TVO.org: Small pot producers’ plans go up in smoke

The marijuana industry could be worth $5 billion a year in Canada. Are craft growers being shut out?

  The application process for pot producers is rigorous, and the list of security requirements for licensed growers is lengthy. (Seastock/iStock)

The application process for pot producers is rigorous, and the list of security requirements for licensed growers is lengthy. (Seastock/iStock)

When the task force on marijuana legalization issued its recommendations to the federal government late last year, Brianna Humphrey, the owner of Radical Gardens, a farm-to-table restaurant in Timmins, was hopeful about what it could mean for her business.

“[It] suggested a two-tier system, much like beer … So they suggested that you have your large [licensed producers], and then you have your small craft growers and producers, which is what we were after,” Humphrey says. “We’re already an organic farm, we have a greenhouse, we have a restaurant — we’re pretty well set up to just roll that out really quickly.”

One of its recommendations was that the federal government “use licensing and production controls to control a diverse, competitive market that also includes small producers.”

Humphrey started making plans to enter a market that Deloitte estimates could be worth $5 billion per year nationwide — about the same as that for spirits. She was going to clear three acres of land and build a greenhouse, and invest $1 million in becoming a retail outlet for unusual strains of cannabis. She also wanted to sell edibles from her bakery.

“We had some really nice craft strains that we wanted to bring in,” Humphrey says. “We were hoping to corner the market for all of northern Ontario.”

She even worked with local politicians to lobby the federal government in an effort to ensure that small producers like her would be able to operate in the new legal environment.

But about eight months ago, Humphrey received a call from a lobbyist in Ottawa: her dreams of establishing the only dispensary in Timmins were not to be. She says the lobbyist told her that the federal government would not be including provisions for small craft producers in its legislation.

The federal government’s Cannabis Act, Bill C-45, stipulates that it will be responsible for licensing production, while distribution and retail will be left up to the provinces and territories. In early November, Ontario introduced its legislation, which mandates that cannabis be sold through a new retail outlet — a subsidiary of the LCBO.

“For the legislation, we still don’t know. We assume, because there’s going to be one buyer, that it might favour the larger [producers]. But remember that local beer crafts are actually represented in the LCBOs,” says Cheryl Reicin, a partner at Torys LLP and the head of its life sciences practice.

“I think the bigger issue is that bigger producers are going to be favoured, period. When you look at the liquor industry, when you look at the cigarette industry, there’s been a few big companies that have really taken over, in large part because there’s synergies, and you can get lower costs by being bigger and putting things together in a more efficient way.”

Health Canada is the federal department responsible for licensing producers across the country. It has received 1,798 license applications since 2013, and has approved 69 — a further 460 are still being evaluated.

The application process — the same as that used for medical marijuana licences — is rigorous, and the list of security requirements for licensed growers is lengthy. All senior personnel in the business must also pass criminal record and other security checks.  

“Four years ago, we were looking at becoming an LP. But the rules and regulations are just insane,” Humphrey says. “Like three-tier fencing, 24-hour security detail — it’s just crazy.

“At the bare minimum, in order to get into this game, you need to have $1.5 million in. That’s with you being a tiny, tiny LP.”

She points out that craft brewers don’t face the same security requirements. “If it’s legal and beer is legal, why doesn’t Full Beard Brewing, which is down the street from me, have a 24-hour security detail and three frickin’ fences around it?”

Reicin agrees: “It’s very expensive to get these grow licences … To put up all the security and so forth, that’s not for a small family business to do on their own … There’s so much regulatory work in maintaining, getting your licence — you can’t just be a small mom-and-pop shop.”

Health Canada says that it does not favour larger producers. “The application process to become a licensed producer is open to eligible Canadians across Canada regardless of the proposed scale of operation,” spokesperson Tammy Jarbeau wrote in an email. “The Department’s primary focus in reviewing applications is to ensure that any successful applicant meets the regulatory requirements, including physical and personnel security requirements, and that Good Production Practices are in place to ensure product safety.”

The government also stresses that it’s possible that the licensing process will change. Jarbeau says that the federal government “has not made a final decision on the structure or requirements for the federal licensing framework for cannabis production under the proposed Cannabis Act. Specific details on the licensing framework – including how it may be designed to encourage a diverse, competitive market that includes both large and small producers in regions across the country – would be set out in regulations that will be required to bring the proposed Cannabis Act into force.” She notes that the public will be given a chance to weigh in on any proposed regulations.

Reicin says she thinks that, at least in the short term, the bigger producers will hold the advantage when cannabis is legalized. “I think right now, they’re working very hard to gain as much volume and as much technology, processes, intellectual property, to make themselves the most efficient, the most cost-effective, and the best products. And they have money to do that. But I wouldn’t forget the smaller producers. Those that have something special will still be able to survive. It depends on how small — the really small will not be able to manage that.”

Eventually, small craft producers could start to take market share from the bigger players. In Ontario today, craft beer is the fastest-growing segment of LCBO’s beer category. “I’m hoping that this is just a case of, we’re getting rid of 100 years of prohibition, so we’re just going to be really absurdly conservative about it,” Humphrey says. “I’m hoping that private industry will be allowed into this at a later date. In the same way that craft brewing was not allowed when alcohol prohibition stopped. It was only large producers. Maybe they’re just following that model.”