consumer and also restricts who can own a microbusiness, meaning larger businesses can’t gobble up all of the smaller players or consolidate the space.
While receiving very little attention at most conferences and even in many legal circles, the threat of the microbusiness license seems to have prevented many of the big players from diving head first into the Michigan Cannabis industry, choosing instead to take a wait-and-see approach to Michigan’s marijuana market. State legislators, in an attempt to help their donors, could try to eliminate this license class since the microbusiness will undercut the business of many licensed growers, processors and provisioning centers. With the capitalization requirements being what they are, only high net-worth individuals and their partners are able to go after these licenses. These same high net-worth individuals have an outsized influence on our political process, so it is entirely possible that the legislators will try to undercut the will of the people and eliminate this license class to protect the investment of the other licensees. More on this below.
3. Goodbye Caregivers, Hello Microbusinesses
As noted in prediction 2 above, the microbusiness license has the potential to disrupt the state’s new recreational marijuana industry . If this happens, Michigan’s cannabis industry as a whole will likely bifurcate once again, this time along different but eerily similar lines. Already, we have seen the split between MMMA businesses and MMFLA businesses. These businesses are drastically different from one another not only in how they are legislated but also in how they are run. MMMA caregivers operate small grows, oftentimes in residential neighborhoods, that sell direct to the consumer or to other caregivers who sell direct to the consumer. They currently dominate both the legal and illegal Michigan medical marijuana market, but this is because the MMMA has been very loosely enforced and there was no viable alternative to the MMMA regulatory structure.
With the MMFLA supplying a viable alternative, and with the state wanting stricter enforcement to drive the market towards the new regulatory scheme so it can receive the resulting taxes and license fees, it is likely that the MMMA will no longer be so loosely enforced. And if the MMMA is strictly enforced, caregiving as a business will suffer. As I sometimes tell potential caregiver clients, you can either follow the MMMA to the letter of the law, or you can make money, but you can’t do both.
That means the court decisions prohibiting “caregiver to caregiver” transactions—which is the lifeblood of almost any caregiving business—will start being enforced since the state can now track where every gram of Marijuana from a dispensary came from. With the only other option being selling to patients not registered to the caregiver, or directly to non-patients—essentially illegal drug dealing—caregiving as a business is living on borrowed time.
The drafters of the ballot initiative likely anticipated this, which is why they came up with the new microbusiness license type. This license gives caregivers who are currently being forced out of the industry a chance to remain in the game. The potential for this license type is seemingly limitless—from edibles, to oils, to simply growing and selling craft strains of Cannabis. The Michigan microbusiness license could also allow for a number of currently prohibited Marijuana businesses, such as a true Amsterdam-style coffee shop or a Marijuana delivery service.
4. More Legislation is Coming
The MMFLA and the RMLA create two parallel licensing and regulatory structures, with different taxes applied to recreational Marijuana (10%) and Medical Marijuana (3%). From an implementation, enforcement, and plain practical standpoint, this doesn’t make a lot of sense. A bill to “fix” the two structures by creating one, unified structure makes a lot of sense, at least on paper. Whether this translates into real legislation is unknown at this point.
Even if the legislature fails to pass a true “fix” to the problem of two regulatory schemes, there is a good possibility that a second “add-on” law will be passed that will supplement, but not amend, the RMLA ballot initiative. A similar law was passed in January 2018 to codify some of LARA’s emergency rules and to clarify some of the vague provisions in the MMFLA, which is a 25 page statute. The RMLA, in contrast, is a 4 page statute, so there will likely be the desire for more legislation to better clarify some of the statute’s inevitable ambiguities.
A bill to “fix” the RMLA—i.e. make it more favourable to larger investors and groups—is also possible. The one saving grace to this is that once the MiLegalize ballot initiative is passed by the voters, it will require ¾ legislative approval to amend the initiative, meaning any “fix” will have to be bipartisan. This makes it less likely that the bill will be amended to take out or make it more difficult for small growers or microbusinesses, but certainly not impossible.
5. The Wholesale Price is Going A Lot Lower
My final prediction is that the wholesale price of Marijuana in Michigan is going lower…a lot lower. I actually expect the price to drop quite a bit, which will put the squeeze on poorly run large to mid-size grows as well as smaller growers unable to compete on quality. There are two simple reasons why I believe this will come true.
First, just look to other states. The wholesale price in Oregon for outdoor is threatening to break below $100 a pound, and the wholesale price in states like Washington are hitting new lows. The reasons for the drop in price are easily predictable, at least to anyone who has taken a macroeconomics class or is familiar with the concept of supply and demand. Too much supply will cause the price of a good to drop, and legalization allows for large suppliers to enter a market they previously were not able to enter into. With at least three large, “mega-facilities” planned in Michigan, including one each in Battle Creek and Pinconning, Michigan will experience Marijuana production on a scale never before seen in the State.
This brings us to our second reason. With several mega-facilities with multiple Class C licenses and plant counts expected to range between 10,000 to 15,000 plants planned or being built in Michigan, the question is not whether the price will fall but when. To better illustrate this point, let’s do some back-of-the-envelope math. In this example let’s assume that there will be three mega projects in Michigan, one that grows 10,000 plants, one that grows 12,000 plans, and one that grows 15,000 plants, for a total of 37,000 plants. If one plant produces roughly 5 pounds per year, then these three facilities alone would produce about 185,000 pounds of Marijuana, which currently can only be sold in Michigan and only to Michigan medical marijuana patients.
There are currently about 270,000 patients in the state of Michigan. That means that these three facilities can supply roughly 11 ounces of Marijuana per year to every registered patient in the State of Michigan. While these three facilities would not be enough to supply the entire Michigan market, you can quickly see how just a few large “mega facilities” can disrupt the economics of growing in Michigan.
Just how low the wholesale price go will in the near-term will depend on just how many Michigan medical marijuana licenses the Licensing Board approves. With well over 600 commercial cannabis applications, many of which are for Class C grow licenses, there could be enough large licensed grows to drive down the wholesale price to the levels seen in Oregon. If, on the other hand, the Licensing Board starts “cracking down” on the license applications , then the wholesale price will not drop close to “Oregon” levels in the next year or so.
Even if the Licensing Board limits the amount of Michigan medical marijuana grower licenses it gives out, I do expect the wholesale price to drop significantly over the next several years. The recreational bill takes the licensing process out of the hands of the Licensing Board and makes it a straightforward, black-and-white process administered by LARA. This process would allow for many more grows to be licensed starting towards the end of 2019 since the ballot initiative wouldn’t limit how many recreational licenses LARA can give out, which would further drive down the wholesale price of Marijuana over the next several years.
Have your own predictions? Let us know in the comments below!
Scott F. Roberts Law, PLC is a Michigan Medical Marijuana Business Law Firm with cannabis clients throughout the state of Michigan. The Firm primarily represents state-law compliant medical marijuana businesses, as well as Hemp and CBD companies, real estate investors, as well as ancillary and professional service companies.
Mr. Roberts is the founder and managing member of Scott Roberts Law, a Detroit-based Cannabis Business Law Firm founded in 2014. Scott has spent his entire career representing businesses and helping them comply with municipal, state and local regulations, as well as assisting on transactional corporate and real estate matters. Scott is an accomplished attorney, author and public speaker, having spoke at CannaCon, Cannabis Industrial Marketplace, CannabisAid, and 420 Canna Expo, to name a few. He has also taught Continuing Legal Education on Marijuana business matters, meaning other attorneys see him speak to learn about the nuances of cannabis business law.