Susan Gress leads neurologist and prominent cannabis researcher Ethan Russo through her cannabis farm. Her business, Vashon Velvet, closed last month (Courtesy Photo).

Susan Gress leads neurologist and prominent cannabis researcher Ethan Russo through her cannabis farm. Her business, Vashon Velvet, closed last month (Courtesy Photo).

Island pot farms going up in smoke

Five years after legalization, some marijuana businesses on Vashon struggle to turn a profit.

Family-run hydroponic cannabis farm Vashon Velvet earned a spot in the British TV miniseries “Islands of America” last year, hosted by actor Martin Clunes, who perused the colorful buds growing in owner Susan Gress’s barn on the island’s south end.

But following a downward trend among small cannabis farms, Vashon Velvet closed last month.

Five years after the first recreational pot shops opened in Washington, some islanders say small marijuana businesses aren’t profitable enough, stamped out one after the other by tight regulations and the state’s high excise tax on cannabis, while the market has become saturated with lower quality product.

Gress did not start her farm for the money. In the film “Saving Grace,” a newly widowed woman living in the English countryside faces off with creditors and devises a bold plan to grow cannabis to pay her debts. After Gress’s own husband died suddenly, she said she was unsure of what new life to create for herself. Then she saw the movie — it was the same week that the window to apply for a license to grow cannabis opened in Washington.

It was 2013. Gress said it was like a light went off.

“That was it. It was about finding happiness again after the death of my husband, and that’s what cannabis is all about,” she said.

It was a long year until Gress was granted a license by the state Liquor and Cannabis Board (LCB) to grow and process marijuana on the island, but when the day came, her label Vashon Velvet was the first on the island able to sell product in the newly-minted retail market in Washington.

At the time, her daughter Ivy was planning to attend law school, but Gress said she saw an opportunity to try her hand at entrepreneurship and joined her mother on the farm. Gress’s sister, Kay Rice, is a graphic designer and created the iconography for their packaging. Things took off from there, and according to Gress, they sold their product to retail shops on the island as well as six others in the greater Seattle area.

“We kept a list of stores that had asked to sell Vashon Velvet, but we couldn’t grow enough to supply them,” she said.

By the time producers at ITV in Britain, researching for a segment on Washington’s medicinal and recreational cannabis market, discovered Gress’s farm last year, she was trying to grow the business. Vashon Velvet was licensed as a Tier 1 producer — the smallest-sized farming operation under the current model presided by the LCB. Gress said they never had trouble selling their product, with strains such as Blueberry Sapphire and Rude Boy, but that it only just paid the bills. Meanwhile, she knew that comparable farms were barely making ends meet or closing.

Gress is retired now and plans to stay on the island. She said the restrictions of a Tier 1 license are partly to blame for Vashon Velvet’s closure, where her plant canopy, or the square footage dedicated to live plant production, could not exceed 2,000 square feet. Moreover, upgrading her license would have been tremendously costly. Pressing the LCB for change, she said, got her nowhere.

So Gress attempted a merger with a much larger marijuana producer in a bid that would combine the resources of a company with a Tier 3 license — for the biggest scale operation — with Vashon Velvet’s superior brand and technique. Entering into a six- month trial period, Gress said the farm grew marijuana plants as quickly as possible for the Tier 3 company, leaving Vashon Velvet with no product of its own.

Then, Gress said, without warning the larger company pulled out of the merger. That was the final straw.

Gress blames a contingent of larger pot farms for protecting their own interests and pressuring the LCB against making any changes to the tier structure or implementing allowances for smaller operations — for them, she said, it’s not only their bottom line that suffers, but the industry as a whole.

“We do have an oversupply of mid- to poor quality- cannabis of the most common, easiest to grow strains. But we don’t have an oversupply of excellent, unusual strains,” she said.

In a study released in March, the Liquor and Cannabis Board found that many licensed cannabis producers in Washington are underutilizing their allotted canopy due to concerns about overproduction. Moreover, businesses reported that they struggle to get product on the shelves in the first place, with retailers selling whatever product is most accessible to them.

Brian Smith, communications director for the Liquor and Cannabis Board, said the state originally established the tier system to understand how big the market could get and to impose restrictions if necessary. Smith said the state is considering whether to provide an easier way for Tier 1 farms to expand their business, such as permitting direct to consumer sales, something the law does not allow them to do now. He added that there may also be a chance in the future for smaller producers to upgrade their licenses to Tier 2. But if that happened, said Smith, it would result in an even greater cannabis surplus suppressing the market.

“Now it is probably time we start having these conversations five years into the regulated system,” he said.

The fastest means of upgrading a license to grow commercial cannabis, said Smith, is to buy a bigger business. Assuming everything goes well, and there are no objections from local authorities, the licensing process takes 45 to 90 days on average, he said.

One factor in the failure rate of small businesses, Smith said, was the “gold rush mentality” that took hold when recreational marijuana was legalized in 2014. Applying for a license to grow only cost $250. Smith said the state only expected hundreds of applications, but instead, received more than 7,500. He said many had unrealistic expectations — businesses of all sizes couldn’t pass the security requirements necessary to get a license, while in time, others were eventually buried by high overhead costs generated from working in a regulated system.

Today there are only 1,024 producer/processor licenses active in Washington. The LCB is not currently accepting new applications for licenses.

Smith said that officials in Colorado, which had the first medicinal and recreational marijuana market in the country, told the Washington LCB that 50% of businesses would fail in the first 18 months after legalization.

“We haven’t really seen that, but a lot of people aren’t making a lot of money. Prices [have] dropped considerably,” he said.

Dexter Wilks, who manages the Euphorium Vashon dispensary on Vashon Highway, said that one of the biggest challenges in the industry is the tax on pot in Washington — 37 % — which he said makes for an extremely thin margin that is only profitable for shops with enough volume of inventory. Wilks said it has worsened a problem facing small retailers.

“Too many farms were allowed to exist, and then there weren’t enough stores, and then a lot of the farms went by the wayside,” he said, adding that now, shops in small communities compete for only so much business and product to go around.

On a leased plot of land on Maury Island, Buds of Vashon, a Tier 2 producer, grew cannabis in a greenhouse as well as outdoors, with the company’s first crop harvested in the fall of 2016. Steve Van Dyke, a founder of the business, said it was their mission to grow a niche product organically and sustainably. But the reality, he said, is that there isn’t enough interest in product like that today.

“As the market grew, it was almost a race to the bottom, and the question became how to produce more cheaply,” he said, adding that the business is now in limbo with nothing grown or sold in nearly a year.

Van Dyke said that between the logistics of getting the business off of the ground, to permitting requirements, and the added costs of all the packaging, labeling and quality testing, it became too difficult to compete with larger producer processors.

Geoff Reading, who owns Laughing Man Farms on Vashon, a Tier 1 producer, said he had to scale back his business substantially in the last year. He hopes legislation will soon be passed that treats cannabis farms like wineries, as state regulations give more leeway to wineries to make a profit no matter how much is produced by larger vineyards.

“The bottom line is, we’re still here,” he said. “But it’s been a tough uphill battle.”

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