To make these cost calculations we accounted for inventory that first fails testing, but then is remediated.In addition, to understand the opportunity cost of cannabis used in the tests or lost in the process, we use data from wholesale prices and a survey of retail cannabis prices conducted by the University of California Agricultural Issues Center.Based on this information, we developed a cost per unit of cannabis tested for representative labs of three different sizes to approximate the distribution of costs in the industry.For simplicity, we assumed that testing labs of different sizes use the same inputs, but in different proportions, to provide testing services.We assume economies of scale with higher share of capital costs per unit of output for the smaller labs.We used information reported by the Bureau of Cannabis Control in the first half of 2018 to compile a list of cannabis licensed testing laboratories and distributors in California.We used information on the geographic location of testing labs relative to cannabis production and consumption to assess the cost of transporting samples from distributors to testing labs.In March 2019, there were 49 active testing licensees and 1,213 licensed distributors.Both testing licensees and distributors are located in many areas across the state, but they are concentrated in traditional cannabis production areas in the North Coast region of California and in large population centers.Table 5 shows capacities, annualized capital costs,indoor growers and other annual expenses for three size categories of testing labs: small, medium and large.The size categories are based on the number of samples analyzed annually and were chosen to represent typical firms, based on our discussions with the industry.We assume about 25% of labs are small, 25% are large and the remaining half are in the medium category.By regulation, these labs test only cannabis.
The annualized cost of specific testing equipment and other general laboratory equipment is a significant share of total annual costs.The cost of equipment and installation is about $1.5 million fora small lab, about $2.4 million for a medium lab and about $3.8 for a large lab.These costs are expressed as annual flows in table 5.Our survey and discussions with laboratories provide the rest of the estimated costs.Equipment maintenance costs, rent, utilities and labor also are large cost categories.Each of these costs is less than proportional to the number of samples tested and thus contributes to economies of scale.This cost of consumable supplies is calculated on a per sample basis and thus is proportional to the number of samples tested.Finally, the return to risk and profit is estimated as 15% of the sum of the foregoing expenditures.Our estimated total annual costs are about $1.6 million for small labs, $3.3 million for medium labs and $7.0 million for large labs.The scale advantage of larger testing labs is reflected in the testing cost per sample: $324 for large labs, compared with $562 for medium labs and $750 for small labs.These cost differences arise from economies in scale in the use of laboratory space, equipment and labor.Each large testing lab processes about 10 times the number of samples as a small lab but has annualized operating costs only about five times those of a typical small testing lab.That means that small-scale labs tend to specialize in servicing more remote cultivators or manufacturers that have products handled by smaller and more remote distributors located at a cost-prohibitive distance from large labs.We used data on the annual testing capacities of small, medium and large labs and our assumption about the number labs of each size to calculate the share of testing done by labs of each size category.We expect that small labs will test about 6% of all legal cannabis in the state by volume, medium-sized labs will test about 33% of legal cannabis, and large labs will test 61% of legal cannabis.Using these shares, the weighted average cost per sample tested is about $428.Let us now turn from the cost per batch tested to the cost per pound of cannabis marketed.
The per pound costs of laboratory testing depends on the number of pounds tested in each test.Therefore, we must consider batch size.We expect that the batch size will differ within this constraint depending on the product type and origin and size of the cultivator and manufacturer and explore implications of batch size differences.Using the weighted average cost per sample of $428, the testing cost for a small batch of 5 pounds is $85.60, while for the largest-allowed batch size of 50 pounds, the cost is just $8.56 per pound.Next, we turn to several costs not included in the cost of testing a sample in the lab.First and most straight forward is the cost of compliance with security measured including video surveillance and archival, disposal and quarantine, and other compliance costs that we estimated were equivalent to $4.88 per pound for small labs, $4.06 per pound for large labs and $3.25 per pound for large labs for a weighted average of $3.62 per pound.The cost of testing requirements on a retail cost basis is best expressed as the full cost per unit of cannabis that reaches the market.Expressing the full cost in this way raises two additional costs.The first is simple: the value of the cannabis used up in the testing procedure.Based on MAUCRSA, the sample size must be at least 0.35% of the total batch of cannabis tested.We use an average wholesale value of $1,360 per pound of cannabis flower equivalent at the testing stage, which represents a recent weighted average price across outdoor grown, greenhouse grown and indoor grown cannabis and products.Thus, for each pound of cannabis tested, flower worth $4.76 is used up.The second issue, costs associated with a failure to pass the test, is more complex.These costs include the cost of the testing process as well as the cost of the cannabis that must be destroyed when it is considered unacceptable to be marketed by virtue of a failed test.Stringent maximums for pesticides, microbials and other contamination mean that there will be a significant chance that a sample is rejected.In some cases, the owner will attempt to remediate or process that batch, intending to eliminate the cause of the non-passing the test.A batch can be remediated up to two times.If a batch fails its testing after its second remediation, regulations mandate that that batch must be destroyed in a verifiable way.This is a major cost of the testing regime required by California legislation and regulation.To estimate the cost of such rejections, we used a range of potential rejection rates, drawing from information that was available on contamination of cannabis in other states.However, the experience of other states is of limited value and must be adjusted based on information from industry sources.Washington state mandates tests on potency, moisture, foreign matter, microbiological and mycotoxin screening, residual solvent and heavy metals, but, unlike in California, testing on pesticide residues is not mandatory.Washington state enforcement is based on spot checks.Based on Washington state data, we found that in 2017, the second year after the testing began, 8% of the total samples submitted failed one or more tests.
Colorado state mandates tests on residual solvents, microbial, mycotoxins, heavy metals, pesticides and potency.The Colorado Marijuana Enforcement Division reported that during the first six months of 2018, 8.9% of total samples of adult-use cannabis failed testing.Testing on pesticide residues only became mandatory in August of 2018 in Colorado, so systematic data on test results were not available.However, the Department of Agriculture in Colorado informed us that 60% of spot-checks based on complaints or concerns between 2015 and 2017 found pesticide residues.Given the cost of cannabis that must be destroyed in case of failed tests, cultivators and manufacturers may pre-test to decrease the chances of failing official tests.For our cost analysis, we assume that 25% of cannabis is pre-tested before being submitted for the formal and binding tests.To express costs in terms of the pounds of cannabis legally marketed, and account for pretesting and pounds lost because of testing, we need to express the ratio of pounds tested to pounds that pass testing.The costs of establishing and operating a cannabis testing facility that meets California’s mandates are largely accounted for by investment in precise equipment, the cost of highly skilled labor and costs of materials.Testing is expensive, but the lost value of cannabis that fails tests to enter the legal retail market is an even bigger issue.It is difficult to predict rejection rates with great confidence; the data we present, however,vertical hydroponic system is consistent with reports of pesticide detection in California food crops and information available from other states.Evidence suggests that major drivers of both direct laboratory costs and lost cannabis costs are low or zero tolerance levels set for pesticides and the difficulty of dealing with microbial contamination.We have shown that if these low tolerance levels were applied to other California food crops, a significant proportion would have failed tests in recent years.Thus California’s safety standards for cannabis are tight compared to other states’ standards and to standards for other products within California.We note that there may be safety reasons that cannabis is subject to such tight tolerance levels, but they are not in the literature and are beyond the scope of this article.California’s system for testing cannabis has been under pressure since the implementation of the state’s testing regime in July 2018 because of difficulties in supplying the market with product that has passed the tests and has been labeled correctly.Some producers, after receiving inconsistent test results for contaminant residues from different laboratories, have voluntarily recalled product.However, California has not yet reported detailed data on official test rejection rates.Costs of testing will be reflected in the price of marketed legal cannabis.Thus it is crucial to understand the value that testing creates for consumers compared to the costs.Competition between legal cannabis and untested illegal cannabis is a major issue in cannabis policy.Rules that help ensure safe and high-quality products for consumers of legal cannabis can encourage some consumers to shift from the illegal supply chain to the legal, licensed supply chain.Before the passage of AUMA in 2016, the low prevalence of testing in California’s essentially unregulated market for medicinal cannabis indicated that many consumers entertained a limited willingness to pay for higher safety standards.
This suggests that at least some consumers may remain today in the illegal, low-priced market, even though certified, tested products are available in the licensed supply chain.Taxes and regulations will make legal cannabis more expensive than illegal cannabis.However, safety testing is the basis of product differentiation for legal cannabis sold through licensed retailers.In some agricultural product industries, growers have urged product safety and consistency standards, as well as more stringent testing standards, to increase demand.As the regulated cannabis market develops, we expect that increased access to data will help clarify the impact on demand of mandatory testing rules.PM2.5 concentrations were measured continuously, using two, co-located laser photometers , placed 80-100 cm above the floor, for five weeks in 2019.Room occupancy was not monitored.In week 1, instruments were located 30-122 cm from the sources.During week 2 and weeks 3-5, they were 6-9 and 2- 4 meters from the nearest sources, respectively.Photometers were operated with impactors to exclude particles over 2.5 µm in diameter.The photometers were zeroed once a day and calibrated gravimetrically using a controlled cigarette smoke generation system before and after each experiment.Gravimetric data from 20 cigarette smoke experiments, when plotted against the matching photometric data and forced through zero, yielded a calibration factor of 0.31 , which was was applied to the dispensary photometric data.Cannabis PM2.5 samples were also collected in the dispensary on filters for one week , and a preliminary photometer calibration factor was calculated as above.PM2.5 concentrations in outdoor air were estimated using data from an US EPA monitoring station located 2.5 km from the dispensary in an area with similar ambient pollution sources.The retail and consumption space was a single room of approximately 400 m3.Cannabis consumption occurred at three tables in one corner of the room, with sales counters located in the opposite corner.The room was served by building HVAC and by four window air conditioners that did not admit fresh air.The air conditioners had dust filters and we were unable to examine filtration in the building HVAC system.