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Marijuana has become big business. So why are small growers struggling to survive?

As marijuana has been legalized in states across the country, investors have identified a major business opportunity. Still, the cannabis market isn’t all easy money. In California, new companies are scaling up operations, but some smaller ones fight to survive, challenged by the new regulations that accompany legalization and stiffer competition. Economics correspondent Paul Solman has the story.

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  • Judy Woodruff:

    Now the latest in our series The Green Rush.

    As marijuana legalization has swept the country, investors are seeing green. In California, new companies are scaling up operations, while some smaller businesses are fighting for survival.

    Economics correspondent Paul Solman has the story, part of his regular reporting, Making Sense.

  • Paul Henderson:

    So, we have about 60 to 70 different strains at any given time.

  • Paul Solman:

    At East of Eden in Salinas, California, pick your cannabis flower, any flower, labeled by brand and THC punch.

    Well, here is one. Berry O.G…

  • Paul Henderson:

    Twenty-nine.

  • Paul Solman:

    … is 29.7, so you really high off of this, I take it?

  • Paul Henderson:

    Anything above 25 will sell out almost immediately.

  • Paul Solman:

    Is that right?

  • Paul Henderson:

    Right.

  • Paul Solman:

    Paul Henderson, formerly with Goldman Sachs, now CEO of Grupo Flor, which owns two dispensaries and will open 18 more within a year.

  • Paul Henderson:

    We will do around, right now, $1.3 million a month in sales…

  • Paul Solman:

    Right here?

  • Paul Henderson:

    … from this store alone, yes.

  • Paul Solman:

    And Grupo Flor isn't just retail. In a few years, the firm's become one of California's largest cannabis companies, from retail, to cultivation, to manufacturing and distribution.

    Co-founder Mike Bitar had been in commercial real estate.

  • Mike Bitar:

    And I just happened to stumble across cannabis and saw how lucrative it was and realized we should get in the business.

  • Paul Solman:

    Were you a user?

  • Mike Bitar:

    No. I didn't see the difference between heroin, unfortunately, and marijuana.

  • Paul Solman:

    Well, he soon did. By 2016, when Californians voted to legalize recreational adult marijuana use, Bitar and partners had already snapped up one-and-a-half million square feet of greenhouse space lying fallow since the cut flower business emigrated to South America.

    They'd grow cannabis instead.

  • Paul Henderson:

    There might not be a larger wealth-generating opportunity that I will see in my lifetime again. I mean, it's staggering what can be built in this industry right now.

  • Paul Solman:

    Eighteen billion dollars was invested in cannabis last year alone. And, says industry researcher John Kagia, big-time players are moving in.

  • John Kagia:

    Constellation Brands, the world's largest alcohol company, and Altria, the world's largest tobacco company.

    But you have also seen companies like Molson Coors, Lagunitas Brewing Company, CVS and Walgreens getting into this space.

  • Paul Solman:

    This is the green rush, chasing an estimated $350 billion in annual global sales, Kagia thinks a trillion within 15 years.

    In Santa Barbara County, acres of white structures house some of the biggest grows in the world. Grupo Flor is rushing to keep up. A recent operations meeting, new employees, new dispensaries.

  • Man:

    They're targeting this location to be the dispensary for celebrities.

  • Paul Solman:

    And over speakerphone.

  • Man:

    Greetings from Colombia.

  • Paul Solman:

    New operations overseas.

  • Man:

    We incorporated Grupo Flor Colombia in February of this year. We're also looking at Mexico. And last but not least, we are looking at Asia as well.

  • Paul Solman:

    In Salinas, fences block the product from public view, while razor wire and guards protect the high-profit plants from thieves.

  • Gavin Kogan:

    A farm like this is ever-flowering. We're always cutting and always harvesting.

  • Paul Solman:

    Five crops a year in this greenhouse, says Grupo Flor's Gavin Kogan, vs. just one or two outdoors. This is one of the firm's seven California sites.

  • Gavin Kogan:

    Right now, what's happening in California is aggregation. Companies are acquiring other companies. And so, if we don't cultivate, we lose our supply chain, and we can get crushed out.

  • Paul Solman:

    Crushed out like Oliver Bates.

    So, you cultivated marijuana for 25 years. Now you are out of the business and broke?

  • Oliver Bates:

    Now I'm out of the business and broke.

  • Paul Solman:

    Bates grew cannabis for years in the Monterey County hills near Big Sur. But with legalization came rules and regs.

  • Oliver Bates:

    Outside investment came in and lobbied their interests and made sure that, in the new regulation, that only commercial greenhouses were allowed to grow cannabis.

  • Paul Solman:

    So you cannot have an outdoor farm in Monterey County?

  • Oliver Bates:

    Yes. I have been giving away weed, all my weed. I can say a pound of mine made it to the Grammys, and it was a big hit.

  • Paul Solman:

    But it's not legal yet?

  • Oliver Bates:

    It's not legal yet.

  • Paul Solman:

    What are you doing for a living now?

  • Oliver Bates:

    Consulting and working for free. I'm actually not making a living right now.

  • Paul Solman:

    How are you surviving?

  • Oliver Bates:

    I'm broke. Day by day, you know, and really help — help from friends at this point.

  • Paul Solman:

    Further north in Humboldt County, outdoor is OK, but it's costly.

    Dylan Mattole had to run a licensing steeplechase.

  • Dylan Mattole:

    We're probably into it about $100,000.

  • Paul Solman:

    A hundred thousand dollars, and how much of your time?

  • Dylan Mattole:

    Well, about three years.

  • Paul Solman:

    Really?

  • Dylan Mattole:

    Absolutely.

    For many people, it wasn't even possible to be compliant, in the sense of dealing with the regulatory requirements for roads, water, grading.

    And so, for people, it just — it wasn't — it isn't feasible to move on.

  • Paul Solman:

    What's more, since the 1960s, rural, rugged, way out-of-the-way Humboldt has attracted government-leery homesteaders who grew pot illegally. To no one around here does regulation compliance come naturally.

  • Dylan Mattole:

    A lot of the, you know, as we would call them, legacy farmers here have been doing this for a long time, generations, and the culture was to keep your head down, mind your own business.

  • Paul Solman:

    And having nothing to do with the man, right?

  • Dylan Mattole:

    But having nothing to do with the man.

  • Paul Solman:

    There are thousands of cannabis farms in Humboldt, but just a tiny fraction have been licensed.

  • Dylan Mattole:

    You know, where this is going to end, I couldn't say quite yet. But it's a void and a vacuum that is not going to be readily filled. There is not a huge economy in Humboldt County currently outside of cannabis.

  • Paul Solman:

    And small farmers like Mattole, licensed and now growing above-board, face other hurdles.

  • Dylan Mattole:

    There currently still is zero banking in the cannabis industry. So, imagine trying to start a small business funding it entirely on your own without credit.

  • Paul Solman:

    Grupo Flor's Gavin Kogan sympathizes.

  • Gavin Kogan:

    This is really difficult to do. It takes a lot of capital. Regulations are heavy. We're overtaxed.

    And so where I really feel the pain coming for small farmers is that they're having to face the obstacles we face without the capital and without the people and the business know-how to really do an effective job.

  • Paul Solman:

    And without the cost advantages of the black market from which they have come.

    Nikki Lastreto's Mendocino farm is now legit. But most of her neighboring farmers aren't. And they pose as much of a threat as her corporate competitors, she says.

  • Nikki Lastreto:

    Right now, they're able to sell at $1,500, where we're getting, after all the expenses involved, the taxes, et cetera, and the packaging, about $900 a pound.

  • Paul Solman:

    And if you're a seller on the black market?

  • Nikki Lastreto:

    You sell it on the black market, you just do like the old days. You just grow it in seclusion, hope the cops don't find you, and find a buyer, and they come right up. They pay you cash. And it's out the door.

  • Paul Solman:

    No permits?

  • Nikki Lastreto:

    No permits, no licenses, no taxes.

    The disadvantage the black market has is, of course, like in the old days, they have to worry about the cops. They have to worry about helicopters circling overhead, getting busted.

  • Paul Solman:

    So, you're in the odd position now…

  • Nikki Lastreto:

    It's very odd.

  • Paul Solman:

    … of rooting for the helicopters.

  • Nikki Lastreto:

    It's difficult, though, because they're our friends, they're our neighbors. And it is what we used to do. So, how can I judge them?

  • Paul Solman:

    Back in Monterey County, where only greenhouse growing is allowed:

  • Oliver Bates:

    We're going extinct. We're really fighting to survive.

  • Paul Solman:

    Oliver Bates lobbies to make outdoor grows legal. And what does he think of big new operations like Grupo Flor?

  • Oliver Bates:

    I am furious that they have no respect for the people that brought this to them.

  • Paul Solman:

    The people who paid their dues?

  • Oliver Bates:

    The people that paid their dues, the people that spent their lives hiding in the bushes from helicopters, feeling like they were criminals. And, for that, I will be forever furious.

  • Paul Solman:

    Lawyer and Grupo Flor co-founder Gavin Kogan is conflicted.

  • Gavin Kogan:

    I used — spent most of my time as a cannabis attorney representing small growers. It affects me to be seen as a threat and somebody that is against their interests, because I don't conceive of myself that way.

  • Paul Solman:

    But he is a threat, due to the economies of scale of industrial production, as prohibition comes to an end.

    For the "PBS NewsHour," this is business and economics correspondent Paul Solman in Northern California.

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