Will NY’s medical marijuana operators supply first-round dispensaries?

Rumors abound over MSO buy-in to the recreational market, as well as how important they’ll be for supplying product to the new industry.

From whence cometh ample weed to supply the Empire State’s potentially large and lucrative market? All options appear to be open.

Both query and response loom large over New York’s cannabis regulatory process as the Office of Cannabis Management continues to issue its first round of adult-use retail, cultivator and processor licenses. Will there be enough product for processors to refine, for retailers to sell, and where will it all come from?

“The OCM will consider all options on the table to maintain consistent supply for retail dispensaries throughout the year,” said OCM spokesman Aaron Ghitelman.

This could mean that if the state’s licensed adult-use growers cannot meet the expected high demand when retailers open their doors (whenever that might be), the 10 “registered operators” (the companies licensed to grow and sell cannabis for medical purposes in New York since 2016) will be allowed to supply the social equity start-ups.

Some advocates fear such a scenario may lead to the medical suppliers’ eventual domination of the New York market, as has happened in other states, at the expense of the little guys – for whom MRTA explicitly carved out a space.

Built-in advantage?

Precious Osagie-Erese, spokeswoman for the Minority Cannabis Business Association, cited her organization’s National Cannabis Equity Report, which found “inequities created when medical operators receive a significant advantage to participate in an adult-use market,” she said

“These advantages,” Osagie-Erese said, “along with the high barriers to entry for minority operators, have proven to perpetuate oligopolies in state adult-use cannabis markets.”

Early-market access in states such as Illinois, Virginia and New Jersey, she said, have led to what was predicted: large cannabis companies “reaping the benefits of initial cannabis sales while social equity operators have to play catch up to not only successfully open their doors, but compete,” she said.

The Cannabis Association of New York concurs.

“Building in an advantage for the ROs is contrary to the social equity goals of the MRTA,” said Dan Livingston, CANY’s managing director.

“The idea behind social equity is to give a boost to social equity operators. Giving a boost to massive corporations with large capital reserves creates a structural disadvantage for all other operators in the industry, especially social equity operators,” Livingston said.

In for a fee

Yet despite these concerns, New York’s registered organizations eventually will have legal access to the state’s adult-use market in return for what could be a hefty licensing payment.

“The MRTA … outlines the process for how medical ROs will be able to participate in New York’s adult-use market,” Ghitelman said.

In return for a “one-time special licensing fee,” which would fund the state’s “social and economic equity and incubator assistance” programs, the MRTA says that the Cannabis Control Board cannot permit medical ROs “to dispense adult-use cannabis from more than three of their medical cannabis dispensing locations.”

An Aug. 25 article in the New York Times cited “a potential fee of $20 million per operator,” but there is presently no official confirmation of that amount.

“The Cannabis Control Board has not yet determined a fee structure,” Ghitelman said.

“That fee should be sizable enough and used to help minority entrepreneurs get into the industry and fund their businesses,” said Osagie-Erese of MCBA. “There should definitely be no early-market access without some sort of significant fee that helps fund minority businesses.”

“But it’s important to remember,” she said, “that slowing the process down is always an option, and it wouldn’t lead to a market giveaway to ROs.”

CANY’s Livingston is more adamant.

“There’s no fee that should allow a group of well-capitalized operators to buy a structural advantage in the New York market,” he said.

Other sources of supply

So what happens next?

The NY Times article quoted OCM Executive Director Chris Alexander as saying, “We definitely need the supply coming from the ROs” in order to help supply the first round of startups.

Livingston disagrees.

“We believe that small and mid-scale operators will be able to supply the New York State market with the quantity and quality of products the market demands, both short-term and long-term,” he said. “In order to supply the market with the quantity and type of products that consumers want, a combination of indoor and outdoor grow license opportunities will need to be made available.”

But are there enough growers to meet demand?

“Determining whether there are enough grow licenses is contingent on knowing how many dispensaries will be open, when they’ll be open, and where they’ll be located,” Livingston said.

Osagie-Erese offers another perspective.

“It begs the question of whether this patchwork of state cannabis industries is even a logical way to set up the industry,” she said.

“Right now there are farmers on the West Coast who could immediately supply East Coast markets with regulated cannabis. But instead we are having to wait for multimillion dollar indoor grow facilities to be spun up in order to supply the market at an inflated price and increased carbon footprint.”

As for the ROs themselves – they want in.

Bryan Murray is executive vice president of government affairs at Acreage Holdings, a vertically integrated multi-state operator. He also chairs the New York Medical Cannabis Industry Association.

Murray said the NYMCIA “appreciates and agrees with the director’s recognition that the existing medical cannabis operators will play a key role in supplying products to both meet demand and support new social equity retailers.”

“Our members stand ready – and have long been willing – to do our part in ensuring the adult-use market comes online in a timely manner that helps fulfill the social equity goals outlined in the MRTA, and also safeguards public safety,” he said.

Whatever happens, Ghitelman insists that MRTA’s social equity aims remain paramount.

“The MRTA … outlines social-equity goals of New York’s Cannabis Law, which are central to both the law and to all of the Office of Cannabis Management’s efforts,” he said.

“There has not been nor will there be any deviation from those social equity pillars of New York’s cannabis industry.”