It has been a remarkably smooth and successful ride for Michigan’s cannabis industry, and regulators hope to keep it that way as the growing network of suppliers and sellers face an inevitable period of consolidation and stubborn competition from old-school street dealers who do not share their overhead and red-tape burdens.
The state Marijuana Regulatory Authority (MRA) said average monthly revenue from medical and recreational sales grew more than 50 percent in 2021, reaching $168 million for the just the month of December, including a record $135 million in recreational sales. July was the most lucrative month with sales of $171 million. Recreational sales increased 16 percent in the second half of 2021 while medical sales were down some 23 percent compared to the same period in 2020.
The 10 percent state excise tax on recreational sales has proven to be a nice payoff for a state that has not had a lot of economic victories for the past few decades. But the excise tax is just one component of the overhead that adds to the price of store-bought weed supplies.
In a new development, there is now a layer of insurance that will be required for licensed cannabis operations this year: $100,000 worth of product liability insurance to protect customers from adverse reactions caused by marijuana that has been intentionally contaminated or adulterated. The legislation, Senate Bill 461, which was signed by Gov. Gretchen Whitmer in December, doesn’t apply to damages from the long-term effects of chronic use, but it does require operators to keep up their premium payments or face a costly license suspension should the coverage lapse.
The new rule seemed to surprise a lot of people, including the insurance industry. The National Law Review noted last month that “the most obvious problem” with SB 461 was the requirement that only “admitted” insurers licensed in Michigan could write the coverage while most cannabis-related business insurance is handled by the non-admitted surplus insurance sector, which specializes in new and higher-risk markets.
“Legislating insurance requirements in a highly regulated and evolving industry characterized by unknown risks should only happen when all stakeholders have been heard,” said the article. “The insurance industry is indeed ready and willing to engage with regulators if given the chance. This should be a learning opportunity for other states that may consider enacting similar mandatory insurance requirements for cannabis businesses.”
Outside Interests
The New Year is bringing about other changes in both the scope and makeup of Michigan’s legal cannabis market as the white-collar business world remakes the industry in its own image. Already, cannabis brands from outside Michigan are moving quickly to set up shop in the state with seed-to-sales business plans featuring a construction boom of high-capacity cultivation facilities and shiny new dispensaries.
The market has been buzzing this winter with a stream of announcements from multi-state vendors and operators setting up shop in Michigan. Boxing champion Mike Tyson’s California company Tyson 2.0 signed an “exclusive cultivation partnership” this month with Common Citizen, one of the growing number of marijuana outlets in Michigan that are partnering with producers and dispensary chains from other states. Tyson’s entry into Michigan was revealed the same week that Body and Mind Inc., based dually in Las Vegas and Vancouver, BC, announced it was expanding into its fifth state with a new branded dispensary in west Michigan and the construction of a separate 57,000-square foot production facility.
The influx of new brands has even created a “locals only” loyalty hook for its in-state growers battling for market share. Starzz Cannabis launched a marketing campaign this month touting 26 years of cultivation experience and urging fellow Michiganders to spend their money on Starzz’s artisan style product rather than meekly accepting “corporate weed, which is generally lower quality, lower potency and unfortunately, has no loyalty to our local communities.”
Industry leaders say there are still opportunities for the local “little guy” to find a profitable niche by entering less-saturated locations and expanding vertically on their own. “We’ve seen a lot of our members, even small mom-and-pop retailers, expanding into new areas,” Robin Schneider, director of the Michigan Cannabis Industry Association, recently told MLive.
“We have also seen a number of our retail members open their own license grows and processes this year and become vertically integrated. So, we’ve definitely seen a ton of expansion and expect to see that trend continue.”
Reining In Caregivers
Nearly lost in the shuffle of the current recreational boom is the medical-marijuana sector and the “caregivers” who have been growing their own marijuana to supply relief for clients suffering from various chronic ailments. Current law allows caregiver growers to cultivate a dozen plants per patient, including up to five patients and another dozen plants for their own personal use. That’s 72 plants. Caregivers are also allowed to keep 15 ounces of harvested marijuana on hand.
Caregivers are now a target of new legislation which, if passed, would trim that generous allotment down to 24 total plants and five ounces of pot. They would also face stricter licensing requirements. The buzzkill bill is based on the premise that the amount of cannabis grown for each patient is more than they are likely to consume, and that the surplus could find its way to the still-thriving illicit market. In fact, the Michigan Cannabis Manufacturers’ Association commissioned a report estimating that 70 percent of the marijuana sold in Michigan in 2020 was sold illegally, including by caregivers who are banned under their license requirements from selling surplus inventory.
Catching Up on Social Equity
Michigan is making the most of what may be the last shot at keeping its cannabis industry in-house and something more than another white-dominated franchise industry. The concept of social equity, which is used in several states, reserves a percentage of cannabis licenses for entrepreneurs from disadvantaged groups and requires other licensees to take steps toward community engagement.
Social equity, however, has become a roadblock to opening the likely massive recreational “adult-use” market in Detroit, where the city has established a “legacy resident” licensing classification that requires applicants to have lived in the city for at least 10 of the past 30 years. The idea is to reserve half of the city’s proposed adult-use licenses for legacy applicants, giving the locals a fair shot at the anticipated bounty.
The law was challenged in federal court almost immediately on constitutional grounds that it discriminates against non-legacy applicants. The federal lawsuit is still pending, and Detroit officials have been blocked from issuing recreational licenses until it is resolved; the judge in the case said last summer it appeared the legacy law was indeed unconstitutional.
More Trouble Than It’s Worth?
Michigan’s industry is highly dependent on the cooperation of local governments since it comes down to city commissions whether recreational marijuana is sold in their communities, where it may be sold and by how many sellers. Without statewide standards and limits on licenses, individual communities can tailor licensing and zoning requirements to their own standards, but they also have to own, enforce and possibly defend them in court.
Mayor Catherine McNally of the lakeshore resort town of Grand Haven, published an opinion column in the local newspaper this month to caution against approving limited recreational pot sales in the upscale resort community, which currently permits only medical marijuana sales. McNally said the lack of statewide licensing standards had created a legal minefield that could stretch the small community’s regulatory and legal resources.
“Many Michigan cities that have tried to permit recreational marijuana sales on a limited basis have been sued for their troubles,” McNally wrote ahead of a Feb. 8 public meeting on the issue, adding her stance that recreational marijuana in Grand Haven was more trouble than it was worth: “We do not have a war chest to fight the cannabis industry. Our safest course is to continue to prohibit recreational sales.”