There's an elemental struggle for the future of New York's cannabis market

Hi everyone,

It was another eventful week in the cannabis world, and we’ll get into all of it.

But first, about 180 of you have joined since the last edition went out. If you don’t know me already, I’m Jeremy and I’ve covered the cannabis industry for a quite a while now.

I’ve got a long track record of breaking stories about the people, companies, and policies that matter.

I want this newsletter to be your guide to the brave new frontier of cannabis, whether you’re already in the industry or are looking for your opportunity.

I want to inform you on the news you can use, cut through the bullshit, and hopefully give you something fascinating to read.

All that’s to say I’ve seen a thing or two, and I’ve heard even more — and like any good reporter, I’m terrible at keeping secrets.

You’ll be the first to know when I have something good to share.

A quick note on the essay below: I usually wouldn’t write something this long or big-picture.

Versions of this have been knocking around in my head for years now, so I thought I’d use yesterday’s news to just send it.

Either prepare to read 2500 words or bookmark this for later.

And as always, let me know what you think.

-Jeremy

Today’s Cultivated is sponsored by Durée & Company.

Durée & Company is one of the top public relations and marketing firms in the cannabis industry.

I can say that with confidence: I’ve worked with the team and their deep roster of clients on many stories, and I always value their insight and expertise about all things cannabis.

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💡What’s the big deal?

What happened: New York’s cannabis regulators are opening their doors to everyone — including big cannabis companies.

That means large publicly traded companies, known as multi-state operators or MSOs in industry parlance, will finally have their chance to enter the state.

It’s a move that sets up an elemental struggle for the future of the state’s potentially multibillion-dollar consumer cannabis market.

These large companies, the majority of whom already operate in the state’s medical market, will have to pay at least a $5 million fee to open up a recreational cannabis shop and will have to pay millions more in fees to open up more stores.

The state also opened up licenses for micro-businesses, research, and other segments of the market, as part of the final approval for the package of regulations governing the industry.

Everyone will be able to apply by October 4.

Exciting time to be a journalist to say the least.

Zoom out: As longtime readers of this newsletter know, New York tried to do something different with legalization: Create a market that deliberately seeks to repair the harms of the War on Drugs rather than one that would be dominated by a handful of companies with mostly white and male executives.

New York set up a program that would give individuals either with past cannabis convictions or a close family member with a conviction preferential access to the lucrative market.

That’s unlike other states which flipped a switch immediately and let big companies (and their backers) come pouring in.

But those programs, like the CAURD licensing program, have been mired in lawsuits from all angles.

There’s plenty of anger on both sides. Some investors say that regulators shouldn’t be in the business of picking and choosing who has access to the market based on criteria that locks them out.

Advocates, for their part, say that the War on Drugs was perpetrated on mostly minority communities in New York City and around the state, and that it’s only fair they get to benefit from the economic opportunity first.

Okay, but: The Office of Cannabis Management (OCM) and the Cannabis Control Board (CCB), the state’s chief cannabis regulatory agencies, have been caught in the middle of this fight.

Like most regulatory agencies and politicians, they’re in an un-winnable position, though they aren’t blameless as I’ll get to later.

They’ve been criticized for promising “generational wealth opportunities” to minority entrepreneurs, who’ve taken on tons of debt and mostly been unable to open their stores thanks to the aforementioned lawsuits and red tape.

They’ve been blamed for the explosion of illicit cannabis shops, or weed bodegas, cropping up all over the city and for the presumed consumer safety issues that come with selling untaxed and untested products.

And they’ve come under fire from the right-leaning members of the cannabis investor community — both in real life and on social media — for what they say goes against American free market principles.1 

Many of these investors, to be clear, are losing lots of money from investing in cannabis stocks and want to point their fingers at someone.

And while the OCM’s policies have mostly been attempts to benefit advocates and those aligned with the social justice mission, Wednesday’s move caused a lot of anger among that camp.

‘I feel like I’m going to hang myself’

For small cannabis farmers who were promised that the state would look after them, and not hand the industry to big corporations, Wednesday’s move felt like a dagger.

“I had the police come to my house because I’m done. … This ruined my life,” Jeanette Miller, a cannabis farmer in upstate New York said during the comment period at the meeting.

“I feel like I’m going to hang myself. … We’re tired. We’re done. We’re struggling. We need help.”

The OCM is far from blameless in all of this.

As I’ve written before, the OCM’s goals are laudable, but the execution has been anything but.

The gap between when the Marijuana Regulation and Taxation Act was passed, and when stores actually started to open, was far too long. That gap led to a boom in illicit sales — tax revenue that could’ve been captured by the state.

They’ve been ineffectual at cracking down on weed bodegas. Many of the minority entrepreneurs they claim to support won’t be able to compete.

And your regular every day consumer is left wondering if the weed they just bought is legal and tested, or whether it’ll make them sick or that the money will flow to cartels or China.

People that don’t pay close attention to this are left bewildered.

That’s a problem. Opening up licensing to everyone will fix some of these issues, but there remains an elemental struggle for what the future of New York’s cannabis industry will look like.

Some commentators have said that allowing these big MSOs access to the market right away would’ve fixed these problems.

But the math doesn’t add up.

If you can trust estimates, there are roughly 1,400 illicit stores in the five boroughs alone. MSOs would be able to open only a handful of stores each — far from the necessary capacity to serve the market, without mentioning the myriad complaints over product quality.

All of this could’ve been predicted by looking at how past states have rolled out their cannabis markets, and how economists and policy scholars who study this stuff modeled what would happen.

Speed does matter. States considering legalization would be wise to look at New York’s failures.

🌿 Jer’s take

The more I think about it, the more obvious it is how the tension between corporate cannabis and social-justice advocates is a microcosm of the broader debates we are having as a society.

Many young people in big cities, I guess you could still include millennials in that, do not have the same rosy view of capitalism as their parents. They see big corporations as evil, and they don’t care whether regulations help or hurt the stock market.

There’s a reason Bernie Sanders was almost the Democratic nominee and perhaps the most visible member of Congress is proudly a member of the Democratic Socialists of America.

These are very popular ideas. I think people in the financial world don’t understand how pervasive these ideas really are. People are questioning capitalism and fairness, and they don’t like what they see.

Inequality is widening, and the purchasing power of my generation is far from what many of our parents enjoyed.

The climate is being destroyed before our eyes under a relentless pursuit of profit and growth. The economy is more competitive and people, who can’t rely on generational wealth, are being priced out of everything.

Some economists think that populism, on both sides of the aisle, is correlated to wealth inequality. Trump tapped into these same anxieties but with a more fascist intent.

Sure, much of this is young people, with lots of education and not much real responsibility, being young. Views tend to moderate and evolve as circumstances change.

But they’re right about a lot of what they see in our economy and they’re right for wanting to change that.

As an aside, I’m deliberately caricature-izing2 these perspectives to make a point. Humanity is messy and I know most people fall somewhere in the middle of all of this.

Help me grow Cultivated. Share this essay with your friends.

Given that framework, here comes cannabis legalization in New York.

One the one hand, you have lots of people, young and old, who have long known that the War on Drugs is racist and wrong and have fought in the trenches for decades to overturn these policies.

They see legalization as a key tool to erode the racial wealth gap. Many young people of color, with cannabis arrests, have been locked out of the above-board economy and have not been able to build wealth like their white peers.

Legalization is not only a win for them, but perhaps an opportunity to correct all of this:

• To provide economic opportunity to people who’ve never had it before.

• To be the tip of the spear in reforming America’s broken police and criminal justice system.

• To support small, local businesses that create good jobs and have environmentally-friendly practices.

The other side views cannabis legalization purely as an investible theme, like cryptocurrency or whatever will come next.

They consider the following questions to be of paramount importance:

• How can we get more capital into the sector?

• How can regulators and policymakers help companies grow?

• How can we advocate to remove roadblocks to capital and growth?

You can clearly see the tension between both sides.

They may say they care about social justice, but people say a lot of things before it impacts their bottom line.

Here, it’s important to note how the timing of New York’s legalization plays into all of this. When the first Canadian companies managed to go public in 2018/19, it was mania.

People predicted weed would be legal within a few years, and that buying cannabis stocks would make a bunch of retail investors — mostly locked out of the real wealth-building private market deals due to network and circumstance — very rich.

But legalization never materialized, and it’s still a ways off.

Companies that raised money on hype and mostly bullshit financial projections crashed. And a lot of executives, who built practically nothing other than extravagant golden parachutes, made off like bandits.

The retail investors who truly believed in the story were left holding the bag, and many of them are rightfully angry.

So along comes legalization in New York.

This, thought the executives scrambling to stave off losses, would be a boon. And retail investors thought it might be the catalyst that finally turns things around.

But then, they saw others get preferential access to the market. The companies they invested in were locked out.

The profits flowed to people who were opportunistically selling a few joints alongside Twinkies and Lay’s chips, instead of those that had been through the thick and thin from the beginning.

And now, the market is well over two years old and still hasn’t materialized in any substantive way.

So you could imagine why they’re angry.

The first principles problem of cannabis legalization

I say all this to get at what I call the first principles problem of legalization.

I’m not sure anyone has a real answer to these questions, and without coherent leadership from the federal government, states are left fumbling for answers:

• Who is cannabis legalization really for?

• What are the goals associated with legalization?

• Is the goal to create a new, investible sector? To create jobs?

• Or is it public health related, like Canada’s legislation — keeping weed out of teenager’s hands was the primary reason Trudeau pursued it.

• Or is it something else entirely, in a post-2020, George Floyd protest world?

• Could the legalization of cannabis — and perhaps all recreational drugs — be a core piece of repairing the decades-long harm of the War on Drugs and eroding the racial wealth gap?

Is it, perhaps, all of the above?

When policymakers write cannabis legislation, they need to be clear-eyed about the goals and what they’re hoping to solve.

The legislation should match the first principle of what they’re trying to do, and that goal needs to be effectively communicated to all stakeholders — companies, investors, advocates, consumers, and the general public.

Changing policy once it’s written, to use a terrible metaphor, is like trying to turn a cruise ship on a dime. There are downstream effects of these decisions that ripple and grow over time.

New York’s fits and starts with opening up a legal cannabis market are, to me, symptomatic of all of these issues.

Cannabis legalization was never going to be the silver bullet that some advocates, and maybe some politicians and regulators, thought it could.

Cannabis, at the end of the day, is a commodity and cannabis companies will look very much like other consumer packaged goods corporations that leverage scale to cheaply reformulate raw materials into consumer products.

It’s not a quick-fix for correcting the centuries-long trend of racial inequality along social, economic, and criminal axes in America.

It could absolutely help, but putting that all on legalization is a recipe for failure.

Legalization is one small step on a long march. 

Nor could legalization in New York save an ailing sector, and buoy stocks of companies that probably, from a fundamental analysis standpoint, shouldn’t even be public in the first place.

I imagine much of the emotion and anger we’re seeing from all sides over legalization is because people tied far too much of their hopes and dreams for themselves, society, or even their wallets to it.

Spreading the wealth is a good thing

I don’t want to get all kumbaya on everyone here, but the end of the day, for legalization in New York to be useful, all of these parts need to work together.

It needs to become an investible sector, so capital can flow in and give minority entrepreneurs the tools to compete.

Spreading the wealth is a good thing. And while I’m not an expert, I’m going to guess that might need a little bit of deregulation, and cutting taxes and startup fees.3 

Big MSOs would be wise to listen to communities that are angry about them entering the market, and should seek to work with them — even if that means letting the bottom-line take a hit — rather than viewing them as the enemy.

They need to be held accountable to the communities they operate in.

In the economy of 2023, there are more stakeholders than just the board and investors. They need to have a social contract to do business, otherwise they’ll never win.

It’s either willfully ignorant or disingenuous to say New Yorkers don’t have good reasons to be angry about what’s happening.

They have a right to be angry at the regulators, and they have a right to be angry with big companies who want to muscle in on their turf.

So what’s ahead for New York cannabis?

I’ll wrap this all up quickly.

I’m going to make a few conclusions about the state of play in New York:

• We need more stores, and ASAP. No matter what you think of multi-state operators, they can provide that.

• People will continue to be angry at MSOs for the aforementioned reasons. If MSOs don’t view this as a problem, it will ultimately eat into profits. It’s more than a PR issue and will continue to get worse.

• Ultimately, New York cannabis will probably resemble the ‘hourglass shape’ my friend Marc Hauser described in an essay for this newsletter. There will be a few consolidated big players at the top, and many small craft-businesses at the bottom.

• In three-to-five years, everything I’ve written might be a moot point, if (and that’s a big if) the Schedule III change goes through, and Congress acts on SAFE Banking or related cannabis policy,

• The industry will likely function normally in New York, given those assumptions.