Michigan regulators are seeking to end the controversial conversion of CBD to THC, a method that’s plagued the state’s legal marijuana market amid basement low prices and shrinking margins.
The Cannabis Regulatory Agency issued new proposed rules for the state’s regulated market Monday as it prepares to close loopholes that allowed illicitly grown and often illegally imported marijuana products to infiltrate the legal market.
The proposed rules contain 96 changes to the current legal framework, including not only the banning of converted CBD to THC, but also allowing the CRA to deny license renewal for companies that have civil judgements against them, requiring growers and processors to identify the location of all product in the statewide monitoring system, requiring new tags if a product changes from raw form to a different product and requiring all product testing to be done in front of a camera.
Most of these rules are designed to make it harder for legal operators to supplement cheaper-grown CBD or non-regulated marijuana for marijuana grown in the legal market.
Law enforcement in the state believes the legal market has been flooded with illegally grown marijuana in the last 12 months, stemming from an Oct. 2023 Michigan Court of Appeals ruling that interpreted the state’s recreational marijuana laws to mean illegal growers and distributors could face only minor misdemeanors under the law, not felony charges. That ruling was recently reversed in a new Court of Appeals ruling in October.
But other legal cannabis operators have been accused of using illicit product or importing CBD from out of state to use in the legal market and label it as Michigan-grown, legal product.
For instance, business owner Endrit Cali of marijuana grower and processor HiCloud LLC in Hesperia, roughly 60 miles northwest of Grand Rapids, was pulled over by Michigan State Police in November last year with 43.5 pounds of marijuana flower and law enforcement suspected HiCloud was storing and selling illegal market product. However, Cali merely pled guilty to a misdemeanor charge and a $950 fine, leading to the tossing of a felony possession charge.
The CRA also alleged Chesaning-based One Love Labs imported more than 110 pounds of isolate — concentrated product containing pure CBD or THC — and listed it in the state system as a hemp concentrate, or CBD from a legal processor in Oregon. That processor held a hemp-processor license in Michigan, but not a marijuana processor license. During the investigation, One Love had a third-party lab test the product, under the supervision of the CRA, and found the so-called hemp product contained 86.49% THC — well above the legal threshold for hemp at 0.3%, according to the state.
It is against federal law to ship hemp product containing more than 0.3% THC across state lines and against Michigan regulations to process or sell product containing more than 0.3% THC that derived from another state.
Beyond outright prohibiting the conversion of hemp CBD to THC, which occurs through a chemical process, the CRA is seeking to require companies test products in the final form.
Currently, companies can test the raw marijuana flower that would be processed down to be placed in a pre-roll joint. Requiring testing in the final form may stymie processors from testing the raw product and then thinning that product out with the cheaply-acquired converted or illegally grown product.
Legal operators have been turning to the illegal market as oversupply has blasted holes in the industry’s margins.
Marijuana prices dropped another 6% in October, setting yet another record low and putting more pressure in the already strained cannabis operators in the state. The average price for an ounce of cannabis flower in Michigan’s adult-use market has fallen nearly 21% year-to-date to $73.99 in October, cutting into margins for the industry.
The price compression is largely attributed to product oversupply.
There were 3.56 million active plants being grown in Michigan, down from 3.77 million in September; but still up 73% year-over-year. The decline in active plants last month is likely due to the influx of product from “Croptober,” when operators harvest their seasonal outdoor grows for the market.
But illicit market marijuana is also believed to play an outsized roll in decreasing prices.
Shrinking margins caused Fluresh LLC to plan to close down its $46 million, 105,000-square-foot grow facility in Adrian, and lay off 46 employees at the end of this month. The company, doing business as Tend.Harvest.Cultivate, couldn’t make the economics of the operation work amid shrinking margins, resulting in the loss of $500,000 a month.
“It cost me more to grow in Adrian than I could sell on the market,” CEO Brandon Kanitz told Crain’s. “The site is not profitable.”
It’s unclear how large of an impact the new rules would have on prices.
“These draft rules are the result of the extensive feedback we’ve received over the last two years and we’re excited to move this process forward,” Brian Hanna, executive director of the CRA said in a statement to Crain’s. “We’ll continue to listen as we move into the next phase of public written comment and our in-person public hearing early next year. This set of rules was designed to set Michigan’s cannabis industry on a path towards continued success as well as align Michigan with possible federal regulation.”
The proposed rules are also not final and a public hearing will occur on the changes in the coming months, the CRA said in its bulletin.
Dustin Walsh is a senior reporter for Crain’s Detroit Business, covering health care with a focus on industry change and operations, as well as the state’s emerging cannabis industry. He is also a regular columnist on all things health, labor, economics and more.
H/T: www.crainsdetroit.com
