Could Arizona see a glut of medical marijuana?

Arizona tightly regulates retail operations in the state's 88 licensed medical-marijuana dispensaries, tracking the amount of pot sold by each outlet down to the gram.

Dispensaries are subject to twice-a-year inspections by state regulators, and customers must have a qualifying medical condition to get a card allowing them to buy and possess marijuana.

But that same strict regulation doesn't extend to marijuana supply, a lack of oversight whose significance could be magnified as permitting ramps up for new pot-growing operations.

Each Arizona dispensary is allowed one location to grow marijuana and planning is in the works for more, but regulators concede that they can't limit how much marijuana is grown legally in the state.

Marijuana growers have secured local-government permits to cultivate more than 1 million square feet of medical pot at sites from Mohave Valley to the tiny town of Amado near the Arizona-Mexico border, according to one analysis.

Some dispensary operators and at least one broker worry Arizona is on the path toward a marijuana glut. State regulators don't see a problem if growers substantially increase marijuana supply. The most likely outcome, they say, would be less-expensive pot for consumers who qualify for medical marijuana.

Local approvals allow operators to sprout marijuana in greenhouses or nurture plants under lamps at locked indoor sites. In February, the Pinal County Board of Supervisors voted to allow outdoor grow operations of up to 5 acres, though the desert heat could prove challenging for outdoor growers.

So far, 58 dispensaries have obtained permits to grow pot, according to the Arizona Department of Health Services. Another 30 dispensaries can still acquire land or buildings to grow marijuana.

If those projects are all built, they'll produce far more medical pot than Arizona's 61,000-plus card-holding patients can smoke, eat or ingest, according to agent Roy Grinnell of Benchmark Commercial, a Tempe-based real-estate firm. The firm gathers figures on marijuana-growing operations from Arizona counties and municipalities that issue permits to growers. Arizona growers are only allowed to legally sell to in-state dispensaries.

"The state can consume only so much cannabis," said Grinnell, who has brokered land sales to operators pursuing plans for large-scale grow operations.

Tracking how much is grown

The Arizona Department of Health Services regulates the state's medical-marijuana industry, controlling how many dispensaries are licensed and where they operate.

The department knows exactly how much was sold at dispensaries: 1.4 million transactions last year, with 9.1 metric tons of pot changing hands. Dispensaries are the only place where marijuana can be sold legally.

What health services employees don't report and can't limit is how much is being legally grown for sale. Arizona law does not allow state regulators to disclose the location of dispensaries or grow operations.

Patients and caregivers who don't live within 25 miles of a dispensary are allowed to grow their own marijuana, but the rate of at-home cultivators has declined as more dispensaries open.

New draft rules proposed by the state Department of Health Services would allow regulators to better track supplies. That means a state health inspector could electronically track by computer when a dispensary receives a donation from a caregiver or purchases marijuana wholesale from another grower. But those proposed rules are on hold, part of a statewide moratorium on all new regulatory rules declared as the first official act of Gov. Doug Ducey's administration.

Each dispensary is allowed one property to grow marijuana that can be located at the dispensary or at an off-site location. The grow operations can be on any property that meets state and local regulations dictating minimum distances from schools, libraries, churches or residential areas. A dispensary operator in Phoenix can obtain a state license to grow marijuana in any nook of Arizona if the property is properly zoned and permitted.

Grinnell said he does not know how many of Arizona's 58 permitted grow operations are actively cultivating marijuana. Nor does he know how much of the million-plus square feet of permitted space will actually be converted to full-scale grow operations. Some space may be used for related activities such as packaging or harvesting plants.

Will Humble, a former state health director, said the state program operates under the idea that marijuana growers can create a wholesale market that dispensaries purchase from. Not all dispensaries choose to grow marijuana, so they can purchase from other dispensaries that may grow a lot of pot but are unable to sell it all. Dispensaries also can take donations from caregivers who grow marijuana.

The system could give cultivators incentive to grow more marijuana than their own dispensary can use, since they are able to sell their surplus to other dispensaries. They also can trade with other dispensaries for strains they covet.

Humble said economic principles keep the system working. He believes dispensaries have no incentive to grow more marijuana than they can legally sell. And if there is too much supply, consumers should benefit by lower prices.

"It's Adam Smith's invisible hand," said Humble, referring to the 18th century economist's theory on free markets. "Oversupply means the price comes down."

Dispensaries have fixed costs such as lease payments, electricity and insurance, Humble added, so it's not in their best interest to grow more marijuana than they are able to use or sell to other dispensaries.

Some other experts agree with Humble, suggesting there is little risk of a glut at this point, with more than 61,000 Arizona patients carrying cards to legally purchase the substance.

"There is not enough medicine to supply the current market," said Steve Cottrell, of Desert Valley Testing in Mesa.

But Cottrell cautioned that there "absolutely" is potential for Arizona to end up with too much marijuana as more grow operations come on line.

Looking at legalization

When Arizona voters approved a medical-marijuana program in 2010, ADHS devised a system to evenly distribute marijuana dispensaries across the state.

Operators submitted applications for 126 regions, known as community health assessment areas. Many sought-after regions attracted several applicants to operate dispensaries. About 30 regions, mainly in rural and tribal areas, didn't get any and initially had no dispensaries.

The state Health Department tentatively plans to expand the medical-marijuana program later this year by accepting applications for new dispensaries. Counties and regions that don't have any would get top priority, Humble said. The system also could allow dispensaries with a minimum three years of experience to bid for new geographic regions.

Another wild card in trying to assess marijuana supply is the prospect of legalization for recreational use. Pro-marijuana forces are gearing up for a ballot initiative in 2016 that would seek voters' approval for full legalization, possibly modeled after Colorado's law that allows adults 21 and over to carry 1 ounce of marijuana.

Ryan Hurley, treasurer of the Marijuana Policy Project of Arizona, said the ballot initiative will include language that would allow state regulators to scrutinize supply and impose limits.

Some dispensary operators believe applicants now obtaining permits for large grow operations may be seeking a foothold in anticipation of legalization, a bet that could backfire if Arizona voters reject the ballot measure.

Others think increasing interest in grow permits could be a sign that Arizona's medical-marijuana market is maturing, with more patients and increasing awareness among doctors who see marijuana's potential as a treatment.

Still, the state's marijuana pioneers are nervous about the eventual possibility of an oversupply.

"It's a big guessing game," said Grinnell, citing the lack of reliable information on the state's marijuana supply.

Supply and demand

Curtis Devine, who operates the Mohave Green dispensary in Mohave Valley, said about 90 percent of the marijuana he grows is sold to other operators. His business is financially healthy now, but he questions whether Arizona could handle a supply surge.

"If there is 1 million square feet, I don't know if the state can support that," Devine said.

Devine's indoor grow operation, located near his dispensary, spans 14,000 square feet across two levels. He also has rooms for trimming, harvesting and packaging. He said his operation can produce about 2,500 pounds each year.

A former contractor, Devine switched careers after voters approved the medical-marijuana program in 2010. He "learned some stuff the hard way" about how to grow. He switched soil and nutrients to better nurture his pot. He also dropped prices to spur business.

Devine said his operations are profitable enough to support 28 employees and to make regular donations to community non-profits. But he also said it's a lot of work.

"It's not like you just open a dispensary and you start making money," Devine said. "A lot of people are probably still losing money."

In Amado, a small town along Interstate 19 just north of Nogales, what will potentially be Arizona's largest marijuana-growing operation is sprouting to life.

It is controlled by Nature's AZ Medicines, a dispensary operator with retail locations in Fountain Hills and Phoenix and a small grow operation in central Phoenix.

Dispensary operator Mark Steinmetz launched the Amado location to create a steadier supply of marijuana. He describes Arizona as an "underdeveloped market."

Steinmetz not only wants to grow enough for his dispensaries, but also sell his excess to other dispensaries.

If the first 50,000-square-foot grow operation is a success, Steinmetz plans to add a second, similar-sized operation at his Amado site. That would create 100,000 square feet of pot production.

"So far, it has taken off," Steinmetz said. "But ask me in a few months."

Steinmetz declined to allow the media to see his operation. But he said his Amado greenhouse is high-tech. It includes curtains to control light during the plants' flowering cycle. It has a giant water wall to cool the air. His worry is that the cooling system will be less effective during the monsoon.

"It takes a lot of expertise," Steinmetz said.

Other states' circumstances

Both Colorado and Washington have experienced uneven production of marijuana — and price drops.

When Colorado began allowing recreational use in January 2014, it initially limited storefront operations to those with existing medical-marijuana permits. It also limited production to the number of patients that dispensaries served. Those production limits, and a rush of tourists hoping to sample legalized marijuana, sent pot prices upward in the early months of the program.

Last September, Colorado allowed non-dispensary operators to open retail storefronts and made growers prove they sold 85 percent of inventory before adding new plants. The changes triggered a 50 percent surge in new storefronts, said Miles K. Light, a partner with Marijuana Policy Group, a Colorado-based researcher.

Commercial growers also increased production to meet the new demand.

Light said the competition spurred a dramatic drop in wholesale prices, from a range of $6,500 to $7,500 per pound of pot in early 2014 to about $2,000 per pound now.

Not only have consumers benefited with lower prices, Light said, but it also has squeezed out illegal street dealers who no longer have a price advantage, and "gray market" caregivers who could legally grow. Caregivers once accounted for about 30 percent of pot supplies in Colorado, but their share of the market has rapidly decreased.

"That's how things should work," Light said. "The benefit of this is, the diversion from the gray market and black market to regulated sales."

Humble sees that as the potential path for Arizona. People who qualify for Arizona's medical-marijuana program now might choose instead to buy from street dealers, who sell at cheaper prices. But as pot supplies grow and prices drop, some of those consumers may turn to regulated dispensaries.

Grinnell, of Benchmark Commercial, nonetheless believes some Arizona grow operations may be caught by surprise as production here ramps up. The state has no limits on production — and no publicly available information that marijuana growers can analyze before pursuing expensive grow operations.

It's hard to say when the effects of increased supply will kick in. The amount of time it takes to grow marijuana can vary based on factors such as technique and strain, experts say. Some choose to grow higher-quality strains that take longer to produce. And not all Arizona growers expect to pursue maximum production with their grow operations.

Skeptics doubt that all growers now pursuing permits will actually start projects, particularly if there is a glut.

"There is a pretty big difference between having a use permit and actually going forward, building out a facility and actually putting plants in the ground," said Hurley, of the Marijuana Policy Project of Arizona.

But Grinnell estimates Arizona could produce about 100,000 pounds of marijuana each year, based on the land for which permits have been secured.

"That's about 20 joints for every resident in this state," Grinnell said. "That's a lot of pot — and I don't think Arizona is going to consume at Colorado's levels."

At a glance

Patients diagnosed with any of 13 medical conditions qualify for a card allowing them to purchase marijuana at a state-licensed dispensary. Each dispensary is allowed one location to grow marijuana.

Arizona's medical marijuana program in 2014:

-- 61,272 patients with cards

-- 58 dispensaries obtained permits to grow pot

-- 371 caregivers qualified to grow their own marijuana

-- 1.4 million transactions involving 9.1 metric tons of pot

Source: Arizona Department of Health Services