Clearing the Haze Around Eastern Oregon’s Budding Marijuana Industry

Clearing the Haze Around Eastern Oregon’s Budding Marijuana Industry

by Christopher Rich

February 20, 2018

Recreational marijuana became legal in Oregon on July 1, 2015 due to the passage of Measure 91. The measure passed with a yes vote from 56 percent of Oregonians. Additionally, legislation allowed for local governments to opt out, or ban commercial marijuana in counties where 55 percent of voters had opposed the measure. Although 22 counties returned a no vote, only 16 counties met the criteria to opt out. Half of these counties are in Eastern Oregon (Baker, Grant, Harney, Malheur, Morrow, Umatilla, Union, and Wallowa) and every Eastern Oregon county chose to opt out.

The End? Not Quite

This may sound like the end of the story; however, even with a ban in every Eastern Oregon county, the commercial marijuana industry continues to grow in the region. To understand how this is possible, to get a better feel for where the industry may be headed, and to get an idea of how the industry down the road might affect players in the industry today, let’s back up a few steps. 

Dude, How Did We Get Here?

Medical marijuana came to Oregon in 1998. The 1998 law allowed for cultivation, possession, and use of marijuana for medicinal purposes. A doctor’s recommendation was required for patients to obtain a medical marijuana card through the Oregon Medical Marijuana Program (OMMP). Patients who obtained a card could grow marijuana for their personal use, or purchase marijuana from a grower/caregiver also licensed through the OMMP, who could grow for them.

Not everyone has a green thumb and connecting with someone who does can be a chore. Several ballot measures prior to 2013 aimed at legalizing medical marijuana dispensaries. These all failed to pass voter approval. Several measures also proposed legalizing recreational marijuana. These failed to pass as well. Nevertheless, medical dispensaries cropped up in Oregon anyway, although they weren’t actually legal until Governor Kitzhaber authorized their operation in 2013.

Measure 91, which allowed for the legal manufacture, possession, and sale of marijuana to and by adults 21 or older (subject to state licensing, regulation, and taxation), passed in 2014. Legislation provided for the local government opt out and set the first date for recreational sales (October 1, 2015). Recreational marijuana became legal in Oregon for adults when the new law took effect on July 1, 2015, even though there was nowhere to purchase it.

The Kick Start

The Oregon Liquor Control Commission (OLCC), which regulates firms on the recreational side of the marijuana industry, began taking license applications in January 2016 and began issuing licenses in spring 2016. However, in order for recreational sales to start October 1, 2015, medical marijuana dispensaries could sell to recreational customers from October 2015 through the end of December 2016.

Counties that rejected Measure 91 by at least 55 percent of the vote, and separate cities within those counties, had until December 27, 2015 to draft and adopt an ordinance banning some, or all commercial marijuana activities without further voter approval (opt out). After the deadline, and for counties and cities not meeting the 55 percent criteria, an ordinance to ban or approve commercial marijuana had to obtain voter approval in a general election (the November election of an even numbered year).

Many municipalities quickly opted out because they wanted to meet the deadline and felt voters had already spoken. Other municipalities called for a local vote in the 2016 general election. Counties and cities that took either action blocked recreational sales from starting in October 2015 or suspended sales that had already begun. Recreational sales could commence however, in any municipality that hadn’t taken any action and that had a medical dispensary.

While all Eastern Oregon counties opted out, which closed the front door on recreational sales, only most Eastern Oregon cities opted out, which left the back door open a smidge. The city council of one Eastern Oregon city approved commercial recreational marijuana and authorized a 3 percent local tax on sales. Some cities simply took no action.

It’s Go Time

There were 416 licensed medical marijuana dispensaries in Oregon when recreational sales began in 2015. Five were in Eastern Oregon and all were in cities that opted out of recreational sales: one in Burns (Harney County), two in Ontario (Malheur County), and two in La Grande (Union County).

A side component of the opt-out option also allowed municipalities to opt out of commercial medical marijuana. The dispensary in Burns and the two in Ontario closed after both cities opted out of commercial medical and recreational marijuana. Hines, however, which is geographically attached to Burns, let the opt-out deadline pass without action. In Huntington (Baker County), a stone’s throw North of Ontario, the city council voted to allow all forms of commercial marijuana and impose a 3 percent local tax on sales.  

420Ville opened as a medical dispensary in Huntington at the beginning of 2016, selling both medical and recreational marijuana. The store was the first in Eastern Oregon to sell marijuana for recreational use. Soon after, the OLCC began issuing licenses which allowed firms (other than medical dispensaries) to engage in production, processing, and sales of recreational marijuana. Two more firms opened in Huntington: Burnt River Farms and Hotbox Farms. Burnt River is licensed as a producer, processor, and wholesaler. Hotbox is licensed as a retailer. The OLCC requires a separate license for each component of a firm’s operation.

Sumpter (Baker County) was the second city in Eastern Oregon with commercial recreational marijuana. Like Hines, Sumpter let the opt-out deadline pass. According to OLCC records however, a ban was established on production of marijuana. In January 2017, the Sumpter Nugget and The Coughie Pot both opened in Sumpter as licensed retailers.

Pendleton (Umatilla County) was next on the list. The city put it to the people in the 2016 general election. The voters said legalize it and Kind Leaf Pendleton opened as the city’s first marijuana retailer in March 2017. Two more retailers soon set up shop: Pendleton Cannabis opened in April and High Desert Cannabis opened in July. Three producers were also given the green light: Ghosttown Organix and two other firms awaiting approval by the OLCC. 

Back down south in Hines, the Tumbleweed Cannabis Company opened its doors in August 2017. The recreational retailer is located 0.6 miles (roughly three blocks) southwest of the Burns city limits. According to OLCC records, a second retailer and a producer are pending approval for operation in Hines as well. 

Thus, 14 recreational marijuana firms were operating or awaiting a license in four Eastern Oregon cities two years after the opt-out deadline. In addition, the two medical dispensaries continued to operate in La Grande and a new medical dispensary opened in John Day (Grant County) in June. This brought the total to 17 marijuana firms in six Eastern Oregon cities and five counties in 2017. Preliminary reports show these 17 firms employed a combined 70 people (annual average) and paid roughly $1.37 million in wages: an average annual wage of roughly $19,500.

What’s Ailing Medical?

Medical dispensaries could no longer legally sell to recreational customers starting January 1, 2017. Moving forward, marijuana retailers were in two categories: Medical dispensaries and recreational dispensaries.

Medical dispensaries are licensed by the OMMP. These dispensaries can only sell medical grade products and can only sell to patients with a valid OMMP medical marijuana card. Medical grade products have more stringent standards than recreational products and can only come from producers also licensed by the OMMP.

Recreational dispensaries on the other hand are licensed through the OLCC. These dispensaries can sell products to recreational customers as well as patients with a medical marijuana card. Therefore, they can sell medical grade in addition to selling non-medical grade marijuana. Medical grade products must still meet the OMMP standards and non-medical grade products must meet the OLCC standards. This gives recreational dispensaries a leg up by allowing a much larger customer base and a much larger choice of suppliers.
While the medical marijuana cardholder is exempt from sales tax, acquiring a card can be costly. The standard fee for the card is $200, plus the cost of doctor’s visits (which could include travel), plus the added fee of time consumption. Legalization for recreational use has likely left many to consider the cost of a card greater than the benefit. The number of cardholders fell dramatically in all Oregon counties since legalization. In October 2015, Oregon had 78,045 licensed cardholders. By January 2017 that fell to 67,141 and by February 2018 that dropped to 50,400. The number of licensed cardholders in Eastern Oregon fell from 2,383 in 2015 to 1,621 in 2018.  

While this decline could reflect fewer patients using marijuana, it’s more likely that fewer patients see a need for OMMP licensure now that recreational use is legal. The effect on medical dispensaries has been marked. By January 1, 2017 the number of medical dispensaries fell from 416 to 305. Two and a half months later that dropped to 93 and in February 2018 there were only 16 medical dispensaries left, according to OMMP records. Three of these are in Eastern Oregon.

The drop in dispensaries is also driven by supply constraints, according to dispensary owners and OMMP data. There are simply fewer OMMP producers. Renewal applications for processing sites dropped to nearly zero in 2017. Many producers that previously supplied medical dispensaries have likely switched to producing non-medical grade marijuana and supplying recreational retailers in order to lower production costs and gain market share in a much broader market. Firms new to the production market are also choosing to produce for and supply only recreational retailers.

Because of these trends, medical dispensaries should continue to see a drop in demand. In turn, these dispensaries should find it increasingly difficult to find product and to operate at profit, which should force more closures. The three Eastern Oregon medical dispensaries are no exception. With only 16 firms left in the state this begs the question, what does the OMMP licensing program look like in the future?  

It’s Go Time…Again and Again

Although medical marijuana data suggests that demand for medical dispensaries is low, the data also suggests that demand for and supply of medical marijuana is high across Eastern Oregon. Along with the region’s 1,621 patients, there were 1,004 growers and 816 caregivers licensed through the OMMP. This number was down from 2015 in line with the level of cardholders. Nevertheless, viewed in conjunction with the recreational marijuana data, which shows marked industry growth, the data suggests demand and supply is high in general for marijuana across Eastern Oregon.

The industry had grown to 70 workers, in 17 firms, in six cities, and in five counties in 2017, in a region that collectively voted not to allow recreational marijuana. That number will likely continue to grow according to OLCC records and news reports from around the region. Records show that several incorporated cities in Eastern Oregon do not currently have a ban in place. Haines (Baker County) will put it to a vote in the 2018 general election and Sumpter will revisit the issue. Local news recently revealed that Joseph (Wallowa County) and La Grande might see a ballot measure as well in November. In addition, efforts to repeal current bans, such as the citizens group led effort currently underway in Joseph, will likely be seen in other cities in the region.  

A Glimpse of the Future

Data shows that demand and supply drive an active marijuana market in Eastern Oregon. Legislation made recreational marijuana legal, which means that even where sales are banned, marijuana can flow freely without any real impediment. This suggests the legal sales market will continue to expand in cities without a ban. In turn, this should put pressure on municipalities and voters to repeal commercial marijuana bans in order to implement a local tax and also receive a share of the state tax.

The biggest risk to legal expansion appears to be a federal government crackdown. However, one might say, as goes the nation, so goes the nation. Nine states and the District of Columbia allow recreational marijuana and another 22 states allow medical marijuana. Recreational marijuana failed to pass in Arizona by just 2 percent of the vote. States in the group such as California, Florida, Illinois, and New York have considerable national influence and voting power. In addition, data from the Pew Research Center shows 70 percent of Millennials (currently 21 to 37 years old) and 66 percent of Generation X (currently 38 to 53) favor legalization. This points to a plausible trend of future national legalization. From an economic perspective, the question doesn’t appear to be, will the marijuana industry continue to grow in Eastern Oregon; rather the question is, how slow will growth in the industry be?