California Pot Seen Commanding Extra Cachet

(Bloomberg) -- Glass House Brands Inc., one of California’s largest marijuana growers, is planning for a U.S. market with no interstate boundaries in which any state’s cannabis can be sold legally across the country.

The Santa Barbara-based company recently completed a transaction with a special purpose acquisition company. But instead of building out production elsewhere to gain access to new markets, Glass House doesn’t plan to use any new capital to expand beyond California, Chief Executive Kyle Kazan told me in a recent interview.

“I like that we’re in California,” he said, predicting that when cannabis becomes federally legal in the U.S., marijuana grown in the state, which is already the world’s largest legal recreational market, will become the most sought after in the country. He said California produces some of the world’s best marijuana because of its long history of cultivation and a favorable climate.

“Cannabis will trade outside its state of origin; Californian product will be like Napa wines,” he said.

Kazan noted that in New York’s illicit market, products are circulating that are labeled with California brands -- and these command the highest prices. He said cannabis with Glass House’s name on it has cropped up among these. While he’s “not thrilled” by the prospect of consumers buying a counterfeit product, “we saw it as validation that we’ve arrived,” Kazan said.

For now, as interstate transport is still prohibited, Glass House’s strategy is to grow inside California. The company said in April it would buy a 5.5 million-square-foot space that will make it one of the largest California greenhouse operators in the industry.

The fortunes of California’s cannabis companies stand to rise -- or fall -- depending on what route the U.S. takes in federal regulation. The latest proposal to legalize marijuana left the industry with questions about the prospects for interstate trade: It called for states to allow cannabis to pass through for delivery to other states, while also saying that “shipment of cannabis into a state in violation of state law is prohibited.”

The fall of interstate barriers wouldn’t be a good thing for multistate operators that have built parallel growing, cultivation and processing facilities in each state they sell in. These companies are expected to wield lobbying clout to try to insulate themselves from competition.

But Kazan’s anecdote about the black market shows that consumers also have influence. If Californian products are better and cheaper, cannabis shoppers are likely to keep choosing them on the black market over legal products made by the multistate operators.

Glass House isn’t the only company seeking to topple interstate walls -- or build its brand around California’s reputation for quality marijuana.

Santa Barbara-based Lowell Farms Inc. recently announced an “Origin Collection” that spotlights the so-called Emerald Triangle formed by Humboldt, Trinity and Mendocino counties. The products draw on viticulture’s concept of terroir, which “recognizes the craft farmer and highlights how elements like soil, climate, sunlight and moisture influence the taste, structure and overall effect of a specific strain.”

NUMBER OF THE WEEK

• 9%: The amount lost by a U.S. exchange-traded fund made up of multistate cannabis operators since the latest proposal to legalize marijuana was announced.

QUOTE OF THE WEEK

“After further review, we believe the Cannabis Administration and Opportunity Act (CAOA) may actually garner the 60 Senate votes needed -- really,” said Pablo Zuanic, Cantor Fitzgerald & Co. analyst, in a July 21 research note.

WHAT YOU NEED TO KNOW

• A cannabis businessman must pay $3 million to resolve allegations he used investor funds for a Colorado marijuana business to buy classic cars and cryptocurrency instead.
• A Colorado dispensary has renewed a request for the Supreme Court to review a tax dispute, citing comments from Justice Clarence Thomas about mixed signals on the issues.
• President Joe Biden’s drug-czar pick, Rahul Gupta, spent nine months last year working as an adviser to a Maryland-based cannabis company, recently released government ethics documents show.
• Mississippi lawmakers say they’re continuing to work on proposals for a medical marijuana program after the state Supreme Court invalidated one that voters had approved.

EVENTS

Monday 7/26

• Red White & Bloom Brands Inc. reports first-quarter earnings after the market closes.
• The Valuation Advisor’s Foundation for Valuing Cannabis Enterprises, a virtual conference through July 30.

Wednesday 7/28

• Tilray Inc. reports second-quarter earnings before the market opens.

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