Cannabis and co-ops, from farming to banking

The liberalisation of cannabis laws in Canada and the US has brought opportunities for co-ops – but also practical problems

The legalisation of cannabis in Canada and several US states has created business opportunities for growers – and also for finance providers, with traditional banks reluctant to offer services to the industry.

The drug is still illegal at federal level in the USA, but has been legalised for recreational use in the states of Alaska, California,  Colorado,  Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, along with Washington DC, the Northern Mariana Islands, and Guam.

At federal level, some its derivative compounds have been approved by the Food and Drug Administration for prescription use.

In Canada, cannabis has been legal for medical purposes since 2001 and for recreational use since March 2018.

This has helped create a growing, lucrative market: the industry generated US$12.2bn, which could rise to more than $30bn in global sales by 2022, and up to $75bn by 2030. Industry website Cannabiz says there are 43,000 licensed cannabis and 12,000 licensed hemp operations in the US, operating across 41 states and 14 international markets.

To take advantage of this, growers have been forming co-ops to produce and sell the drug. The co-op model offers the ability for small growers to scale up and compete with bigger rivals – with large corporations expected to enter the market.

It also helps them to maintain transparency in their operations, and pool resources to negotiate the complex regulations around the fledgeling industry. These can include minimum distances from schools and residences, and rules around security, light pollution and odour from farms.

For instance, in British Colombia, Canada, provincial laws restrict growers to 195 sq metre production limit; an independent marketplace is also forbidden, with all distribution made through through the BC Liquor Distribution Branch. Licences are also expensive – with a CA$23,000 regulatory fee, a $3,000 application fee and a $1,700 security fee. In response, cannabis industry specialist Grow Tech Labs and business incubator Victory Square Technologies have launched a cannabis co-op to consult small producers in the province and help them navigate the legal terrain.

To cut costs and red tape, growers in the province are opting for a shared community garden approach, using the same plot of land – for instance, the Kootenay Outdoor Producers Co-op is planning a demo farm, where it will expand into edible and fibre production, with plans to take its model to 60 more farms.

Legalisation has brought bigger players from Canada’s co-op sector into the field, with Calgary Co-operative Association, one of the largest retail co-ops in North America, forming a Co-op Cannabis division, operating separate stores selling dried cannabis, cannabis oil, and accessories.

The co-op model has also been adopted by growers in the USA; in Pioneer Valley, Massachusetts, craft marijuana co-operatives has been included as a licensing category by state regulators – although some town councils have imposed a moratorium on growers. Among those formed to take advantage of the rule is Farm Bug Co-op – which is lobbying legislators to ensure that co-ops under licence must abide by the seven co-operative principles.

“We were concerned about some big company coming in and calling themselves a co-operative,” Marty Dagoberto of the Northeast Organic Farming Association told local news site Valley Advocate. “I do feel like co-ops are the way of the future as far as a democratically controlled local economy goes.

“Hopefully the craft cannabis cooperative will be a brand identity that people will look for and will benefit all of our farmers. This is going to help farmers who are hoping to diversify.”

And in Conway, Mass., John Moore and Lisa Gustavsen of Roaring Glen Farms are looking to set up a cannabis co-op.

“There are so many farmers who are having to leave their farms, they can’t make a living,” they told local news site Greenfield Recorder. “And this doesn’t require the electricity and the water that urban greenhouses may require.

“This could be a magic bullet for all the abandoned farms and dairy farms in the western part of the state.”

But cannabis co-ops face another hurdle: where to put their money, with many players in the banking sector unwilling to help because they are subject to federal law, which maintains a ban on the drug.

This has prompted cannabis businesses to turn to credit unions for banking services, although they often face a waiting list before being accepted as members, and are subjected to rigorous background and licence checks, with the cost handed on in the form of higher banking fees.

Even with credit unions, it’s an uncertain route. At the start of August, Alaska’s Credit Union 1 announced it was ending a pilot project to provide checking and savings accounts to cannabis businesses.

Chief executive James Wileman said businesses in the industry cannot continue the programme beyond a pilot phase without the liability coverage, adding that four businesses had participated in the scheme, which did not perform as well as expected.

Last month, the chair of regulator the National Credit Union Administration said credit unions would not be sanctioned for serving cannabis-related businesses in states where the drug is legal – with Congress working to allow allow banks to take on cannabis-related customers.

Rodney Hood told the CU Times: “It’s a business decision for the credit unions if they want to take the deposits … We don’t get involved with micro-managing credit unions.”

But he said said that credit unions which do work with the cannabis industry must comply with FinCEN rules, file suspicious activity report and strictly adhere to other rules, such as the Bank Secrecy Act, safety and soundness, and money-laundering regulations.

US Treasury figures in 2018 found 375 traditional banks and 111 credit unions accepting business from the cannabis industry – usually from businesses in their own communities. This number is growing – Treasury figures in July found that in the first half of 2019, the number of banks servicing cannabis businesses rose10%, and the number of credit unions rose by 20%.

Another difficulty for cannabis growers is obtaining insurance, with hemp growers in Oregon losing millions of dollars’ worth of crops during a severe hailstorm last month.

Chris Boden cannabis practice group team leader at Crouse and Associates Insurance Services, told Insurance Business America that growers could pool together as co-ops to fund insurance solutions, to help them with the prohibitive cost of parametric weather underwriting.

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