Business

Marijuana merchants, growers squirm as state gets into seed-to-sale tracking system

California will soon have one of the world’s most tightly-regulated marijuana markets, as the state in the next few weeks launches a long-awaited digital tracking system intended to follow every plant grown and sold through the licensed cannabis industry.

Many licensed marijuana business owners are applauding the so-called “seed-to-sale” tracking system as a way to cut down on competition from the state’s still-massive black market.

But many also say a lack of information about how the new tracking system will work — and the abrupt shift from what has been a fairly lax attitude about tracking product — is causing chaos in a fledgling industry that’s reeling from hefty new taxes and regulations.

“This is our livelihood. This is how we feed our children,” said Terra Carver, executive director of the Humboldt County Growers Alliance, which represents nearly 200 businesses in the heart of California’s cannabis country.

“We’ve worked so hard to get to where we are,” Carver added. “To have such a key piece (of the industry) be so uncertain is very concerning.”

Part of the deal

The new rules aren’t surprising. Proposition 64, which legalized recreational marijuana use, included a requirement that marijuana businesses put a tag on every plant and digitally monitor each gram of cannabis as it makes its way from farms to consumers. The stringent requirement was a key selling point to voters when the law was passed two years ago.

One reason for tracking plants is to reduce the flow of cannabis to states where marijuana laws are more stringent. The system also can help keep black market weed — which likely hasn’t been taxed or tested for safety — from ending up on shelves at licensed dispensaries.

Member Berry 2 cannabis strain grows at THC Design, where they are tracking their product using barcode labels, in Los Angeles on Tuesday, September 18, 2018. Soon all cannabis produced and sold in California will have to be tracked from growth to sale. (Photo by Sarah Reingewirtz, Pasadena Star-News/SCNG)

The digital tracking system also figures to generate important new data about California’s marijuana market, including identifying which parts of the state have the most growers and which have the most consumers. Such information will make it easier for state regulators to halt shipments if a marijuana product is recalled for contamination or any other health reason — something not currently feasible with food, cigarettes or alcohol.

State officials initially hoped the digital system would be active when legal marijuana sales kicked off on Jan. 1, but so far this year cannabis businesses have complied with product tracking rules by putting data on everything from private software to handwritten invoices.

“It’s utter madness,” said Hezekiah Allen, executive director of the California Growers Association, the state’s largest trade group for cannabis cultivators.

“We are tracking hundreds of millions of dollars of consumer product by paper in a market that’s never been regulated before.”

The digital tracking system has actually been ready to go since Jan. 2, according to Richard Parrott, director of CalCannabis, the Department of Food and Agriculture division that oversees cannabis cultivation. But per state code, regulators can’t make companies start using the tracking system until they’ve been issued full annual licenses. So far, the state has issued only temporary licenses to more than 6,000 marijuana businesses.

The state hopes to approve its first annual licenses “within the next month,” Parrot said Monday. That means California’s tracking system could be online by Halloween.

Big change for industry

For two decades, attorneys and industry experts discouraged anyone involved in California’s gray medical marijuana market from keeping written records to make it tougher for prosecutors if the business was raided by federal or state authorities.

“Every single piece of paper would be something they could use against you,” said Ryan Jennemann, founder of the Los Angeles-based cultivation company THC Design and a board member on the Southern California Coalition, a cannabis trade group.

Nelson Perez harvests Tahoe OG at THC Design, where they are tracking their product using barcode labels, in Los Angeles on Tuesday, September 18, 2018. Soon all cannabis produced and sold in California will have to be tracked from growth to sale. (Photo by Sarah Reingewirtz, Pasadena Star-News/SCNG)

But that lax strategy made it tough to prevent internal theft, Jenneman said, and generally reduced efficiency.

The new digital tracking should offer businesses and marijuana-friendly states a layer of protection against federal interference.

A 2013 memo issued by then-U.S. Deputy Attorney General James Cole discouraged federal authorities from targeting marijuana programs in states where the drug was legalized, so long as those states took steps to prevent cannabis from getting into the black market — and as long as the businesses in those states made sure all revenues were “tracked and accounted for.”

Today, while cannabis remains illegal under federal law — and Attorney General Jeff Sessions has revoked Cole’s 2013 memo — federal regulators so far have not stepped up enforcement against the cannabis industry in states where it is legal. And most states that have legalized medical or recreational marijuana are still operating under the Cole memo guidelines, which calls for seed-to-sale tracking systems.

That’s a major reason why Jennemann said he’s embracing the required tracking system.

“Now that we can actually keep track of everything accurately, and not have to worry about a paper trail and email chain, it’s like a 500-pound gorilla has been lifted off our chests.”

Under the system, growers will put a tag with an embedded radio transmitter on each marijuana plant. That tag will be tied to a unique ID number. As the plant moves through each phase of the supply chain, workers will scan the tag, weigh the processed material, and update information about growing conditions. It also will note information such as the strain of marijuana and lab test results until every product made from that plant is sold.

Some industry insiders say the system could help make their operations more efficient and profitable. At Caliva — a San Jose company that grows, manufactures, distributes and sells cannabis — chief digital officer Matt McLean said he wants to add sensors throughout his facility that can read radio signals from plant tags and send information to the company’s own database. That way they can virtually monitor all products at their 1-acre campus.

But businesses won’t get to test the tracking system before it goes live. They’ve also heard complaints about the chosen program not communicating with existing software, resulting in temporary product shortages in other states. Some remote farmers in Northern California’s famed Emerald Triangle region who pride themselves on being “off the grid” may have to install satellite internet so they can connect to the system and operate legally.

Another issue is money. While the tags are included in license fees for California businesses, Jennemann said he’s allocated one staff member dedicated just to tracking compliance at each of his company’s eight grow locations, adding roughly $400,000 in additional annual payroll.

That cost, Jennemann notes, comes in addition to a host of other new expenses incurred by legal operators competing with a black market that’s bigger than ever. The rules, he said, are crippling an industry “that doesn’t have the profit margins to bear any more costs.”

Choosing a system

In June 2017, Florida-based Franwell beat out four other software companies to win the contract for California’s track-and-trace system. Franwell hit the pot-tracking jackpot, with a contract valued at up to $60 million for the first two years.

Franwell started making tags with radio transmitters in the early 1990s to track fresh foods. Then they focused on items that need to be traced securely, such as pharmaceuticals and weapons. Five years ago, when Colorado set out to implement the first cannabis seed-to-sale tracking system in the country, regulators in that state contracted with Franwell to develop the Marijuana Enforcement Tracking Reporting Compliance system, better known as METRC.

“It has been a critical component of Colorado’s accountability, and arguably the success of our framework, since the advent of the recreational marijuana market,” said Jim Burack, director of Colorado’s Marijuana Enforcement Division.

Employees clip cannabis flowers at THC Design, where they are tracking their product using barcode labels, in Los Angeles on Tuesday, September 18, 2018. Soon all cannabis produced and sold in California will have to be tracked from growth to sale. (Photo by Sarah Reingewirtz, Pasadena Star-News/SCNG)

Colorado’s METRC system automatically notifies regulators if something seems off with data submitted by businesses, such as a gap between the amount of cannabis expected to be harvested from a plant and what actually gets sent to market. Colorado also has data analysts who regularly review the information gathered by the system to look for red flags.

If there are suspected discrepancies, Burack said his investigators can visit the site and request security camera footage that all businesses are required to keep so they can try to determine what went wrong. Often, he said, it’s simply an employee training issue. But last year Colorado took administrative action against 210 businesses. And sometimes, Burack said, data discrepancies can lead to criminal investigations.

Colorado’s track-and-trace system also gives regulators and the public a robust picture of the state’s regulated marijuana market, including what happened to the nearly 1 million pounds of usable cannabis produced in the state in 2017. And Colorado’s taxing authorities use the data to make sure businesses are paying their fair share.

A batch of Tahoe OG cannabis flowers are clipped at THC Design, where they are tracking their product using barcode labels, in Los Angeles on Tuesday, September 18, 2018. Soon all cannabis produced and sold in California will have to be tracked from growth to sale. (Photo by Sarah Reingewirtz, Pasadena Star-News/SCNG)

Things were a bit rocky at first, since METRC didn’t communicate with the internal tracking and point-of-sale software that many businesses were using at the time. But Burack said Colorado “solved that problem” a few years ago by having Franwell develop an interface that lets third-party systems interact with its program.

The METRC system is now used by 11 of the 21 states that require seed-to-sale tracking.

Franwell didn’t respond to requests to discuss METRC for this story.

BioTrackTHC, which handles tracking for seven states, also bid for California’s contract. So did MJ Freeway, which has two state contracts. Rounding out the field was New York-based Quintel and Swiss company SICPA, which monitors California cigarette sales and created the first local cannabis seed-to-sale tracking program in the state.

Two years ago, as part of a pilot program, SICPA worked with Humboldt County to develop a system that is tracking about 945,000 plants and 128,583 pounds of inventory at 632 sites in Humboldt, Yolo and Mendocino counties, according to Jeff Dolf, who oversees Humboldt County’s track-and-trace program.

While there was some grumbling at first, Dolf said they’ve had good compliance with no major issues. And he said everyone is a fan of CalOrigin’s coded stamps that brand products as being from Humboldt County, which is arguably the most famous region in the world when it comes to cannabis cultivation.

While CalOrigin should be able to tie into METRC, Dolf said his county will have to decide whether it makes sense to renew the SICPA contract this November or transition entirely to the state system. Either way, he said they’re determined to find a way to keep the valuable “proof-of-origin” stamp — something METRC doesn’t offer.

Questions about rollout

As they’ve built out California’s custom version of METRC, state regulator Parrott said his team tried to apply lessons learned in other states.

CalCannabis will make a feedback forum available, for example, which Parrott said will allow METRC users to quickly communicate about any issues they encounter. The state also is letting companies train on the program before it goes online; more than 400 applicants so far have been offered instruction.

They’ve already hired data analysts who can review the flood of information that will come in through METRC. They’re also partnering with agricultural commissioners in Humboldt, Alameda, San Mateo, Santa Barbara, Los Angeles, Trinity and Mendocino counties for help with licensee site inspections — a pilot program that could be extended to track-and-trace inspections.

California’s METRC system also will have third-party capabilities built in. A number of independent software companies have already signed up to connect with METRC in California, Parrott said.

But business owners said the lack of communication and chance for input with Franwell, the company behind METRC, means they’ve largely been left to guess how it will all work once it goes live in a few weeks.

“That’s not a stable transition,” Carver said. “That’s chaos.”