The Budding Entrepreneur: Getting into the Cannabis Industry
On November 8, 2016, Massachusetts residents voted to legalize marijuana; and on July 1st the first retail shops (dispensaries) opened. No doubt, growing cannabis will be far more profitable than tomatoes: with huge demand and little competition, farmers can command a much higher price. Many farmers are already creating plans to add this cash crop to their sales mix. While the details are still being worked out, we’ve been doing some research on our own to help familiarize you some of the nuances and financial considerations of this budding industry. Here’s what we’ve learned.
The Basics
There are two basic varieties of cannabis:
- Marijuana – the psychoactive plant containing more than 0.3% THC (the psychoactive chemical) based on dry weight. Consumers use it for recreational and medicinal purposes. It falls under the jurisdiction of the Cannabis Control Commission (CCC).
- Hemp – a variety of cannabis bred to have little or no THC (less than 0.3%). It is grown for fiber (clothing), food (hemp seed and oil), or CBD extract (therapeutic products). Hemp falls under the jurisdiction of Massachusetts Department of Agricultural Resources (MDAR).
While both kinds of cannabis were illegal in Massachusetts prior to 2016, hemp has been grown in the state for research purposes since 2014. As a result of changes in the farm bill: universities and state programs were given allowances, if legal at the state level, to grow hemp as an agricultural pilot program. Even though you may have purchased hemp products prior to 2014, it was probably grown in Canada and then shipped to the US.
Despite being an “agricultural product” cannabis is still federally registered as a Schedule 1 controlled substance. As such cannabis farmers cannot receive the benefit of any federally backed program, like loans, insurance, and grants. Marijuana farmers face further challenges as they don’t benefit from the right-to-farm laws, and local jurisdictions can block zoning permits if they opposed cannabis in their communities.
There are several ways farmers can enter the cannabis market, and a license is required for each process. The licensing for medical vs. recreational, and grower vs. processor vs. distributor are all different. Growers will need to determine the end use of the product (and where they fit in the value chain) prior to applying for a license.
For hemp growers, there are two distinctions – a grower or processor.
- Growers will be responsible for cultivating the plant, whether outdoors or indoors. They are required to purchase certified seeds and comply with regulated signage, reporting, inspections, and testing.
- Processors can either extract or manufacture:
- Extractors remove the usable parts from the plant, such as the fiber, seed, or oil. They are responsible for tracking the crop from receipt through the extraction process. If the product is intended to be used for human consumption, then they will also need to comply with testing under the Department of Public Health.
- Manufacturers create the end product that is packaged, labeled and ready for sale, such as cloth, infused products, and edibles. They are also responsible for tracking the product from the extractor and comply with labeling requirements.
For marijuana, entrepreneurs can enter the supply chain at various points:
- Cultivators grow/produce the actual cannabis plant
- Processors extract the THC from the plant to make cannabis products such as oils and edibles.
- Dispensaries sell the marijuana products to the consumer.
Other parts of the marijuana supply chain include independent testing laboratory, storefront retailer, transporter, and research facility.
Even if you’re not a farmer, you can still support the cannabis industry:
- Advocate – Farmers will need help navigating town bylaws, zoning considerations (to avoid getting zoned-out), and earning municipal host agreements, which will require educating local communities on the benefits of the local cannabis industry.
- Growing practices – Farmers will need support in learning the proper growing techniques for propagation, flower and bud development, and breeding.
- Financial services and loans – Farmers will not be able to use federally insured banks, loans, and grant programs. They will need support in conducting business transactions, brokering purchases, financing, and payroll services.
- Business services – There is an opportunity to help farmers with brand development, particularly for sun-grown or climate-friendly cannabis in a competitive market with industrial, indoor growers.
Financial Considerations
Without question, cannabis will be a high profit crop. Already we’re seeing this in Colorado and Oregon. Nonetheless, there are many costs specifically. associated with cannabis which could make it prohibitively expensive to enter the market.
- Because cannabis is still illegal on a federal level, federally-insured banks will not provide services to cannabis businesses. As such, all transactions are made in cash – from selling, to paying bills and employees, to reimbursing investors. There are a few banks in Massachusetts that are working through the process to offer services.
- Extra security measures are required by law for growing and selling facilities. No doubt, with an all cash business, you’d likely want extra security for the cash as well.
- Many communities are imposing a “hosting tax” requiring producers and sellers to pay a fee proportional to sales.
- Federal taxes must be filed on revenue, not profit.
- For hemp growers, there is the added cost to test the amount of THC in the plants in order to prove it’s grown under the 0.3% threshold.
We’re already working with clients to help with business planning. Let us know how we can help you.
Resources:
For Hemp:
For Marijuana
