Study of cannabis as an agricultural crop has been notoriously inadequate, but data provided by the water quality control board’s cannabis program offers critical new insights into the water use practices of cultivators entering the regulated industry. In this initial analysis, we found that subsurface water may be much more commonly used in cannabis cultivation than previously supposed. Further analyses of cannabis cultivation’s water extraction demand, as well as of geospatial variation in water demand, may help elaborate the ramifications of this finding. Ultimately, a better understanding of cannabis cultivation’s water demand will be useful for placing the cannabis industry in the greater context of all water allocation needs in the North Coast and throughout California. U.S. state markets for cannabis are evolving rapidly. As of mid-2019, 32 of 50 states had some form of legal medicinal cannabis system in place, and since 2012, 11 of those states had legalized and regulated adult-use cannabis.California was the first U.S. state to decriminalize the sale of medicinal cannabis, with the 1996 passage of the Compassionate Use Act . In 2003, a California state legislative act, Senate Bill 420, set out more specific rules for the operation of medicinal cannabis collectives and cooperatives. For the following 15 years, regulations on the cultivation, manufacturing, and sale of cannabis in California were largely limited to a wide variety of local ordinances, drying room with little intervention from the state government. In November 2016, California voters legalized adult-use cannabis by approving Proposition 64 .
Subsequently, the Medicinal and Adult-Use Cannabis Regulation and Safety Act of 2017 created a unified framework for the state licensing of cannabis businesses and the taxation and regulation of adult-use and medicinal cannabis. MAUCRSA regulations went into effect on January 1, 2018. Safety regulations generally add costs to production. One of the most costly components of California’s new system of cannabis regulation is the mandatory testing of all legal cannabis for more than 100 contaminants, including pesticides and heavy metals. This paper is the first to comprehensively examine the economic challenges of cannabis testing and estimate the cost of testing compliance per pound of cannabis marketed in a legal and licensed cannabis market. In a previous article, we provide a brief introduction to testing costs to which this paper supplies needed rigor. We review and compare the allowable tolerance levels for contaminants in cannabis with allowable levels in other crops from California, and review rejection rates in California since mandatory testing began in 2018. We compare these with rejection rates in other U.S. states where medical and recreational use of cannabis are permitted. We use primary data from California’s major cannabis testing laboratories, several cannabis testing equipment manufacturers, Bureau of Cannabis Control license data including geographical location information, and data from Cannabis Benchmarks on average wholesale batch sizes to estimate the testing cost per pound of cannabis legally marketed in California.At the U.S. federal level, cannabis is still classified as a Schedule I illegal narcotic, and its possession, sale, and even testing are serious criminal offenses under federal law. Even cannabis businesses that are fully compliant with state regulations thus face legal risks, uncertainties, and obstacles to doing business such as a lack of access to mainstream banks. In recent years, however, the conflict of state and federal laws has generally been mediated via a series of informal, non-binding agreements, letters, and memos of understanding between the U.S. Department of Justice and states. These understandings have enabled cannabis businesses to focus more on complying with state and local laws than on hiding from federal prosecutors. All of the U.S. states that have legalized, taxed, and regulated recreational cannabis, and most states that have legalized and regulated medicinal cannabis, require testing for some contaminants and testing and labeling of potency .
Colorado and Washington were the first states to vote to legalize and regulate adult-use cannabis, both in 2012. Colorado first introduced the enforcement of potency and homogeneity tests for retail cannabis products in 2014. Residual solvents and microbial contaminants were added to the testing requirements in 2015, and heavy metals and pesticide residues as of mid-2018 . Washington State mandates that licensed testing laboratories must also perform potency tests, moisture analysis, foreign matter,microbial and mycotoxin screenings, and screenings for residual solvents. Some states, including California and Colorado but not Washington, also require more sophisticated and costly wet-lab tests for pesticides and heavy metals. Per MAUCRSA, the California Department of Pesticide Regulation established maximum allowable thresholds for 66 different pesticides, including zero tolerance for trace amounts of 21 pesticides and low allowable trace amounts of 45 other pesticides. MAUCRSA also established thresholds for 22 residual solvents plus a variety of heavy metals and other contaminants. The Bureau of Cannabis Control was put in charge of licensing and regulating testing labs and enforcing the testing standards. In the 2016 marketplace, prior to the passage of Proposition 64—which was unregulated at the state level and partially regulated at the local level—total California cannabis production was estimated at approximately 13.5 million pounds of raw flower, with roughly 80% of this production illegally shipped out of the state. These out-of-state shipments may explain why California accounted for 70% of nationwide cannabis confiscations in 2016. Rough estimates suggest that only about one-quarter of California’s in-state cannabis consumption, or less than 5% of total cannabis production, went to the legal medicinal market in 2016. Until 2018, there were no rules in place at the state or local levels in California for testing contaminants, even for products legally marketed as medicinal cannabis. A minority of medicinal cannabis retailers in the pre-2018 state-unregulated market was routinely testing and labeling cannabis for THC potency, but few were voluntarily testing for contaminants. Informal evidence suggests that pesticide residues were common in cannabis products in the pre-regulated market. For example, in 2017 an investigation reported that 93% of 44 samples collected from 15 cannabis retailers in California had pesticide residues.The mandatory testing framework introduced under MAUCRSA is summarized in Table 1, where we briefly describe the tests for specific types of batches and the standards for passing each test.
Dried cannabis flower and cannabis products must be tested for concentrations of cannabinoids and various contaminants in order to enter the legal market. Some tests apply to all batches, while some others only apply to some forms of cannabis. Heavy metals tests were not mandatory until December 2018. Table 2 shows the list of contaminants with their maximum tolerance levels allowed in California. Tolerance levels are generally lower for products that are inhaled than for products that are eaten or applied topically. For 21 pesticides, how to trim cannabis the maximum residual level is zero, meaning that no trace of those residues may legally be detected in a sample of cannabis. MAUCRSA requires that all batches of cannabis flowers and products must be sampled and tested by licensed laboratories before being delivered to retailers. Distributors are responsible for testing . Fig 1 shows the flow of cannabis testing in California. The weight of a harvest batch cannot exceed 50 pounds; larger batches must be broken down into 50-pound sub-batches for testing. The sample size must be bigger than 0.35% of its weight. A processed batch cannot surpass 150,000 units.After testing each batch, laboratories must file a certificate of analysis indicating the results to distributors and to the BCC. If a sample fails any test, the batch that it represents cannot be delivered to dispensaries for marketing. Instead, it can be remediated or reprocessed and fully re-tested again. If a batch fails a second re-testing after a second remediation, or if a failed batch is not remediated, then the entire batch must be destroyed. Analyzing the cannabis market, compared with other agricultural markets, presents a unique challenge to researchers because of the rapidly changing legal environment, the lack of historical data or scientific studies, the lack of government tax data, and the cash nature of the business. Quotes are known to vary depending on the number of samples, the frequency of testing, the type of contract between the distributor and the laboratory, among others. Bulk pricing is common and is negotiated on a case-by-case basis. We approximate the costs of testing by collecting detailed data on the testing process and constructing in-depth estimates of the capital, fixed, and variable costs of running a licensed testing laboratory in California. We use these results in a set of simulations that estimate the costs per pound generated by cannabis testing under the California regulations in place as of mid-2019. We make some market assumptions based on the most reliable industry data available as of this writing in order to estimate the current cost per pound of testing compliance.We construct a simulation model using R software to assess the cost structure of cannabis testing in California under the current regulatory framework. We base our simulations on the number of testing labs and distributors that had been granted temporary licenses by the BCC as of April 2019. The number of labs and distributors in California will fluctuate as the industry continues to develop. To estimate costs incurred by labs, we first construct estimates of fixed and variable costs for labs based on their testing capacities. We calculate the cost of testing a sample of dried cannabis flower considering the lab scale and the distances between labs and distributors. Based on meetings with representatives of California testing labs, we assume that 70%, 20%, and 10% of the labs are distributed into small, medium, and large size categories. We assume that the testing industry is like many others in that many small firms supply relatively little of the output. We run 1,000 simulations to estimate the cost of sampling and testing for a sample of a typical batch of dried flowers from each of the 49 labs, assuming that costs, working hours, testing capacities, etc., may vary from lab to lab. Next, we use the weighted average of testing cost per sample to estimate cost per pound. We express total testing cost in dollars per pound of legal cannabis that reaches the market, after incorporating costs of remediating and re-testing failed batches and losses from batches of cannabis that cannot be remediated and must be destroyed.We used the list published by the BCC to identify actively licensed testing labs and requested, to managers or representatives, a personal or phone-call interview based on a set of questions that we used as a guideline . We interviewed one-fourth of the operating or prospective licensed testing labs listed by the BCC. We gathered data on market prices for testing equipment, supplies and chemical reagents consumed by equipment, equipment running capacities, and other cannabis testing inputs needed to build a compliant testing laboratory in California. Likewise, we collected financial, managerial, and logistics data. To complement licensed testing lab data, we also drew on personal interviews, phone calls, and email exchanges with sales representatives of three large equipment suppliers. Table 3 summarizes capital costs, other one-time expenses, and annual operational and maintenance costs used in our calculations. We report average cost and standard deviation for each estimate. We assume that medium-sized and large labs receive discounted prices on equipment, given the larger scale of their purchases. Based on information provided by equipment suppliers, we expect these discounts to be between 1.5% and 2.5%. Different-sized labs have different capacities based on their scale. We assume that larger labs have made larger capital investments and are better able to optimize processes when supplying a larger volume of testing . On the other hand, small testing labs require less equipment and less capital investment, and operate with low annual costs, but their testing capacities are also low. Table 4 summarizes our estimates of running time for tests, the main consumables used by testing machines, and the expected cost of running a specific test per sample. In addition, we include a range of $80 to $120 per sample to cover general material and labor apparel used while preparing and processing samples.Next, we must estimate sampling cost , which includes transportation, labor, equipment, and material costs. We use the zip codes of active licensed testing labs and distributors published by the BCC to estimate the distance from labs to distributors .