Colorado’s Cannabis Growers Will Shoulder the Cost of New Regulations
Colorado is home to one of the most mature cannabis industries in the United States. Since voting to legalize recreational cannabis in 2012, the state’s cannabis industry has grown into a major economic player. Sales of the drug broke the $1 billion mark by 2016, just two years after the first legal recreational sales took place in the state. But after enjoying months of consecutive record-breaking sales figures in early-2017, changes in both the cannabis market and the regulatory landscape may soon be putting a financial squeeze on local cultivators.
Forecasting the Colorado cannabis market
Troublingly for cultivators, this trend of continuous record-setting growth is not forecasted to continue in Colorado, despite the medicinal and recreational cannabis sales in 2018 being projected to surpass $1.6 billion for the first time. In 2017 the year-over-year growth was measured at 19%, but estimates given for 2018 put it at a more conservative 10%.
One of the most likely causes of this decelerating growth is that the cannabis market is reaching maturity. In a similar way to the slow decline being seen in the American beer industry, the cannabis market is reaching a point of saturation where it is already serving the majority of residents who are interested in consuming the drug.
The legalization of recreational cannabis shifted many pre-existing cannabis users away from black market sales and towards the legal cannabis dispensaries, causing the industry to initially grow rapidly. In response to this, cannabis cultivators rushed to meet consumer demand but this rush created an oversupply problem, which in turn caused wholesale cannabis prices to fall.
It is unclear whether regulations will be needed to help stabilize the cannabis market, or if the current tumultuous situation is just a natural transition period following the initial market boom, but in the face of slowing market growth and falling prices, many small cannabis producers are already uncertain of their future.
Changes to testing regulations
Against this backdrop of economic uncertainty, cannabis producers are also having to navigate recent changes to testing regulations brought in by the state.
New legislation brought in by the Colorado Marijuana Enforcement Division, in effect from August 1st, now requires mandatory pesticide testing on all strains of cannabis flower and trim that is sold in the state. The legislation does not call for mandatory testing of cannabis concentrates, but this is put down to the absence of an established set of acceptable limits for pesticides in cannabis concentrates, which would imply that once these limits are agreed upon there may be further legislation drafted to cover the testing of cannabis concentrates.
The inclusion of mandatory cannabis testing in Colorado legislature brings the state alongside the likes of California and Oregon, which already require mandatory testing of all cannabis products, though the exact pesticides being tested for varies from state-to-state.
Under the new regulations, medicinal and recreational cannabis sold in Colorado must be tested for:
● Abamectin (Avermectin B1 &B2)
● Spinosad A&D
Cannabis cultivators must submit a sample from each strain for mandatory testing. Validated cannabis producers need to submit test samples every 30 days for continued monitoring. The validation process itself involves a much more intensive testing regimen where strains are tested weekly for a period of 6 weeks. Each test costs the cannabis producers money, and so the introduction of mandatory testing may result in a substantial increase in the operating costs for small-scale cannabis producers.
The impact on local business
Denver-based Colorado Harvest Company is one of many businesses that are feeling the financial impacts of the regulation change.
“It’s not like you can charge any more for the same product,” says Tim Cullen, CEO of the Colorado Harvest Company, in an interview with the Denver Post. “You’re just paying more [to produce the product].”
Cullen operates two different cultivation sites, each producing around 25 unique strains, and is currently going through the process of becoming a validated cultivator. With the average cost of a pesticide test being around $100, Cullen has estimated that his outgoings on testing this year will total around $30,000. While he recognizes that cannabis testing is an essential part of keeping consumers safe, he also feels that more could be done to support businesses during this transition.
“You can’t have the state government imposing all these new tests every year that come out of the profit margin of the business without giving some relief on the federal tax side that takes all of the profit out,” he added. “It’s an additional cost that does not generate more revenue for the company, but it’s also absolutely necessary that cannabis be tested for pesticide use.”
The cannabis tester’s perspective
With the advent of mandatory testing, the licensed cannabis testing laboratories in Colorado are preparing for an increase in their annual turnover, but also an equally substantial increase in their workload.
Nordic Analytical Laboratories, also based in Denver, have spoken publicly about what the changes in regulations will mean to them.
In order to keep up with the increased demand for their testing services while maintaining the same efficient turnaround of results, Nordic Analytical have had to purchase an additional liquid chromatography-mass spectrometry (LC-MS) instrument. These typically cost anywhere between $300,000-$500,000 so it is a substantial investment for the laboratory. They’ve also gone from employing one full-time pesticide testing technician, to employing four.
“I know the cost is very high for the growers, and they’re not happy about that,” explains the laboratory owner, Kimia Mahmoodi “But it costs us a lot of money to do the testing as well.”