Survival Small Growers
Survival Small Growers in part, we were prompted to write this article by the press noise generated by the possibility of roll-backs in cannabis taxes. See “California distributors warn ‘double taxation’ by cities could further strain legal marijuana industry”
Cannabis taxes are but a small part of one of several problems that confront California’s cannabis industry. If you look at the Pie Chart in our article on the division of the dollars generated from the sale of cannabis oil, you will see the minuscule impact of the elimination of the Cannabis Cultivation Tax (“CCT”) on this part of the industry. Cannabis taxes are paid by consumers – not by the dispensaries and distributors that are leading the charge for cannabis tax reductions. These two groups are leading the charge against cannabis taxes because these taxes cut into their profits – not because a reduction in these taxes will benefit consumers or cultivators.
For the vast majority of California’s cannabis growers, the utilization of a Cannabis Cooperative Association (“CCA”) in the movement of cannabis through the commercial market will provide far more financial benefit than a reduction in cannabis taxes will provide. The preceding is a long explanation of one of the reasons we decided to write this article.
Cannabis growers have little reason to lobby for lower cannabis taxes. Lower cannabis taxes will produce little if any benefit for growers. California cannabis growers who are not looking at how to utilize a CCA to increase their profits are throwing away money. The California legislature created CCAs to create a vehicle so small growers could compete with larger, well-financed commercial cannabis businesses. The California legislature did such a good job that a properly structured and efficiently operated CCA has a financial advantage over a larger, vertically integrated conventional business structure.
The enabling legislation for CCAs was part of SB 94. It was the product of a grassroots movement in California’s cannabis industry led by the California Growers Association and similar organizations, such as the Humboldt County Growers Alliance. This legislation created a special form of a corporation – CCA – expressly for the benefit of small cannabis cultivators.
CCAs are the equivalent of a purchasing, processing, and marketing agricultural cooperative. The California legislature was concerned well-financed, vertically integrated businesses would squeeze small growers out of California’s commercial cannabis industry. This legislation was passed to establish a vehicle for the preservation of the communities of small cannabis growers, particularly in the Emerald Triangle, who have been the backbone of California’s cannabis industry since the late ‘60s. Of course, as everyone interested in California’s cannabis industry is aware, small growers are being squeezed out of the commercial marketplace.
The California legislature exercised far more wisdom than one generally expects from a legislative body in enabling this new form of California corporation. The legislation gives all of the benefits of an agricultural cooperative association to California cannabis growers. A number of our readers are unlikely to understand the power and influence of agricultural cooperatives on American business. Many who are involved in California’s cannabis industry will be surprised to learn that some of the largest and most powerful corporations in the United States evolved out of agricultural cooperatives over the past 100 years. See The Economic Culture of U.S. Agricultural Cooperatives.
This wonderful piece of legislation, unfortunately, has not been utilized by the group it was designed to benefit for a number of reasons. We are writing this article in an attempt to direct the efforts of some of those individuals who are interested in the welfare of small cannabis growers to CCAs because these corporations provide competitive advantages over well-financed, vertically integrated cannabis businesses organizations. Properly organized and operated CCAs are more financially efficient business organizations than vertically integrated, conventional business structures financed with millions of dollars out of Canada.
Before we discuss how cannabis cultivators can utilize this wonderful piece of legislation, we must describe what CCAs are and why they offer so much in the way of financial benefits to cannabis cultivators. The codification of the enabling legislation for CCAs is found in Division 10 of the California Business and Professions Code (“B&P”) at Chapter 22. Chapter 22 is entitled to Cannabis Cooperative Associations. The codification of this enabling legislation identifies Articles 1 through 11, Sections 26220 – 26231.2 as the relevant provisions of California law applicable to CCAs.
Article 11 is an unusual provision to which we will address in a separate article. Article 11 creates some unique challenges for California’s regulatory agencies that these agencies they have not yet recognized let alone addressed.
Agricultural cooperative associations grew out of the industrial revolution in the United States. Agricultural cooperative associations gave farmers the ability to band together into a legally recognized organization that collectively represented the members of the organization. Such organizations gave individual farmers acting as an organized group the financial and political clout to compete on a level playing field with well-financed processors and distributors. The preceding is a brief history lesson for most agricultural commodities. The California legislature passed the enabling legislation for CCAs to give small cannabis cultivators the same collective power growers of other commodities received a century ago. The legislation was passed in order to enable their survival for small growers.
Why are CCAs so important for small cannabis cultivators? A good starting point is found in the obvious political clout of organized groups of small cultivators. This is illustrated by the critical force such groups played in the passage of the enabling legislation for CCAs. At a functional level CCAs give small growers the purchasing power and marketing power of much larger business organizations. CCAs give small growers far more, however, than political, purchasing and marketing power. CCAs give small growers the opportunity to participate in, and to profit from, all of the business functions involved in the movement of an agricultural commodity from the cultivator to the consumer.
The enabling legislation for CCAs focused on marketing. The California legislature states the purposes of the enabling legislation for CCAs in Section 26222 is to “promote, foster, and encourage the intelligent and orderly marketing of cannabis product through cooperation . . . eliminate speculation and waste . . . make the distribution of cannabis product as direct as can be efficiently done [and] stabilize the marketing of cannabis product . . . .” In Section 26223(a) the legislature again references marketing in the first statement of the reasons for which cultivators may organize a CCA to engage in “the cultivation, marketing, or selling of the cannabis products . . .” of the members.
The benefit to a small grower of being a member of a group that is large enough to have marketing power with regard to prices and terms is obvious. While a single CCA has only the power of one good-sized business, the enabling legislation for CCAs allows one CCA to be a member of other CCAS. Multiple CCAs acting on a coordinated basis to establish prices and terms for an entire industry are far more powerful than a single CCA. The California legislature recognized the potential abuse of this power and determined restrictions had to be placed on the power of CCAs over marketing.
As a consequence, the California legislature included Sections 26222.3 and 26222.4 which respectively state,
“26222.3. An association that is organized pursuant to this chapter shall not conspire in restraint of trade, or serve as an illegal monopoly, attempt to lessen competition, or to fix prices in violation of law of this state.”
“26222.4. The marketing contracts and agreements between an association that is organized pursuant to this chapter and its members and any agreements authorized in this chapter shall not result in restraint of trade, or violation of law of this state.”
The benefit to a grower that a CCA provides through marketing is only the tip of the iceberg. As is noted above, through a CCA a cannabis cultivator can own and profit from all of the functions involved in the movement of cannabis from cultivator to consumer. A CCA is entitled to engage in all of the functions involved in the movement of cannabis from the cultivator. A CCA must participate in such functions through duly licensed cannabis businesses, but a CCA is not prohibited from participating in such activities and profiting from them. Such businesses can be wholly or partially owned by a CCA. Such businesses can be independently owned. A CCA can own, or have an interest in, a distributor or a manufacturer. A CCA could even own a dispensary or delivery-only dispensary, although for reasons relating to the taxation of California’s cannabis industry such a business model is not well-advised.
One of the reasons for mentioning the benefits that flow to growers from the ownership of distributors or manufacturers through CCAs is the impact of such ownership on the power of collective marketing. CCAs that sell cannabis at the same price and on the same terms to CCA controlled distributors or manufacturers as they sell to competitors are not conspiring to restrain trade or fix prices. Such CCAs are dealing with all market functions on a level playing field unlike the present situation in California’s cannabis industry.
On another occasion, we will address some additional benefits of CCAs for small growers.