California’s Small Cannabis Farmers Launch Direct-to-Consumer Sales Platform Inspired by Industry Struggles
Members of the Mendocino Cannabis Alliance, who have struggled to thrive in California’s regulated adult-use marketplace, have come together to launch an online sales and delivery platform.
March 11, 2022
By Melissa Schiller for the Cannabis Business Times
https://www.cannabisbusinesstimes.com/article/california-cannabis-farmers-industry-struggles/
For Casey O’Neill, owner and operator of HappyDay Farms, a ban on direct-to-consumer sales under California’s adult-use cannabis regulations was the first of many blows to small farmers operating in the state’s regulated marketplace—and the blows just kept coming.
That’s why O’Neill, along with 19 other Mendocino County-based cannabis growers, have come together to launch MendocinoCannabis.Shop, an online sales and delivery platform that allows the farmers to sell their small-batch, craft cannabis products directly to Sacramento and Butte County residents.
Products purchased on the platform, which launched March 7, provide 90% return of the retail price back to the farmer, after applicable taxes are paid.
The farms participating in the MendocinoCannabis.Shop platform are members of the Mendocino Cannabis Alliance (MCA), a cannabis trade association that provides guidance to small, legacy cannabis operators whom O’Neill says are struggling to stay afloat in the wholesale marketplace.
A Struggle to Survive
HappyDay Farms is heading into its 12th year of gardening. The family farm, located in northern Mendocino County, grows vegetables and cannabis, and also raises livestock. HappyDay Farms sells its non-cannabis wares through farmer’s markets, community-supported agriculture programs and boxed vegetable subscription services.
When it comes to the farm’s cannabis crop, HappyDay Farms served California’s medical cannabis market under Proposition 215, the state’s medical cannabis law, before the state’s regulated adult-use marketplace launched in January 2018 under Prop. 64.
“We had strong returning clientele [and a] solid business model,” O’Neill says. “The new regs removed our ability to do direct-to-consumer sales. So, that was the first step in the struggle.”
The second issue, he says, was competing with the larger-scale farms that California began licensing under Prop. 64.
And things only became more complicated from there.
“The original promises of the regulations were not maintained, and at the same time, farmers were stripped of a lot of their original abilities,” O’Neill says. “Then, couple all that with a very Byzantine permitting process—ironically, the state is quite a bit easier for us here in Mendo than dealing with the county. The county has struggled to figure out it. … They just kept adding layers onto it.”
Over 80% of California’s more than 8,500 cannabis licensees still operated under a provisional license, rather than a more permanent annual license, as of September 2021, according to data from JD Supra. The state will stop issuing provisional cannabis licenses in June 2022, and operators planning to apply for a provisional license must do so by March 31.
Blaire AuClair, owner of Radicle Herbs, a regenerative cannabis farm in Round Valley, says that of the roughly 1,000 cannabis cultivators in Mendocino County, only around 200 have annual permits at the county level.
“The other 800 still only have [provisional licenses], including myself,” she says. "We can’t even begin to do the [California Environmental Quality Act] (CEQA) portion of our application, the Environmental Review, until we have our annual permit. … Then, [we] will have to do an extensive Environmental Review, which has to be done, created, and also reviewed and modified by the county. So, it’s pretty daunting to think about that and being able to get through that process.”
Then, once these 800 provisional licensees in Mendocino County receive annual permits at the local level, they must then embark on the journey toward annual state licenses.
“Right now, there are only about 10 state annual licenses in Mendocino County,” MCA Executive Director Michael Katz says. “So, in the state, there are only about 20 percent, tops, of licensees that have annual licenses.”
However, as Katz points out, without the ability to sell directly to the consumer and without significant tax relief, farmers lack the necessary revenue to participate in the licensing process, regardless of the deadlines.
“The people who have chosen to be licensed are not fly-by-night, running around, going to bounce out in a year,” he says. “The investment of time, energy and resources is just too great.”
High taxes have also burdened California’s small farmers, especially the state’s cultivation tax, which is weight-based. The current tax rate is $10.08 per dry-weight ounce for flower and $3 per dry-weight ounce for leaves.
With wholesale cannabis prices plummeting over the past year, O’Neill says the current tax rate is unsustainable.
“Right now, I know lots of people who have sold pounds for $300 or less, and the cultivation tax is $160 a pound,” he says. “There’s no business that’s taxed at greater than 50% of potential revenue before it even leaves the farm gate. And the cultivation tax is new to any other agricultural industry—there are no other agricultural industries that are taxed in that manner, at that rate.”
High taxes, coupled with the additional costs to get product to market—including testing, packaging and distribution fees—force many farmers to frontload funds that may not be recouped for up to 60 days, O’Neill says.
In addition, Mendocino County levies a 2.5% gross receipts tax on 2.5% of farmers’ total revenue.
“It doesn’t mean 2.5 percent of what’s left over after you pay your costs—it’s 2.5 percent of all your revenue,” O’Neill says. “That’s an additional burden that is very much a struggle to deal with, as well.”
AuClair says that while she initially thought her business’s “existential crisis” was getting through the licensing process, her concern has since shifted to a flooded marketplace that has resulted in a steep decline in wholesale prices.
“Basically, during this past summer of 2021, I think we really saw the regulatory issues … with the stacking of licenses and the removal of the one-acre [cultivation] cap, and the flooding of the marketplace with cheap, industrial cannabis,” AuClair says. “We saw a 75 percent decrease in the price of cannabis, also without the cultivation tax changing, since it’s a flat rate.”
In 2020, Radicle Herbs received between $1,200 and $1,600 per pound for its wholesale cannabis crop. Last year, the farm received $400 per pound.
“The wholesale market has just become incredibly flooded with product, and I think a big part of that is the way the structure of the licensing … in California has happened, where they’ve just allowed basically corporations to come in different places and have allowed huge amounts of cannabis to be cultivated and have just pumped in a lot of product into the marketplace, where there’s just too much, combined with just not enough opportunities for retail,” AuClair says. “The way that California had licenses come out, every county could decide how they wanted cannabis to be regulated within their county, and there are many counties that don’t allow any dispensaries.”
Local bans on cannabis retail have led to unregulated shops, where customers can purchase products on the illicit market for less than they would in a licensed dispensary, Katz says.
“In the unregulated market, … there are no taxes,” he says. “Consumers … go into a shop that they don’t know whether or not it’s legal, probably because it still looks like a legal shop and there are packaged products that look like legal packaged products. They’re going to pay for a package of flower 40 percent to 50 percent less than someone who’s purchasing from a licensed shop. So, that’s a huge issue because there isn’t an incentive for a consumer to seek out a more expensive product that seems to be the same, more expensive product. … Most people just think cannabis is legal, so if you see cannabis for sale, that’s legit.”
With so much pressure on California’s legal cannabis operators—and especially small farmers—something has to give.
Rising From the Ashes
While the MendocinoCannabis.Shop platform can’t solve all the issues that California’s cannabis farmers currently face, it aims to revive direct-to-consumer sales in a state-compliant way, while also giving the majority of revenue back to growers.
“This is a really unique situation where when people are purchasing cannabis, they’re actually able to support a living wage for these small farmers and know that the vast majority of their dollars are going back to the farmer instead of to the state,” Katz says.
“Like I said, direct-to-consumer, that’s our business model,” O’Neill adds. “I go to the farmer’s market, I stand behind my table, and I interact with people. And I love it. So, this is a huge step in the direction of creating and maintaining these direct-to-consumer pathways in this cooperative-type process where we’re able to work together as farmers, we’re able to partner with people who hold the licenses for distribution and retail, and long-term, we can start to build out this idea of the wine club model, the returning customer, the CSA-type model—all of these different avenues for creating returning, consistent clientele that helps to provide a stable bottom line for the farm.”
Katz says the discussion around the MendocinoCannabis.Shop platform began in August 2021, when he and some of the organization’s members realized that a direct-to-consumer pathway has been on the minds of many small farmers since Prop. 64 took effect. The organization wanted to find a way back to a place where producers could sell directly to patients and consumers—and receive the full value of their product.
“The California cannabis regulatory system is designed to create separation between the cultivator and consumer through retail, so breaking through those barriers is a challenge,” Katz says.
The organization looked within and tapped some of its members for help in implementing the MendocinoCannabis.Shop program.
Brandy Moulton, CEO of Sovereign, a cannabis cultivator, distributor, retailer and delivery service in Fort Bragg, along with leaders from Mendocino Cannabis Distribution (MCD), Madrone and The Bohemian Chemist, offered use of their licensed services to help bring the platform to life.
“We were able to piece together this plan for how we can gather folks’ products, utilize Brandy’s retail in Sacramento, and in that process, we understood that we needed to be able to market it,” Katz says.
Participants in the program contributed marketing dollars, which were used to launch the MendocinoCannabis.Shop platform, as well as secure digital marketing and a billboard advertisement in Sacramento.
The program is now trying to raise awareness about the value of purchasing cannabis directly from small farmers who align with sustainable and regenerative values and whose products are similar to non-cannabis products that consumers find at co-ops and farmer’s markets.
“It’s a step in the direction we’ve been trying to head for a long time, and it’s been so rough in the industry lately that, for all of us, we felt really demoralized,” O’Neill says. “We’ve made various attempts at cooperative projects in the past and just haven’t been able to make them stick, so this feels like a new beginning that is very exciting for us. Cooperation has always been one of the main threads in the tapestry of our community. As small business owners, learning how to work together in the new paradigm has required a lot of effort.”
“This awesome project was born in collaboration with a lot of different folks, and I think it just really embodies … the community spirit of our region and how much we all really care about each other and want to see each other succeed, and want to see small farmers in general succeed,” AuClair adds.
More Help On the Way
California Gov. Gavin Newsom and the Legislature seem to understand the issues that are threatening the state’s small cannabis farmers, and a few key proposals are on the table to provide relief to the industry.
Newsom included a plan in his state budget proposal, released in January, that aims to aid local governments in opening up more legal cannabis retail outlets and reform the state’s tax policy.
In addition, State Sen. Mike McGuire has introduced legislation that would end California’s flat-rate cannabis cultivation tax on July 1.
Assemblymember Jim Wood has also come to the industry’s aid with a bill that would authorize the California Department of Cannabis Control to issue temporary cultivator event retail licenses that would allow small farmers to sell their cannabis products at events throughout the state.
“That would be really, really huge,” AuClair says of Wood’s bill. “One of the issues we have when we sell at events is there may be … 30 different farms there. People can’t buy a product when they come to our booth. They then have to go to a retailer. … So, once you make this connection with a customer and they want to buy your product, by the time they’ve gone around and looked at 30 people’s flowers, who knows if they’re then going to buy your product afterwards. So, being able to have that direct connection just like farmers do at a farmer’s market and create that relationship is really essential to our ability to survive in this industry.”
While the powers that be consider legislative reform, MCA hopes to expand the MendocinoCannabis.Shop platform to other areas of the state to help more small farmers access direct-to-consumer sales.
“For us to expand into other areas, we will have to find like-minded, aligned folks who really want to support this community,” Katz says. “Ultimately, we know that those folks are out there, but we are completely resource-limited in our ability to expand this offering to other areas.”
Beyond providing much-needed relief to small farmers, Katz hopes the MendocinoCannabis.Shop platform will help cannabis consumers identify safe, reliable products that align with their values.
“This is an opportunity for new consumers who are trying to figure out, what’s a reliable source for conscious products?” he says. “This is exactly that platform, so we want people to know that if they’re just trying to get it figured out, what better way to start than with farm-fresh product from people who have been doing this for decades, sometimes generations?"
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