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California wildfires affected 30-40% of cannabis cultivators, who, with property taxes due and lack of insurance coverage, are looking for aid relief.

Impact of California Fires on Cannabis

Scope of fire:

Three days after the Harvest Moon, the first full moon of October, wildfires broke out across Northern California while cannabis cultivators were beginning to harvest their crops. The fires not only damaged more than 245,000 acres, displaced 100,000 people, killed 42 people, and destroyed roughly 8,900 homes and buildings, but also affected roughly 30-40% of the state’s cannabis cultivators to varying degrees. Destroyed crops, lack of insurance coverage, and ineligibility for relief aid are negatively impacting cultivators, with the full scope of impact to be determined in time.
These direct impacts on cultivators have the potential to affect ancillary service providers in the near future, including manufacturers, distributors, and dispensaries, as well as investors. With a decreased supply, these ancillary service providers could face a scarcity, specifically a lower supply in the midst of a higher demand.

Prices:

Speculation as to the price of cannabis per pound varies depending on the outlook and scope of damage. For example, expectations of higher prices are based on the idea that there will not be enough cannabis to meet demands of the California adult-use market come January, due to a large reduction of supply due to the wildfires. On the other hand, expectations of average prices are based on the idea that there were too many legal cannabis growers before the fire, potentially resulting in excess supply and too little demand; however, since the wildfires reduced the supply, expectations are that prices will be average.

Alternatively, regardless of the scope of damage, BDS Analytics discovered that any scale of disruptions within the supply chain can affect prices by 10-20% increases for several months. These finding were based on observations of the medical use industries in Washington, Oregon, and Colorado, which identified disruptions as anything from delayed product tests to regulatory changes. A silver lining for cultivators could be to sell smoke-damaged crops to manufacturing and production businesses to be made into oils, tinctures, edibles, etc. Unfortunately, these secondary uses for the crop yield lower profits than direct sales of the cannabis flower.

Taxes and Insurance:

Several other factors affecting cultivators include outstanding county bills and lack of insurance. Mendocino County property taxes were billed October 23; however, it remains uncertain as to whether the $5,000 flat tax per harvest cycle for cannabis cultivators will be suspended or not. These flat taxes are generally mandatory, regardless of profit or loss by cannabis growers with crop areas spanning 5,000 (not sure about this terminology—you guys are probably right, but I’m doing a little digging to 10,000 square feet. While cultivators were expecting these bills, making payments may be difficult due to decreases in expected revenues, and a lack of insurance coverage. Since most insurance agencies abide by federal regulations, most outdoor cultivators remain uninsured. Some indoor cultivators are eligible, for expensive, limited coverage, if any. Speculation as to whether homes, buildings, or (the extent to which) crops are insured remains to be answered.

Aid Relief:

Since cannabis is not federally recognized, cultivators are not eligible for federal aid relief from the Federal Emergency Management Agency (FEMA), from the U.S. Department of Agriculture, or from the Small Business Administration. Additionally, several crowdfunding aid efforts were suspended due to federal guidelines: WePay complies with federal regulations, so it required the California Growers Association (CGA) to refund the donations to their $100,000 crowdfunding campaign. Ultimately, the CGA transferred the campaign to GoFundMe instead.

Future:

 Previous wildfires in other regions brought an influx of cannabis growers, which helped local economic recovery. The 2015 Butte Fire in Calaveras County is a prime example of rebuilding: more than 70,000 acres were damaged, 800 homes and building were destroyed, and 2 people were killed. While this fire was only one third of the current wildfires, the rebuilding in Calaveras County was largely due to cannabis cultivators. The underbrush and shade trees were cleared out, allowing maximum sunlight for cannabis. More than 700 cannabis cultivators applied for the local cannabis program, and land prices increased. Several cannabis farmers whose crops were destroyed in the fire were able to take out loans to offset land fees, water fees, and supplies.

Summary:

Many farmers have been affected by lack of insurance, lack of federal aid, and uncertain prices, and the full scope as to producers and retailers remains to be seen. Economic recovery is possible for the recently affected Emerald Triangle region, although it depends on access to relief aid, insurance, and loans. Optimistically, prices will remain stable, demand will meet supply, and the industry supply chain will recover from this disruption.

Rick L. Frimmer is a Managing Director in the Bankruptcy and Restructuring Group, with over 35 years of experience in providing legal, financial advisory and strategic advice in restructurings of municipal and corporate debt, as well as equity.

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