A 7th way of picking growers

Picking Winners: Deciding Who Gets to Grow Marijuana Commercially, https://newrevenue.org/2015/10/20/picking-winners-to-grow-marijuana/, pasted at the very bottom of this post, describes in detail six ways to pick winners, who get the privilege to grow:

  1. Self-selection (Responsible Ohio ballot ploy)
  2. Voucher privatization – Share the wealth
  3. Grandfathering existing growers
  4. Lottery
  5. Steep fees
  6. On the merits.

Professor Sam Kamin of the University of Denver Law School points out that Colorado has a seventh way of controlling production. It allows anyone who qualifies to get a license to grow 3,600 plants. And existing growers who can sell most of what they are growing can get additional licenses to grow more. (Details from Regulations are below.)  I’d call this method “All Comers — First Come, First Served.”

But “The State Licensing Authority, at its sole discretion, may adjust any of the plant limits described in this rule on an industry-wide aggregate basis for all Retail Marijuana Cultivation Facility Licensees subject to that limitation.” https://www.colorado.gov/pacific/sites/default/files/Retail%20Marijuana%20Rules%20through%2001302015.pdf

That’s just like the system that the federal government used to limit tobacco production. In early 1938, for instance, Agriculture Secretary Henry Wallace “proclaimed a marketing quota for the 1938 flue-cured crop of 705 million pounds, in contrast to the 1937 crop of 850 million pounds.” Anthony Badger, Prosperity Road, page 151.

Why limit who can grow?  One reason is “to protect the industry:  You want to limit how much can be grown for sale; if so, you might start by limiting who can grow commercially.”

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Here are details from Colorado’s rules:

https://www.colorado.gov/pacific/sites/default/files/Retail%20Marijuana%20Rules%20through%2001302015.pdf

Basis and Purpose – R 212

The purpose of this rule is to establish a means by which to manage the overall production of retail marijuana in tandem with Rule R 211. This rule is necessary to ensure there is not significant under or over production, either of which will increase incentives to engage in diversion and illegal sales of marijuana outside of the regulated environment.

The State Licensing Authority intends to replace or revise this rule no later than December 31, 2015 with a long-term production management solution based on any one of the following methods or a combination thereof: plant count, output by weight, output by type of product, square footage, limiting available cultivation licenses, or other reasonable metrics.

 

R 212 B Production Management.

 

  1. Any new applicant Retail Marijuana Cultivation Facility with a license granted after September 30, 2014 shall be authorized to cultivate 3,600 plants or less at any one time.

. . .

 

  1. Application for Additional Retail Cultivation Facility Licenses. After accruing at least two quarters of sales, a Person who has any ownership interest in a licensed Retail Marijuana Cultivation Facility may apply to the Division for an additional Retail Marijuana Cultivation Facility license. The Person shall provide documentation demonstrating that for at least three consecutive months prior to the application, the related Retail Marijuana Cultivation Facility has consistently cultivated an amount of plants that is at or near its maximum allowed plant count, and has transferred at least 85% of the inventory it produced during that time period to another Retail Marijuana Establishment.

 

  1. Industry-wide Adjustments. The State Licensing Authority, at its sole discretion, may adjust any of the plant limits described in this rule on an industry-wide aggregate basis for all Retail Marijuana Cultivation Facility Licensees subject to that limitation.

 

Professor Kamin clarifies:  “Increases aren’t actually by business, but by license.  This is a subtle, but important, difference.  Everything here is license based and for grows each license has a count associated with it.  So you have businesses (as we generally understand them) that might have 20 or 30 licenses – grows, retail, MIPs.  Each of those has to be bought, renewed, etc.  They can also be sold.  We’re in a period of real consolidation.”

[An aside: I disparage option 2, Voucher privatization, in the article more than I would now. Voucher privatization might be too unwieldy to work on a state level at first, but it’s conceivable on a county or sub-jurisdiction level from the get-go.]

Picking Winners to Grow Marijuana

October 20, 2015 § 1 Comment

If marijuana is legal, should everyone be able to grow and sell all they want?  Free market absolutists would say yes, but there are two reasons to be cautious.  First, to protect the public:  Some people’s criminal records might make you worry they would sell to minors, or sell untaxed product.  Second, to protect the industry:  You might want to limit how much can be grown for sale; and if so, you might start by limiting who can grow commercially.

Unlimited commercial growing could flood the market and drive prices way down.  Ultra-cheap marijuana could alarm the federal government, leading to a crackdown.  It might increase the number of dependent users as well as use by minors, risking a political backlash among parents.  Although a price collapse might make consumers smile, it could wipe out small producers and leave the industry in the hands of a few big firms.

So if you want to limit growers, how might you do that?  Say the state is legalizing for several reasons: to make cannabis available to adults for responsible use, to minimize use by minors and substance abusers, to marginalize the black market, and maybe to raise revenue.

  With those ultimate goals in mind, what might we want in a method for handing out production licenses?

  • An honest process.  No favoritism (except maybe for state residents, during federal illegality).  Transparency.  Privileges to grow and sell should be handed out in a fair and transparent way.  Then people might gain trust in our ability to govern ourselves, which we may need more than drug law reform.
  • Sharing the wealth.  Lots of people would like to get licenses, so hand out many licenses for small quantities rather than few licenses for large quantities.
  • Regulation.  Allow only a few market entrants, so they are easy to find, regulate, and tax.  (This conflicts with sharing the wealth.)
  • An efficient process.  Selecting licensees should take up little time and cost little money.  Objective criteria could limit appeals.
  • Revenue.  Charging money for privileges can reduce the need for taxes.

 

With all that in mind, here is a tentative look at six ideas that have been proposed:

1.  Let powerful private interests divide up the privilege among themselves.

  That’s the actual proposal in an Initiative in Ohio – a power grab.  There, marijuana could be grown commercially only on 10 specific tracts of land, all belonging to corporate funders of the Initiative, who have raised $36 million to get Ohio voters to do their bidding.  Seriously.  If you think this passes the smell test, keep sniffing.

 2.  Give each voter a transferable voucher each year.  Divide up the state’s total target commercial marijuana production in square feet, and let each voucher claim an identical share.  Then let voters sell vouchers for cash to growers.  There are details here.

3.  Favor current growers.  Base quotas on individuals’ “historic base” of growing state-legal medical marijuana.  Tobacco quotas in the New Deal were allocated by historic base – among states, then counties, then farmers.  Some Share-the-Catch fishing quotas follow this model.  For marijuana, calculating a historic base could be tricky.  Growers have been hiding from the federal government – and may stay in the shadows.  But some jurisdictions have kept close track of medical marijuana growing, so a historic base method could work off clear data there.  From one perspective, this method rewards past lawbreaking.  From another, it favors folks who undermined the discredited War on Marijuana – and helped end it.

The historic base method gets both praised as a cooperative form of capitalism and condemned as a cartel.  The cartel objection could be parried this way:  Let the privilege expire after a set number of years.  That way, the privilege could not be passed on to distant heirs, as happened with tobacco quotas — which the federal government decided to buy out at the turn of the 21st century.

4.  Have a lottery.  Everyone who wants to sell and grow can sign up for free, or for a nominal fee.  That’s the approach Washington State used at first, requiring only basics like state residence and a relatively clean criminal history.  Warning:  Winners are random, by design.

5.  Weed out applicants by charging a steep fee.  That might favor the wealthy, but you could charge large operators exponentially higher license fees than small ones.  (You could tax them more, too.)  The “right” price for a fee is hard to set, so you could have an auction – maybe every year.

6.  Pick the most qualified applicants.  In 1933, right after repeal of Prohibition, liquor importers got licenses that way from the Federal Alcohol Control Administration.  Its chair explained that process:  “I suppose people have allotted quotas before among an industry, but they have never been called upon before to allot quotas among an industry which did not exist.  We had nine hundred or a thousand applicants, many of them purely speculators, in fact with no connection with the importing business, with no resources, no means of distribution, and no responsibility, all clamoring to get into the importing business.  If we had simply distributed the quotas among them all on anything like an even basis, nobody would have got enough to do business with, and the whole thing would have been disorganized.  Accordingly, a system had to be worked out and each application considered separately on its merits.”  Sure enough, Washington State’s new merit-based process favors industry experience.

But subjectivity is a problem.  (A civil service-like exam might show who knows the most botany and chemistry.  But not applicants with a green thumb or a public spirit.)  Subjectivity risks favoritism.  No method is perfect.

Even if only non-profits, co-ops, or benefit corporations can grow commercially, you might not want to issue licenses to all of them.  And if you do pick winners somehow, other questions remain.  How much can each legal grower grow?  Will total state production be allocated equally, or will some growers get bigger quotas, in grams or square feet, than others?  Will non-commercial home growing be legal?  And who can sell at retail?  Those are topics for another day.

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An earlier version of this post appears at http://marijuanalegalization.about.com/od/ModelsofLegalization/fl/Picking-Winners-Deciding-Who-Gets-to-Grow-Marijuana-Commercially.htm

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

2 thoughts on “A 7th way of picking growers”

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