With a freeze on new cultivation licenses under consideration, an analysis of how stagnant businesses blur the Mass capacity map
I recently published a column about how the Massachusetts Cannabis Control Commission is considering limitations on issuing new cultivation licenses to stabilize market prices—a so-called freeze. As I explained, this would be a major change after years of the regulator largely sitting idle as the capacity problem spiraled out of control.
But while capping, limiting, or slowing the number of licenses is a risky approach that might not be legal and could even backfire, there is nonetheless significant oversaturation in the cultivation market (a predicament that we predicted back in 2020).
As of March 18, the CCC’s data set of “Marijuana Establishment License and Applications – Approved, Pending, Re-Opened” lists a total of 386 cultivation applications and licenses broken down as follows:
Provisionals in waiting
Of 123 active licenses that have commenced operations, license counts by tiers and total square feet by tiers are summarized in the table below, showing a maximum allowable canopy of 3.875MM square feet. In the early days of legalized adult-use cannabis, the target figure of around 2.5 million square feet of canopy was tossed around by a few of the larger medical-turned-recreational operators. They may have been right when one considers how current capacity has crushed flower prices. The table below shows operational licenses by tier and canopy.
Behind those active and operational licenses are 52 active licenses that are not yet authorized to commence operations. Forty of those licenses are provisional and 12 are final.
The maximum allowable canopy of those 40 provisional licenses is 960,000 SF. If all those licenses become operational (e.g. authorized to commence operations), it would increase the current canopy by 24.8%. The maximum allowable canopy of those 12 final licenses is 380,000 SF. If all those licenses become operational, it would increase the current canopy by 9.8%.
The problem of lingering licenses
Taken together, this overhang of shadow in-process capacity could increase statewide canopy by 34.6%. One can only imagine the impact on pricing with that much more flower available. One of our concerns has always been that non-operational licenses can be renewed forever and never have to reach operational status. That makes planning for everybody else exceedingly difficult, as one never really knows how many of those licenses will eventually cross the finish line, become operational, and add to the state’s total canopy.
We looked at how long many of those licenses have been sitting in limbo. The oldest provisional license has been sitting for 35 months, the oldest final license for 33 months. That is a long time to pay carrying costs for the operators and too long a time for an effective regulator to gauge where the market is headed.
To show similar details for these two classes, here are similar tables as shown for the commence operations class:
Allowing licenses to sit unchecked makes it exceedingly difficult to estimate statewide cultivation capacity for prospective cultivators seeking to enter the market. There does not appear to be any level of estimated demand planning from the regulator that would allow cultivators to keep in mind the broader market when deciding how many plants to grow in each cycle. This is yet another factor that contributes to the oversupply of flower which results in compressed prices.
Other factors to consider
- Social Equity Trust Fund. The state also needs a bit more internal coordination on this front. It is an interesting conundrum when one arm of the state is considering freezing licenses for a certain license class due to falling prices, low-to-no profits, and over-capacity, while another arm of the state is providing grant money to the very same license class the other arm is seeking to somehow reduce.
- The potential correlation between problem cultivators and tier size. The commission might also be well served to review operating violations issued and product violations (mold, etc.) issued by cultivation tier to determine whether any particular tier has more problems than another. It is no secret that there have been allegations of lab shopping and improper remediation of product. If any of those more public-facing violations (or simply test failures or routine lower product quality) are concentrated in larger grows, the CCC could also consider reducing the tier sizes for indoor cultivation. Consider that tiers 1, 2, and 3 (grows up to 20,000 SF) account for 25.6% of the licensed square footage but 62.6% of the issued cultivation licenses (77 cultivation licenses). Whereas the top 2 tiers (80,001 to 100,000 SF) account for 36.6% of the square footage, they only account for 11.4% of the licenses (14 cultivation licenses).
- Consider eliminating tiers. If the CCC is focusing on constricting canopy growth, a good and easily implementable solution is to eliminate tiers 5 through 11. Currently existing licenses would be protected, but no new large grow operations would be allowed to come on line. While we did not analyze social equity cultivation licenses, it is a good bet the SEs are not the folks owning the large-tier licenses. Tier-size definition and regulation is left to the CCC and not the legislature. This fix could be implemented within 90 days without much risk.
The current CCC appears to be constantly chasing old and long-festering problems. Hopefully, with respect to cultivation licenses, they will make some productive decisions and get ahead of the issue. As has been said of the Iditarod, if you’re not the lead dog, the view never changes.
