‘Day of reckoning’ coming for Kootenay cannabis growers as pressures mount
Efforts to build a legal cannabis economy in the West Kootenay are faltering, and the legacy industry could face imminent collapse, say local industry insiders and analysts.
“We’re extremely concerned this whole industry is going to fold,” says Shannon Ross, CEO of Antidote Processing. “And with it there’ll be thousands of jobs lost in this region.”
“Have we hit the bottom? I think we’re close to it, and I certainly think we’re in for some pain for the next year, as more people close shop,” says Slocan Valley Economic Development Coordinator Ron LeBlanc.
It’s difficult to get an exact picture of what’s happening in the local cannabis economy – even nearly four years after legalization, many people are still employed under the table by the quasi-legal ‘grey’ market. More than 2,000 medical grow licences were issued in this region before legalization, but no one can say how many are actively being used. Grey-market sales figures are, by their nature, hard to estimate.
But people working in the industry agree many local producers are selling assets, laying off workers, looking for second jobs themselves, changing crops, or just living with less.
“A safe thing to say is, it’s affecting the income of hundreds of residents in the Slocan Valley,” says LeBlanc, who supports economic development efforts in the valley and has done studies on the cannabis industry there.
“I have a friend who said they are worried about paying rent this month,” adds Ymir resident Velvet Kavanagh. Her business, Phenologic, supports licenced craft growers across Canada manage growing pains. “There are not a small number of single parents doing this for their income, to raise their family. So that’s concerning. What happens if they can’t afford to pay for daycare? How will they make a living, feed their families?”
“Isn’t this a sign of success from the view of the government?” says Winlaw-area farmer Gary Krempl, who’s critical of government cannabis policy to date. “It was the stated objective of legalization to diminish the black market. Seems like it’s working.”
Economy faltering
The signs of change are already appearing. Earlier this month, two properties came up for sale on a realty website within a few days of each other. Both located in the Slocan Valley, the listings offered buildings with industrial-level electrical service, heat, water and ventilation systems and other growing necessities. One near Winlaw was approved as a micro-grow operation by Health Canada. A second property near Crescent Valley didn’t mention certification, but noted the building featured “$200,000 in lighting.”
There are said to be at least 70 such grow facilities on the market across Canada. Some of those sales are happening because people who wanted to be part of the new cannabis economy just can’t hold on any longer, says LeBlanc.
“Some folks are just unable to make ends meet,” he says. “We’re seeing a lot of legacy cannabis businesses are shuttering their operations, in some instances for good, and in most cases I would not see a bright light on the horizon for those operations.
“That’s because in addition to the economics, there are the operational challenges. Maybe the grower hasn’t been able to reinvest, to scale up or streamline operations. Maybe their product isn’t consistent in quality or potency – or they just haven’t been growing trending strains.
They could lose their distribution, or have buyers fall through.
“It’s not just people who have struggled through the licencing process from Health Canada.”
Kavanagh agrees. Her company, Phenologic, works with licenced craft growers across Canada to help them work through their businesses’ growing pains.
“Not only does it cost a lot of money to get in, it costs a lot of money to operate,” she says. “You have to float yourself for quite a long time, and the prices people are getting now are not the prices they would have built their business plan on.”
Well-known problems
It’s no secret what ails the local cannabis industry, as policy analysts and industry critics have been sounding the warning for years.
“It’s not a new story,” says Ron Leblanc. “The writing has been on the wall, and now it’s right here in front of us.”
Problem #1 is regulation. Since legalization in October 2018, craft-industry proponents have decried the heavy burden of regulation and control exercised by Health Canada and the Province. Would-be small-sized craft growers face stacks of complex and interconnected regulations and applications for licences to grow, for construction of their buildings, for quality control and marketing, and for the licences and stamps to sell their products legally. The final bill for a small farmer meeting those requirements could easily top $1 million.
“Even though there was a lot of good intention on the part of the provincial and federal government staff, we were still unable to remove a lot of the barriers for these growers to transition into the legal market,” says LeBlanc. “There was some hope that by continuing in the grey market, they could fund their transition to the legal system… but for many, the economics of the current price of cannabis does not allow for that to happen, either.
“I think some folks got halfway on the path to legalization, and were unable to make it to the finish line because of the cost and timeline.”
He does see a possible bright side.
“Some facilities may find a sweet spot to operate in now, to wait out the storm,” he says. “Others might reopen, scale up or change hands if the market environment improves.”
“The government is listening,” adds Velvet Kavanagh. “But some of the changes are going to be too slow for some businesses to survive while they wait for change.”
Problem # 2 is financing. If they need $1 million to go legit, they aren’t likely getting it from a bank.
“I think the biggest point to it is there is very little financing for people to transition,” says Antidote’s Ross.
It’s a catch-22. Lenders won’t consider a building loan until they know the grower will get a licence from Health Canada. But they can’t apply for a licence from Health Canada until they have built the building.
“There’s still a lot of stigma around cannabis, and assumption of criminality,” she says, and it frustrates her. “There needs to be a lot of work in coming to terms that cannabis is an agricultural crop, and we want it integrated into the community.
“Our region’s growers are mom-and-pop operations, regular people.”
All lenders continue to consider cannabis high-risk or illegal, she says, in practice if not explicitly. Only one institution in the West Kootenay – Kootenay Savings Credit Union – will open a bank account for legal cannabis businesses, says Ross. Even those come with steep service charges. It’s also very hard to get insurance at a reasonable rate – despite growers working in one of the most strictly-controlled industries in the country, receiving multiple audits by the Canada Revenue Agency and Health Canada every year.
Add to that the price of processing, quality control, shipping and marketing, the end result is the system is skewed against small West Kootenay craft growers, says Ross.
“The list just goes on and on,” she says. “It all becomes quite burdensome and challenging. You just can’t package your flower and send it to market. There are a lot of barriers, the processing is a huge bottleneck. It requires additional licenses and learning curves and high operational costs outside of the cultivation licence.
“The people who have the processing licences are big corporations, and big [licenced producers] that have deep pockets and can manage this stuff,” she says. “And that’s craft’s competition.”
Problem #3 is price. Even if that wanna-be craft grower with deep pockets built their own facility, navigated the licencing, kept to health and quality standards, and found a processor to take their crop, there’s the final hurdle. Prices have plummeted in recent years. It’s been a rollercoaster ride for cannabis producers.
Ross believes it’s due to an oversupply – large-scale licenced producers, first to market, produced sub-par products and are sitting on inventory, she says.
“I think we’ll see large corporations folding over the next year because of high operating costs and an inability to meet consumer demand for quality products,” Ross says.
“They’re hovering around ‘break-even’ to a ‘loss’,” says Leblanc. “You can’t sell your product for what it costs to make it.”
Like employment numbers, pot prices can be hard to pin down.
The grey market has seen a harder hit. Twenty-five years ago, Kootenay flower would have gone for $3,000/lb. Just before legalization, it was $2,000, and has dropped since. Observers say many grey market growers are now getting $350-$1,000 per pound if – and that’s a big ‘if’ – they can find a buyer in this flooded market. One established grower in the valley calculated his cost of production to be around $450/lb, LeBlanc says.
Legal cannabis is doing no better. Prices and supply are controlled by the government, but since legalization there’s been massive overproduction, and producers are left trying to sell in a glutted market.
“There’s a lot of cannabis that has flooded the market,” says Phenologic’s Kavanagh. “About a year ago, at the rate Canadians are consuming cannabis, we had three years of inventory sitting there…
“There are really strange things that are happening to pricing, and part of that’s because of the oversupply.”
Six months to save industry?
These elements have all been burdening the transition to a legal economy, but are now coming to a head, say the industry officials. Small-sized local growers – whether licenced, grey-market (selling cannabis grown under a medical licence) or completely illegal – are all being squeezed out in the same way.
“There was always going to be a day of reckoning for some folks, either you made it to the legal market, or milked it until it’s no longer profitable,” says LeBlanc. “The harsh reality is if you haven’t made it yet, that day is pretty much here.”
On a bad day, Antidote’s Ross says she doesn’t give the industry much time to correct itself.
“I give it six months,” says Ross. “It’s a possibility that no one will continue cultivating here.”
The situation has already damaged the region’s historic cannabis industry. They say with every grow operation sold, with every legacy grower who has to move away and get a 9-5 job or gets head hunted by a big corporate player, the Kootenay brand loses a piece of itself.
“It all shuffles out into the bigger community, and that is quite a concern,” says Kavanagh. “Because you have people leaving the industry who have a lot of experience and skills… it is really sad and unfortunate, because those skills and knowledge are not concentrated like this in other areas of the country.”
Ross, Leblanc and Kavanagh all repeat one mantra – that the Kootenay’s cannabis industry has been responsible to a great degree for the region’s prosperity, and the unique art, culture, and history, and it would be a shame to let that waste away.
“We are known around the world to be some of the best producers in the world,” adds Ross. “It’s quite concerning, and I’m very disappointed by the rollout of legal cannabis and the continued stigmatization, and lack of funding from bankers and lenders not supporting this region.”
LeBlanc, who works to support economic development in the Slocan, says it may be time for Slocan residents to move on.
“Yesterday would have been a good time to start thinking what else a person can do outside the cannabis industry,” says LeBlanc. “It’s tough for some folks, they’re lifers. But there’s an opportunity for support, and maybe we can light a path for folks through retraining, support for new business, or working online. We need to step up and encourage folks to help them along the way.”
Light at the end of the tunnel?
Winlaw farmer Gary Krempl still thinks there’s time to save the legacy craft economy. He sees his participation in a new collective of craft producers as a way to have legacy growers survive and thrive in the cannabis industry.
“I’m the pioneer, I’m the guinea pig,” he jokes. “But once we figure it out, we want to spread the word and get a bunch of people onboard, and save the Valley economy.”
Antidote Processing specializes in cannabis licensing, regulation, and compliance. The South Slocan-based company has built a team of regulatory and market experts to work with local growers to find each individual’s best path to the most economic and feasible way of getting a licence.
“There’s no easy path to market, and that’s how we came up with our name,” he says. “We’re the ‘antidote’ to the corporate mess, the regulatory mess that is legalization.”
The company can help drastically cut the cost of entering the legal field by careful study of what the grower wants to accomplish, says Krempl. This fall, Antidote plans to take the next step – processing and marketing locally grown cannabis extracts and products.
And as the legacy market crumbles, the phone is ringing off the hook.
“More and more people are calling us, looking for information on licencing,” says Shannon Ross, the company CEO. “Many are interested in a legal pathway to market, but it’s a complex system to navigate, and costly. We’re working on a solution from a grassroots level from licensing to distribution.”
Krempl sees nothing but the potential for growth through Antidote’s business model.
“In five years, I hope we’re national, if not international,” he says, adding the model and service Antidote is developing may just provide a decent living for local craft growers.
“My hope is the micro-garden – 200 square metres – will be able to provide someone with $50,000-$80,000 income a year,” he says. “We’re not there yet, but were hoping it will be something attractive to people – worth the hassle of the regulatory burden.”
There are other faint lights.
The Province has recently committed to developing policy to allow farmgate sales for craft producers. And on the federal level, they’re talking about streamlining licensing for processors.
More study is also being done on the potential for cannabis tourism up the Slocan Valley, something LeBlanc still sees a future for.
“There’s a lot of good folks working behind the scenes to open up policy to this vision, of small farmgate tourism, people coming here because of the Valley’s history and diversity in cannabis,” says LeBlanc. “This is happening. But instead of visiting dozens of farmgates on your tour of the valley, there will likely be just a handful.”
So there is optimism for the future – in the longer term.
“It’s going to change for the better,” concludes Kavanagh. “But it’s going to get worse, before it gets better.”
— This story was originally published by Valley Voice.
