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B.C.'s illicit cannabis growers face obstacles on road to legal operation

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Monday, May 20, 2019 – Page B1

You smell "the show" before you see it - 200 cannabis plants, tucked inside a 120-year-old barn on a sloping acreage overlooking central British Columbia's Slocan Valley. In one room, 40 plants are nearing maturity. The pungent flowers will be harvested in two weeks, hung to dry and sold for between $1,500 and $1,800 a pound to distributors moving B.C. bud to illegal dispensaries across Canada.

On the other side of the property, a larger building is under construction. The roof is up and the interior is partially finished with white walls and rows of plastic bins waiting to be filled with bushy marijuana plants.

For the couple that owns the property, this second building is supposed to be their ticket into the legal recreational marijuana market. They've put $400,000 into the project and expect to spend at least as much again trying to bring it up to Health Canada standards for a micro-cultivation licence, which permits a company to have a plant canopy of 200 square metres. Six months into legalization, however, they still have not submitted a licence application and construction has come to a halt.

The couple, who were granted anonymity by The Globe and Mail because of the nature of their business, say the application process is vague, expensive and fraught with uncertainty. It is a common sentiment across rural B.C., the long-time heart of Canada's cannabis industry, where small and mid-sized growers from the illicit market are struggling with Health Canada's new "micro" system.

The program, which launched in October alongside the federal legalization of recreational cannabis, permits small-scale cultivation and processing with lower infrastructure and security requirements than standard licences. It was designed, at least in part, to give incumbent growers a route into the legal system. However, the roll-out has been hampered by land-use restrictions, limited access to capital and a federal regulatory system that many growers say is too burdensome for a small-business approach to cultivation.

The process of getting a licence became even more daunting two weeks ago, when Health Canada changed its rules to require new licence applicants have a "fully built site" before they can submit an application.

Meanwhile, the legal cannabis system, dominated by publicly traded licensed producers, is struggling to meet the demand of consumers accustomed to lower-priced, higher-quality illegal product. Industrial-scale facilities have been plagued by growing problems and quality concerns. Supply remains strikingly short.

For both sides, there's a lot at stake in the success of the micro program. Many rural communities in B.C. have come to depend on cannabis cultivation - at both a family farm and semi-industrial scale - to offset declines in traditional extraction industries such as logging and mining.

Without a viable route into the legal market, thousands of craft growers could see their livelihoods vanish.

The financial success of the Trudeau government's project of Bay Street-led recreational legalization is likewise at risk. According to Statistics Canada, around 80 per cent of cannabis consumed by Canadians in the first quarter postrecreational legalization was produced outside the legal system. Legal sales have barely increased in the months since.

Few illicit producers expect the unregulated market to remain viable over the long term; legal product will eventually glut the market and police are shutting down illegal sales channels.

Still, legal cannabis companies, most of whom are fragile startups, face protracted and financially damaging competition if the legal marijuana market cannot integrate large parts of the illegal system.

Illicit growers have extensive supply and demand, said a cannabis broker who runs an illegal online dispensary, and who was also granted anonymity by The Globe. The only way his dispensary business will go legal is if his supply chain can also transition into the legal market, he said.

And that requires micro licences.

After recreational legalization on Oct. 17, Health Canada expected a flood of applications from the thousands of small and midsized growers operating in the black market and what's known as "grey market" - growers grandfathered in from the old Marihuana Medical Access Regulations (MMAR) who are allowed to produce medical cannabis for designated patients but who also sell to illegal dispensaries. As of March 31, only 150 Micro Cultivation and Micro Processing licence applications had been submitted.

Health Canada has set up a separate queue to process micro applications and approximately a quarter of the 150 applications are under active review. Only one micro licence has been granted: to a B.C. company that Health Canada declined to name.

On a Thursday in early April, around 150 black- and grey-market cannabis growers gathered in the Prestige Hotel in Nelson, a picturesque mountain town on the western arm of Kootenay Lake, with a population of around 10,000. The idea behind the Kootenay Cannabis Symposium was to bring together growers from across B.C. and representatives from all levels of government.

"The outcomes of not transitioning [into the legal market] are unfathomable. We're talking about unemployment, homes and businesses for sale, empty storefronts," Tracey Harvey, an instructor at Selkirk College in nearby Castlegar and a University of Guelph PhD candidate researching the impact of legalization on rural B.C., told growers gathered in the hotel conference room.

Because of its underground nature, it is impossible to know how large the cannabis industry is around Nelson. Ms. Harvey estimates that at least a quarter of the work force in the Kootenays is involved in cannabis production. With marijuana money circulating through the local economy, the impact of the industry is likely far greater, she added.

"Cannabis legalization ... wasn't properly addressed by our provincial government who knew very well about the thriving underground cannabis industry but did nothing to aid a transition. Now, our province is scrambling, as they realize what a mess this is creating, particularly in the peripheral areas," Ms.

Harvey said.

One of the biggest issues is land use. Some municipalities, such as the Regional District of Central Kootenay around Nelson, recognized the coming effects of legalization early on and changed bylaws and zoning regulations to allow for cannabis cultivation. Most municipalities in B.C., however, have yet to update their rules to permit legal cannabis cultivation.

At the provincial level, wouldbe legal growers are running into problems with the land management system in place to protect B.C's scarce arable land. Municipal and First Nations governments are allowed to prohibit most forms of indoor cannabis cultivation on Agricultural Land Reserve (ALR) land within their local boundaries. There are also rules that prohibit new concrete being poured on ALR land. This creates a catch-22 for indoor growers: existing operations won't meet Health Canada standards, but they can't build new facilities due to restrictions on concrete slabs.

People with properly zoned land still face significant hurdles.

Micro-cultivation sites are capped at 2,000-square-feet of growing space and have lower infrastructure requirements than traditional LPs. Still, the upfront cost to start a micro-cultivation facility is estimated to be between $1-million and $2-million, which is beyond the reach of most growers operating in basements, garages and outbuildings across the province.

"We don't see a way in, unless we're signing over everything that we've worked for to millionaires," said Patrick Bonin, who, along with his father, owns a grey market medical cannabis company called the Melatonic Society.

His operation, run out of a yellow outbuilding in the hamlet of Ymir, about 30 kilometres south of Nelson, grows between 50 and 80 pounds of cannabis flower a year, which Mr. Bonin turns into CBD-rich oils for medical patients. Last year, he sold around 10,000 bottles of cannabis extract, either directly to patients or through dispensaries.

It is a good family business, but Mr. Bonin does not see how to make the transition. Despite building a clean and controlled environment, his facility won't meet micro standards, not least because he grows with organic methods that don't meet strict limits on microbial content. He doesn't have access to financing to build a new building.

"We have our facility here.

We're willing to bring you in, tell us what can we upgrade. ... Don't make us criminals," he said.

There is a sense of extreme frustration among incumbent growers, who believe legalization was designed to sideline the existing industry. With commercial medical licences in hand, companies such as Canopy Growth Corp. and Aurora Cannabis Inc.

raised billions of dollars in anticipation of recreational legalization. Most black and grey market players weren't given a legal way to prepare for the recreational market until last October, when the micro system came into force. They are still, for the most part, unable to access financing.

The only thing black and grey market growers can do is group together, leverage all of their equity and roll the dice with five or six partners, said another grower who runs a 2,000-square-foot operation at the southern end of Slocan Valley.

The facility does close to $1.8million in sales a year, earning profits of around $1-million, split between six partners, he said.

Groups growing at this scale have a decent shot of making a transition into the legal system. People growing at a smaller scale will struggle.

David Robinson, who runs the Nelson branch of Pacific Northwest Garden Supply, a hydroponic store, shares that view. He estimates that illicit growers in the Kootenays produce around 25,000 kilograms of cannabis a year, which he says is equivalent to around 60 to 70 micro cultivation facilities.

"The best chance we've got is to take the top 10 prospects of the area, get them to build out a micro facility or two and then they'll build out three, four, five and six. ... The person who had [a smaller operation] will work for them. It's a model that's acceptable, because it's better than total failure," Mr. Robinson said.

Despite the challenges, business models are emerging across B.C. to help growers into the legal system.

In the Sooke Business Park, around 40 kilometres west of Victoria on Vancouver Island, real estate developer Ian Laing is planning a "micro park" of 53 units that he'll rent to micro cultivators.

"We deliver the building, the zoning, the power to your electric room. The tenants are responsible to do the tenant improvements of their units. So they will need a budget of $300,000 to $500,000 depending on their method of growing," he said.

A related model is being developed by Pasha Brands Ltd. and its subsidiary BC Craft Supply.

They plan to source cannabis from micro growers, process it in a facility in Nanaim, and sell it under old black market brand names, which Pasha has acquired. In return for the first right of refusal on product grown by its craft partners, BC Craft Supply is sharing licensing costs and helping line up financing.

"We've got strains, we've got the intellectual property, we've got the talent; it would be really sad to see that not capitalized on by the people of B.C.," Mr. Robinson said.

"If we do this right, not only will we bring more money to B.C.

than ever before ... We'll keep B.C. beautiful, we'll keep the culture, and the tourism potential is huge."

Associated Graphic

Patrick Bonin, who heads the Melatonic Society, which produces CBD-rich oils for medical patients, says his facility would not be able to meet the requirements to obtain a micro licence, despite being a clean and controlled environment. MARK RENDELL/THE GLOBE AND MAIL

Wednesday, May 22, 2019
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