New rules proposed by Michigan cannabis regulators could give the state significant new tools to bring underground producers of hemp oil into the regulatory fold but also put cannabis wholesale prices into the basement, say industry operators and observers.
“On the cultivator side we expect it to hit them hardest, because they won’t be able to sell dry biomass to make distillate for anything worthwhile. Because you’ll be able to make synthetic distillate for one tenth of the price,” said Chase Marx, COO of Hype Cannabis, a processing company based in Jackson, Mich.
Combined with a recent executive order issued by Gov. Gretchen Whitmer moving hemp oversight from the state’s Department of Agriculture to the newly named Michigan Cannabis Regulatory Agency (it remains the “Marijuana Regulatory Agency” until April 13, 2022), the new rules would create a regulated pathway for industrial hemp with high levels of the CBD cannabinoid to be processed into THC.
Much of the oral testimony at a hearing Wednesday morning held by the soon-to-be renamed Marijuana Regulatory Agency (MRA) was in favor of the new rules because it was taking into account a practice that is already widely conducted by the underground. And according to the MRA’s own advisors, CBD distillate is widely available and inexpensive.
“A significant amount of CBD isolate and CBD distillate has been produced, creating a surplus of CBD that is easily obtainable at very low cost throughout the country,” testified Aaron Duckworth, a member of the MRA Scientific Advisory Workgroup and vice president of research and development for Fluresh. “More recently the ability to synthesize or convert CBD into delta-9 or other minor cannabinoids…have come to light.”
“You’re buying CBD isolate with no THC present and you’re converting it in an acidic reaction to close the carbon ring on CBD, effectively changing the molecule from CBD to delta-9 THC,” explained Marx. “It is much less [expensive] because CBD is much cheaper. You can procure CBD with a much lower pricing system. You’re talking $200 for a kilogram of CBD isolate. You’re normally paying $7,000 per liter of THC distillate.”
While liters and kilograms are respectively volume and weight measurements, one liter of water weighs one kilogram, effectively meaning a processor buying a $200 kilogram of CBD isolate is making a 3500% profit at current THC distillate prices.
“This is the sort of thing that goes on all the time,” with the underground market, said Marx.
THC-cannabis growers, who have paid $40,000 per class C license in Michigan already have big sunk costs, says attorney Thomas Lavigne of Cannabis Counsel. “They might be priced out of the hemp market by hemp growers, in particular the outdoor growers,” he told Grown In after testifying Wednesday morning.
One person’s pricing crisis could be another’s bonanza, points out Michigan NORML executive director Rick Thompson.
“Our market is in its infancy. Our price structure is in a race to the bottom. We’re at $187 an ounce [for wholesale flower], according to the MRA right now. That is a difficult to sustain business model when you’re doing that wholesale. When you introduce a cheaper price the only companies that could sustain that are MSOs, who can offset their losses in Michigan with profits somewhere else,” said Thompson.
One consistent concern among testifiers Wednesday was that the rules would allow processors to purchase hemp produced out of state.
Nick Young, an owner of a Michigan hemp and cannabis extraction business asked MRA to limit sourcing to Michigan growers only.
“I would love to see something in there promoting Michigan hemp growers. There are a lot of hemp growers still sitting on 2019, 2020, and now 2021 crop,” he said.
NORML Michigan’s Thompson agreed.
“Michigan’s regulatory scheme is very different from that seen in other states. If you can grow hemp at half the price in Kentucky than Michigan, then Michigan growers don’t stand a chance,” he said.
In addition, accepting hemp grown out of state would complicate law enforcement, testified Thompson in his written statement submitted to MRA.
“A cop on the roadside cannot tell the difference between a truck loaded with compliant hemp from Kentucky from a truck loaded with dank stalks of the good stuff from Cali,” wrote Thompson.
Steven Linder, executive director of the Michigan Cannabis Manufacturers’ Association, who often opposes Michigan NORML on policy issues, agreed with Thompson in his written testimony.
“The proposal..raises real concerns around the tracking of the converted product from hemp and identifying its origin before going to market. This is complicated by the fact that industrial hemp can be legally transported across state lines and cannabis cannot,” wrote Linder.