How Big Alcohol Is About to Get Rich Off California Weed-By SARA SOLOVITCH August 29, 2016 Politico

With recreational marijuana on the ballot, some worry that big business will transform the way pot is grown, distributed and sold.

More than 20 years later, Hezekiah Allen remembers the Blackhawk helicopters hovering over his childhood home, the armed soldiers barricading the road to the family’s northern California pot farm, the neighbor who hang-glided to escape from the Feds. More than once, Allen came home from a friend’s house to find his mother and stepfather had been arrested again.

Allen eventually entered the family business and was himself arrested in 2009 for cultivation and intent to sell. The charges, dropped for lack of evidence, didn’t impede his ambitions: in 2014, he ran unsuccessfully for California State Assembly on an environmental platform. A few months after bowing out, the scruffy 30-year-old college-dropout, who was by then the executive director of a coalition of small-farm marijuana growers, moved to Sacramento and elbowed his way into negotiations over new rules governing how medical marijuana would be grown, distributed and sold

“Our parents wanted to get back to the land. We want to get back into the system,” says Allen, who grew up in a house with no plumbing. “I’ve been lying my whole life about who I am and what my family did. Now I’m addicted to telling the truth.”

In Sacramento, he insisted that growers be treated like farmers of any other crop. Most important, he won the removal of a limit on the number of growing licenses for small farms. But the price of that legitimacy has been steep and it is about to redefine the nature of the marijuana industry in ways that make many of its most committed supporters deeply uncomfortable. California’s iconic counter-culture drug is about to be treated just like a six-pack of beer.

Under the new regulations, licensed distributors were given control over measurement, taxing and testing for all medical marijuana before it can move to the retailer. The rules are modeled on the system that emerged at the end of Prohibition to wrest control from mobsters and their illegal liquor empires. States required wholesalers to bring alcohol from the manufacturer to the retailer, a system that has proven fantastically lucrative for distribution companies. Some of those players are now poised to make millions of dollars as the middlemen in California’s burgeoning medical marijuana market.

The familiar alcohol distribution model gives comfort to California law enforcement and state regulators who still view marijuana growers with suspicion, even 20 years after medical marijuana was legalized. But it runs counter to the 22 other states that have legalized marijuana in some form where cultivators sell their wares directly to retailers.

“We made some challenging compromises and the distributor model was by far the most challenging,” acknowledges Allen, who found himself allied with interests like law enforcement he and his family once considered enemies. “But it was the foundation for what we’ve done.”

It might also be the foundation for marijuana policy across the country. In November, Californians will vote to legalize marijuana for recreational use, a ballot initiative that has received backing from Napster’s Sean Parker and Lt. Gov. Gavin Newsom, who’s running for governor in 2018. Polls indicate 60 percent support for the measure, which, if passed, is expected to grow the state’s $2.7 billion marijuana market into an industry worth $15 billion or more in five years. Hedge fund managers, venture capitalists and savvy entrepreneurs have begun flooding into the arena, alert to opportunities for legal profits that dangled out of reach when marijuana was underground. The sheer size of California’s market (U.S. sales totaled $5.7 billion in 2015), along with pressure from prominent marijuana policy advocates, could influence other states contemplating legalization (there are eight with measures on the ballot this fall) and permanently shape the regulatory landscape nationally.

But the transformation is causing discomfort within California’s community of renegade pot growers, many of whom worry that their long wished for legitimacy may end with them being coopted by the implacable force of corporate America.

Not so, says Allen, who argues that the alcohol distribution model will ultimately prove the guardian of that very culture. “There’s going to be big business in this industry, we can’t keep it out,” he concedes. “[With this model], we can put all the distributors in the Big Business box and we keep the boutique businesses for ourselves. Yeah, this is big money, big business, but it’s contained.”

The legalization of marijuana in California has created some unlikely allies—growers like Allen and the cops who used to bust them. But it has also created some unlikely foes. One of the loudest critics of the proposed recreational use law—and by extension of Allen—is the so-called “father of the legal cannabis market.”

Steve DeAngelo, 58, is owner of Oakland’s Harborside Health Center, the largest medical marijuana dispensary in the country (and possibly the world), president of The ArcView Group, an influential marijuana investor network, and co-founder of Steep Hill Labs, a commercial chain of marijuana testing labs.

Over the last few months he has stoked growers’ fears in op-eds (published in the San Francisco Chronicle) and video clips (on his website), claiming that mandatory distribution will jack up the price of medical marijuana, add red tape, slow down the supply chain and reinforce the black market.

DeAngelo has made some headway among the growers, including some of the 650 farmers that Allen’s group represents. They fear the new law will bring about their demise. They worry that their already thin profit margins will be further whittled away by distribution charges that could climb as high as 30 percent.

Sunshine Johnston, who manages a 2,500- square-foot farm in the Eel River Valley south of Eureka, is one of the growers who is most skeptical.

“I’ve been growing for close to 30 years, doing it for supplemental income – though I don’t even know if income’s the word,” says Johnston, who’s also a winemaker and distributor. “This is my time now. The big-time growers, you had your time, you made your money during the Green Rush.

“But it’s complicated,” she continues. “A lot of growers are thinking only about law enforcement and getting Water Quality enforcement off their backs. What they don’t realize is by January 1, 2018, if you’re operating a commercial grow and you don’t have a cultivation license and aren’t in the process of getting one—it’s just a cease and desist order. That can be thousands of dollars a day. And it could be ugly when the IRS comes in in a few years and businesses get audited. We do want to keep all our small farmers. They hold the culture. They hold the innovation. If we lose the small farmers we’re going to lose a lot.”

Growers, as well as small business leaders, contend that this new highly regulated system will operate like the alcohol industry, where Budweiser and Coors rule shelf space and small craft brewers struggle for distribution.

“It’s such an archaic model,” says Kyle Sherman, CEO of Flowhub, a Colorado company that does `seed-to-sale’ tracking for retailers across the United States, to make sure they stay compliant with multiple state laws. “In a world of Uber, who needs taxis? Why do we have to go back to these old models that provide no added value?”

Because, some say, groups with deep pockets to spend on political lobbying wanted it that way. Groups like the Teamsters.

“We concluded it was the best model for us and we proceeded to forge an alliance with law enforcement and local government because we thought that it fit their needs as well,” says Barry Broad, legislative director of the California Teamsters Public Affairs Council.

Broad acknowledges the potential gain to the Teamsters’ organization.

“I’m not hiding our self interest. This is a growing industry and we’d like it to grow unionized,” he says. “To have local government, organized labor and law enforcement all together is a pretty potent alliance. What’s on the other side? A couple marijuana people with illusions of grandeur?”

He is referring here to DeAngelo, who was recently named one of the seven most powerful people in the marijuana industry by Fortune magazine. Yet for all his power, DeAngelo hasn’t managed to stop “the rollover by alcohol.”

“It’s a payoff to the liquor industry,” DeAngelo says. “They’re using the same strategies, drawing from the same capital pool, and they have the same problematic culture as the liquor industry. There’s a thin fig leaf of being independent, but in fact this is the alcohol industry making a play for cannabis.”

His accusations are targeted at a retired 78-year-old liquor executive named Ted Simpkins who last year set up a marijuana distribution company called RVR, also known as River Wellness or River Collective, based in West Sacramento.

Simpkins, who declined to be interviewed for this story, is by most accounts a formidable businessman. As senior manager of the Florida-based Southern Wine & Spirits, the country’s largest liquor distributor with $12 billion in revenues, he earned $7.8 million a year in salary and bonus compensations. That figure was made known in a 2011 federal lawsuit filed by Southern Wine & Spirits, which accused Simpkins of breaching a restrictive covenant after he jumped ship for a competitor. The judge ruled in favor of Simpkins, who was until recently the owner of an esteemed Sonoma vineyard, Lancaster Estates.

During the 2015-16 state legislative session, Simpkins’ company paid out $134,500 for lobbying of medical marijuana distribution, the very rules that Allen helped negotiate, according to California disclosure filings.

RVR invested heavily in other ways, too, leasing a 17,237-square-foot storage and distribution warehouse in West Sacramento and investing in armored vehicles to transport cannabis around the state. After the state announced it would embrace mandatory distribution, the members of CGA, Allen’s group, were surprised to learn that they now shared the same Sacramento lobbyist as RVR.

“It’s pretty common for lobbyists to represent different clients,” says Allen. “We reviewed the potential conflicts and decided there wasn’t one.”

His chief critic remains skeptical.

“I don’t think Hezekiah has the political experience to outwit and outplay the people he’s made alliances with – people like the Teamsters and RVR, who are very accomplished political players,” says DeAngelo.

The hostilities between Allen and DeAngelo are a microcosm of the relationship that has festered between pot growers and the dispensaries that have sold their product ever since legalization 20 years ago.

As the 1996 law was written, the only regulated and licensed participants were the dispensaries. They operated in the open while the growers continued to be treated as outlaws; no legal distinction had been made between growers who were supplying dispensaries and those who might be raising high-grade pot for the black market. That gave the dispensaries leverage and led to a common complaint from growers—that the dispensaries often reneged on agreed upon prices and then turned around and commanded top dollar from their customers over the counter.

“Cannabis is the epitome of the free market supply and demand model,” says Stephen Dillon, executive manager of the Humboldt Sun Growers Guild, a CGA member. “We’re going into a stage where the supply is growing and growing. The prices are dropping, dropping, dropping.”

But while the prices to farmers have fallen from about $3,000 to about $1,400 a pound, the dispensaries have continued to realize a profit of 200 to 400 percent, according to Dillon.

“That doesn’t create the best feeling,” he says. “And that’s why the dispensaries are so against the distributors. It’s going to come to light. It’s their hidden nest egg, they’ve had all the power, and that’s going to change.”

Allen doesn’t hesitate to share his personal grievances. Four years ago, he drove the 290 miles from his farm in Humboldt to Harborside in Oakland, a pound of marijuana in his car. The dispensary had promised $2,200 on the phone, but when he presented the product a clerk adjusted the price to $1,100 – take it or leave it – with a lecture on the proper curing method of delicate buds.

It was, says Allen, a humiliating experience. “I’ve been doing this since I was six and you don't get to make me feel like crap and offer me half of what it’s worth.”

That longstanding grudge would lead to major repercussions down the road. Harborside’s owner, DeAngelo, had not only founded the organization that morphed into CGA; he had a seat on the board. As Allen embraced the new alcohol model, his relationship with DeAngelo grew increasingly strained. The young man spoke openly of “bad blood.” The father of legal cannabis alluded to betrayal. In March 2015 Allen accepted the resignation of DeAngelo from the board of CGA. DeAngelo was replaced by an executive from RVR, the company established by Ted Simpkins, the retired alcohol distribution executive.

What is going on in California has a chance to influence the rest of the country. Voters in eight other states will decide this November whether to legalize the medical or recreational use of marijuana. And the organization behind most of these initiatives is the Marijuana Policy Project.

MPP, the nation’s most prominent cannabis reform organization, has been instrumental in writing many of the initiatives in the 23 states where cannabis has already been approved in one form or another. As a result, they have generally reflected a corporate-friendly libertarian approach, one based on commercial, for-profit goals. MPP is founded and directed by Rob Kampia, who in 2000 ran for Washington, D.C.’s congressional seat as a member of the Libertarian party.

In April, Kampia unnerved health policy experts by his blunt and unapologetic embrace of the alcohol industry. At a national cannabis forum, he described how he successfully sought a buy-in from alcohol distributors in return for lucrative concessions in Nevada. The ballot initiative, known as Regulate Marijuana Like Alcohol, gives preference to 18 alcohol distributors for the first 18 months after it passes. Alcohol distributors committed $200,000 to the initiative, which will appear on the Nevada ballot this November.

“Therefore we wrote them into the initiative,” Kampia tells POLITICO, adding that he’d been reaching out for months to alcohol distributors around the country before he actually got a bite.

“The (alcohol) manufacturers might have a little to lose, they’re the first tier. The second tier – the wholesalers/distributors – should be interested because they already have a distribution system in place. It’s easy enough for them to put marijuana on their trucks.

“The retailers! They should be courting us actually. Because we write the laws. And the retailers are writing themselves out of the game, because they’re not showing us any love.”

Kampia sees no downside. Public health experts suggest otherwise. They say that most state initiatives on cannabis legalization have replicated the same mistakes once made around Big Tobacco – marketing and glamorizing a product that in retrospect demanded government regulation.

“To me, the strongest argument against legalization has never been the cannabis plant,” says Keith Humphreys, a Stanford University drug policy expert and co-chairman of California’s Commission on Marijuana Policy. “It’s our experience with tobacco and alcohol, and our inability to regulate those industries well. I’ve worked to regulate these companies all over the world and they usually win. The question is how can you do this without corporate takeover? Buying legislators flat out? Throwing money around?”

The corporate takeover is already underway. Dillon, of the Humboldt Growers Guild, ran into it head on at a 2014 national cannabis convention in Las Vegas.

“I looked around and saw 3,000 to 4,000 people and they were almost all hedge fund managers, stockbrokers and venture capitalists, all trying to figure out a way into this business. They had no soul, no spark in their eyes. They care about the bottom line. For us, cannabis is about more than that.”

The big money investors concede that small growers like Dillon should be alarmed. California already produces 10 times more marijuana than it can consume, according to the state Board of Equalization. The corporate transplants – MBAs from Goldman Sachs and Ernst & Young – are flooding the market, hiring government policy experts, land use teams, and community relations wizards. And the future is no longer in 10,000-square-foot lots; it’s in farms that are eight times as large. Growers who’ve staked their claims on steep land with little access to roads and water will find it difficult if not impossible to be compliant with the state’s new regulations, as corporate analysts are quick to point out.

“The ones who are not evolving are the ones who lose,” warns Leslie Bocskor, who has been called “the Warren Buffett” of the cannabis industry. As CEO of New York-based Electrum Partners, Bocskor is developing a $25-million hedge fund to meet the anticipated demand for cannabis investment on a state-by-state basis.

The real money, “the on-ramp” to the cannabis industry, is in distribution. That’s where he’s telling his clients to invest.

“Evolve or die. If you don't make the transition, you won’t find yourself participating,” he says. “I can easily see a Bureau of Alcohol, Tobacco, Firearms and Cannabis.”