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California Hemp Farming and Products Start to Take Shape

Written By Robert W. Selna,
Founder Selna Partners Law Firm

Interview with Robert Selna as a webinar.
Listen to the interview with Robert Selna as a podcast episode through Spotify.
Gloved hand holding leaves of five leaved plant, potentially hemp or cannabis.

California hemp cultivation registrations skyrocketed in 2019 and are expected to increase further this year due to federal hemp decriminalization and a perceived demand for hemp-derived CBD and other hemp products. A mature statewide hemp industry is a ways off however, due to unfinished regulations and the on-going effort to overcome a federal ban on food and beverages infused with hemp-derived CBD.  

“Ninety-nine percent of the hemp being grown in California right now is for CBD and, at the moment, the only legal hemp CBD products are topicals and smokable hemp,” said Brian Webster, Founder of CA-Hemp, an advocacy group that supports the growth of the hemp industry. “There needs to be an expansion of the topical and smokable products while the feds and the state issues around hemp CBD in food and beverages get worked out.” 

Hemp is defined as cannabis with extremely low concentrations of THC (not more than 0.3 percent on a dry weight basis). The Food and Drug Administration (FDA) prohibits CBD in food, beverages and cosmetics, regardless of whether the CBD is derived from cannabis that includes THC (the psychoactive constituent of cannabis) or from hemp.

CBD, short for cannabidiol, is a chemical compound from the Cannabis sativa (L.) plant that is widely accepted as exhibiting therapeutic properties, including anti-anxiety and pain-reduction effects. Unlike THC (short of tetrahydrocannabinol), CBD is not psychoactive. 

The U.S. Department of Agriculture (USDA) currently is reviewing public comments submitted in response to its October 2019 draft interim rule for domestic hemp production. The interim rule, which, despite its singular name includes scores of regulations, is a key step to implementing the 2018 Farm Bill. The Farm Bill legalized hemp nationwide after it had been criminalized by Congress in the early 1900s along with marijuana.

The 2018 Farm Bill left it up to states to decide whether to legalize hemp farming within their state’s borders, but required that, at a minimum, cultivated hemp could be freely shipped across all state lines. States that want to permit hemp cultivation either must adopt the federal regulations, or create their own that are consistent with the federal regs. The USDA’s publishing of the first draft of the interim rule has allowed states, including California, to start writing their regulations. 

Federal and State Laws

Outline of west coast states with California highlighted with image of hemp or cannabis filling its shape.

In 2019, as California’s fledgling hemp farmers waited for the federal interim rule to be published, they closely monitored two bills that state legislators introduced to take advantage of a vast new hemp business opportunity created by the 2018 Farm Bill. As the legislative session came to a close last year, results on the bills were mixed.

In mid-October, Governor Gavin Newsom approved SB 153, which provides the funding and timetable for California to draft a state hemp cultivation plan that conforms with the USDA interim rule. That work has started, but can’t be completed until the feds release their final draft.  

In contrast, state lawmakers failed to decide on AB 228, which would have legalized the statewide manufacture and sale of food, beverages and cosmetics that include hemp-derived CBD. The bill died in the Senate Appropriations Committee without a vote.

Following the lead of a handful of other states, including Colorado and Oregon, California Assemblymember Cecilia Aguiar-Curry (D-Winters) tried to address the federal CBD disconnect through AB 228. AB 228 contradicted the FDA, which deems products with CBD as “adulterated,” and prohibits them from being introduced into interstate commerce.

The FDA’s position is based on its decision to approve CBD as an active ingredient in the pharmaceutical drug Epidiolex, which treats a rare form of epilepsy. In turn, the FDA deems CBD to be like all other active drug ingredients, which may not be added to food and dietary supplements. 

Despite seemingly broad support, AB 228 did not make it out of committee by the end of the 2019 legislative session. Aguiar-Curry brought back a new version of AB 228 in January 2020 and hemp industry advocates had hoped the bill would be approved by late March. 

An early 2020 approval timetable proved unrealistic as advocates say that the Governor’s office and legislators still need more education about hemp, a crop that was ubiquitous from the founding of the Nation to the early 1900s, but that had been illegal for more about a century after being lumped together with marijuana. 

Thus far, the California Department of Public Health (CDPH) has followed the FDA’s restrictions on hemp-derived CBD. Meanwhile, one can find hemp-derived CBD wellness products in small health food stores, as well as large chain supermarkets, which has caused confusion among consumers. As noted by CA-Hemp’s Brian Webster, most of the hemp CBD products on those shelves are lotions, creams and other topicals — a type of product the FDA has not regulated.  

The FDA and CDPH prohibition are seen by many as inconsistent with the spirit of the 2018 Farm Bill, which approved the cultivation and sale of hemp, as well as the interstate commercial transfers of hemp and hemp products, including hemp-derived CBD. However, the Farm Bill did explicitly confirm the FDA’s authority to regulate hemp-derivatives in food and beverages. 

Representatives in Congress are starting to awaken to issues surrounding the FDA’s CBD prohibition. Senate Majority Leader Mitch McConnell has taken baby steps to resolve the problem. In mid-September, McConnell introduced a bill that could result in the FDA adopting a more lenient framework for hemp-derived CBD products. Specifically, the legislation directs the FDA to issue “an enforcement discretion policy” that would give the agency latitude and possibly lead to recognition that CBD products are safe.

Industry Growth 

Chart showing change in California Hemp Growers registered with the USDA from 74 in June 2019 to 558 in February of 2020.

Legislative hiccups and regulatory confusion aside, the California hemp industry is gaining momentum. Q4 statistics from the California Department of Food and Agriculture show that the number of registered hemp growers in California increased from 74 in June 2019 to 558 as of February 4, 2020. In addition, there are now at least 1,165 registered hemp cultivation sites and 38,464 acres associated with growers and seed breeders.

Under the 2018 Farm Bill, counties may only allow limited cultivation pilot programs until the USDA confirms that their state’s hemp plan conforms with federal rules. However, until the USDA’s interim rule issuance on Oct. 29, there was a chicken-and-egg problem. California and other states struggled to draft federally compliant hemp plans not knowing exactly what to expect in the interim rule. As a result, at least half of California countries have temporary bans or restrictions on hemp cultivation.

The federal interim rule clarifies states’ hemp regulation responsibilities, including practices for record keeping, methods for testing hemp to ensure that it is below the legal THC limit, and plans for the proper disposal of non-compliant hemp. In addition, the interim rule makes it clear that states and Native American tribes may not prohibit the interstate transport of hemp that has been legally grown under federal and state laws.

California is said to now be working on its hemp conformance plan. SB 153 aids that effort by adding testing, enforcement, and other administrative provisions and providing a deadline for completing a federal hemp conformance plan as May 1, 2020.

California’s nascent hemp industry is incrementally taking shape. 2020 promises to be a big year as federal and state hemp regulations are finalized and the State Legislature debates legalizing hemp-derived CBD products. 

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Finance – Economics of Legalizing Cannabis – Pricing and Policing are Crucial

Written by: Alice Mesnard, Reader in Economics, University of London
Originally published in The Conversation
29 July 2019

Legalising cannabis can have major benefits for all citizens. If carried out correctly, everyone will benefit from less crime and stronger rule of law. Legalising the drug will especially help protect young people and may even lower their consumption of the drug. It is also a way of raising taxes for the state, instead of fuelling criminal organisations, which currently control the illegal market.

These benefits are increasingly recognised by the public. Crucial to seeing these benefits come about, is the way legalising cannabis is done and how the drug is priced once it is made legal. These are the findings from research I’ve carried out with colleagues in France. There must be a combination of getting the price level right and cracking down on illegal activities to reach the right balance between reducing criminality and avoiding increases in cannabis consumption following legalisation.

To fight the black market, the price of legal cannabis has to be relatively low. For example, it could be set around or slightly below the current illegal price. This will attract current users of the drug away from their existing dealers.

But if nothing else is done, this will not be enough to eradicate the black market. Dealers will simply lower their prices to attract customers back. They are able to do this because there is currently a high markup in the illegal market.

There is a large range of prices and cannabis products sold illegally but the average price of high-quality cannabis is roughly US$300 per ounce in London, according to the crowd-sourced website priceofweed.com. This is up to three times as high as production costs based on evidence from the US market.

Controlling consumption

The increased competition that the legal market would bring would likely substantially increase consumption – not something most policy makers want. So as well as implementing a legal market, there needs to be a mix of policies to control consumption, including sanctions that are enforced against illegal activities. This would allow a government to price out dealers, while keeping the price of legal cannabis relatively high.

The reasoning is simple: if production or distribution costs of illegal cannabis increase, it is easier to drive criminals out of business by selling legal cannabis. My research shows that the harsher the punishments you put in place against people selling cannabis illegally, the higher you can set the price of legal cannabis to price out dealers. We call this the “eviction price”.

Other instruments governments can use to increase the eviction price are to deter consumers from buying illegal cannabis through enforced sanctions or warning them against the dangers of using illegal cannabis compared to high-quality, safe products supplied on the legal market.

Viable alternatives

It’s also important to introduce incentives for illegal cannabis producers and sellers to turn their activity toward the legal sector. So as well as investment in law enforcement to crack down on criminal activity, it’s important that former cannabis dealers are given viable job alternatives. Otherwise they may just switch to selling alternative illegal drugs or close substitutes.

Dealers often live in deprived neighbourhoods and are trapped in vicious cycles of crime where low aspirations and job prospects push them into illegal businesses. Investment in these communities is therefore needed to support and train those that make a living from drug dealing.

The money that will be generated by selling and taxing legal cannabis should be largely redistributed towards these kinds of initiatives. Plus, legalising cannabis may enable the police to reallocate their efforts towards other crimes, improving police effectiveness against class-A drugs and non-drug crimes. This was found in the London borough of Lambeth after penalties were reduced in 2001 for those holding small amounts of cannabis.

History also shows that prohibition increases violent crimes. Famous gangsters such as Al Capone in Chicago in the 1920s profited from the imbalance between demand and supply of alcohol by establishing organised crime to supply and serve alcohol illegally in speakeasies. In illegal markets, violence is often seen as the only way to resolve conflicts and secure market power.

Our research was inspired by recent examples of cannabis legalisation in Canada and Uruguay. The stated objectives in both countries was to combat drug-related crime. It is too early to evaluate the overall effects of these policies but evidence from Canada suggests that illegal transactions linked to the black market shrunk as a result of legalisation. And we also learnt from what did not work so well there: a shortage of legal supply helped the illegal market persist. So it’s important to avoid making the same mistakes and propose more effective policies to control the overall consumption of cannabis.