Legal marijuana arriving in California after decades of underground dealing

Show Caption Hide Caption Here’s what Calif.'s legalization of marijuana means for consumers California begins legal recreational marijuana sales in 2018 and along with that, there are a host of questions about exactly how the system will work and the rules people need to follow.

A new gold rush is sweeping California as the state prepares to launch legal marijuana sales Monday, bringing the powerful and largely underground economy finally into public view.

Marijuana has long been one of California’s most important cash crops, albeit one many visitors would never see amid the vineyards and avocado farms. Now, tens of thousands of entrepreneurs are rushing to carve out a slice of an about-to-be-legal market that has grass-growing cannabis evangelists colliding with out-of-state suits eager to make a now-legal buck.

And there's a lot to be made: The state's existing marijuana black market is worth $13.5 billion, according to cannabis financial analysis firm GreenWave Advisors, while the legal market could be worth $5.1 billion in 2018.

More: Marijuana's legalization fuels black market in other states

“You’re taking an industry that was completely underground and making it the most regulated product of all time,” said Jessica Lilga, who runs a medical cannabis distribution service in Oakland, Calif., and hopes to expand into recreational pot. “It’s just insane.”

Legalization through voter approval of Prop. 64, which created a system for legally growing and selling cannabis, also raises concerns about whether kids will start using more marijuana thanks to increased visibility and whether the state is creating a new Big Tobacco industry that puts profits ahead of public health.

While five other states already offer legal marijuana sales, the Golden State’s sheer size is expected to reshape the pot industry worldwide, potentially driving down prices for consumers while generating hundreds of millions of dollars in taxes. It also holds the promise of wiping out criminal records for some people with previous cannabis convictions and helping longtime illegal drug dealers go legal by getting them licensed.

Eight states and the District of Columbia have legalized marijuana, but only Colorado, Oregon, Nevada, Alaska and Washington have functioning marketplaces. Massachusetts and Maine expect to begin sales sometime later next year. Marijuana remains illegal at the federal level, but the Trump administration has made no high-profile moves against any state where pot is openly sold to adults.

That has store owners scrambling to erect billboards near Los Angeles International Airport and flooding bars with street marketers. California rules limit marijuana advertising, so dispensaries are getting creative in how they reach potential customers. Med Men, which sells medical cannabis but hopes to offer recreational pot come Monday, is wrapping 30 trucks with advertisements for its four existing high-end dispensaries. Cannabis firm American Green even bought an entire town — Nipton, Calif. — to create a marijuana mecca.

Because California’s marijuana law requires all cannabis to arrive in stores pre-packaged, growers and distributers are frantically developing branding and packaging to set their wares apart.

“You’re seeing a lot more sophisticated people from other industries starting to move into the space,” said B.J. Carretta, Med Men’s chief marketing officer. “If traffic doubles in January, it can’t be amateur hour.”

California’s marijuana growers are already highly sophisticated when it comes to operating illegal farms in the mountains of the Emerald Triangle north of San Francisco. But playing by these new rules is a different proposition. California’s pot regulations require a variety of water and environmental considerations, along with tight accounting and tracking.

More: California's illegal marijuana farms force cops to wield 'green' stick

Many longtime cannabis farmers are struggling with whether to go legal, in part because getting licensed can cost tens of thousands of dollars. Additionally, many longtime marijuana moonshiners are culturally opposed to playing by the rules. For generations, they have secretly grown vast quantities of pot destined for black-market users across America.

Matt Karnes of GreenWave Advisors estimates at least half of all the cannabis grown in California is illegally shipped across state lines and sold at two or even three times the price it would fetch if sold locally as medical marijuana. Those growers have an extensive network of distributors built through mutual trust over decades of underground dealing.

“What we are going to see is not only a legal shift but a cultural shift,” said Michael Steinmetz, the CEO of cannabis distribution company Flow Kana.

Steinmetz bought an abandoned vineyard and winery in Mendocino County to serve as a centralized processing marijuana center for small growers. He envisions dozens of farmers pooling their crops to be trimmed, packaged and distributed as a premium umbrella brand.

“Commodity cannabis is going to be a race to the bottom. We want to be more like wine and less like wheat,” he said.

Like other states that have legalized recreational marijuana, California is creating a network of privately owned but tightly regulated pot shops that will offer shoppers a wide variety of products, from the smokeable “flower” most people are familiar with to cannabis-infused foods called edibles, and increasingly popular marijuana extracts used for vaping. The state requires quality testing and will regulate the kinds of pesticides and other chemicals used in growing.

“Consumers at large haven’t seen that,” Steinmetz said. “In the black market, you buy whatever the dealer has and you want him out of your house as soon as possible.”

Lilga said she expects to see retail prices drop as newly formed cannabis conglomerates use their size to price out smaller players. While there's a state tax on marijuana, the government isn't regulating how much consumers will pay, leaving that largely up to the free market.

“There’s a lot of culture and community and soul being sucked out,” she said. “We see that inevitably that a lot of people will not survive the next year.”

Steve DeAngelo, one of California’s best-known medical marijuana business owners and advocates, said he worries the new regulations will artificially limit the supply early next year, potentially driving up prices.

“Cannabis consumers deserve the same choices enjoyed by shoppers at the grocery store. While everybody would like to be able to afford heirloom tomatoes, meticulously tended in small patches and selling for $5.99 a pound — most families can’t afford them,” said DeAngelo, the CEO of Oakland-based Harborside cannabis dispensary. “Most can only afford the lower-priced tomatoes grown by larger, more efficient farms. And thankfully for these consumers, regulations allow the existence of such tomato farms.”

Still, the state faces major challenges in the coming months, said Kevin Sabet, the director of the anti-legalization group Smart Approaches to Marijuana, which warns that California's legalization of marijuana is creating a new Big Tobacco industry because many Americans don’t see the broader consequences of widespread cannabis cultivation and consumption.

Data about how legalization has affected cannabis use rates, particularly among kids, remains consistently unreliable. Marijuana remains entirely illegal at the federal level, most banks refuse to handle cannabis cash and employers are struggling with how to handle routine drug testing for workers in states where pot is legal.

More: Recreational pot is coming to California. Here's a map of dispensaries in the Coachella Valley

Knowing those challenges, Sabet said California should have taken more time to work out the kinks.

“Prop. 64 was written with this expedited timeline because the industry was its main author. And the industry only makes money if things are rolled out quickly, without much thought about the actual way this will operate. California is not ready for recreational legalization,” Sabet said. “The only people who will benefit from this rollout are the Silicon Valley billionaires who have invested in this whole thing.”

Silicon Valley billionaires heavily backed Prop. 64, particularly Napster co-founder and former Facebook president Sean Parker, who donated more than $1 million to the November 2016 ballot measure.

Some industry experts say they believe venture capitalists hope to commoditize cannabis production and create a legitimate cash crop. “We’re going to have more Budweiser than craft brewers,” said Lilga, the distributor. “I can tell you it’s not fun at all. This is the epitome of the corporate model.”

That corporate model is expected to generate hefty tax returns for the state: $300-$500 million in marijuana taxes in the first year, according to cannabis analytics firm New Frontier Data. That estimate doesn’t include local sales taxes and depends heavily on how quickly the industry ramps up.

Former California Attorney General Bill Lockyer counts himself as both a responsible member of the community and someone who thinks legal cannabis can be done right. Lockyer, who was in office as medical marijuana became widespread in California, said he thinks the new recreational pot regulations are far better than the state's original medical marijuana rules — so much that he's co-founding a marijuana distribution company with colleagues drawn from the brewing and alcohol-distribution fields.

“This is the right thing for California, and we’re trying to do it in a legal and smart way,” he said. “If it winds up helping pay for my kids’ college education, I won’t complain about that.”