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The race for New York has begun. All types of entrepreneurs looking to enter the state’s cannabis marketplace are busy preparing for the soon-to-be-released application process. Hemp farmers are poised to switch to marijuana crops, legacy entrepreneurs are operating in the open, regulators are shaping the laws, and no one is excited about opening the borders.
I spoke to Kalean Castetter, a long-time upstate resident, son of a legacy grower, owner of a hemp-infused wine company, and now cannabis consultant, to get his insights into how things are shaping up in New York.
Please share your background.
I’ve always had a passion for policy and helping entrepreneurs understand the regulatory frameworks of legislation. Towards the end of last year, I decided to completely step away from the hemp wine business and focus on my consulting practice, The Castetter Cannabis Group. We’re a boutique firm. We do government relations lobbying advocacy. We help entrepreneurs understand the legislation, forecast regulations, and develop a business plan around it.
Who are the entrepreneurs you work with who are looking to enter the New York marketplace?
I’ve developed a reputation for working with small players like social equity applicants, people of color, and legacy operators—New Yorkers who are hungry for an opportunity and have unique and innovative ideas. I have clients in Niagara Falls, and I have clients in Harlem. We hold a summit in December, where our clients come together to meet and share their expertise and experience. Because of prohibition at the federal level, we’re going to develop supply chains and relationships from upstate and downstate where people have not been connected for a long time. I think that’s going to be a huge cultural change in bringing communities together.
But many private equity-backed entrepreneurs, MSOs, and ROs are all looking at this opportunity from a dollars and cents perspective. And a lot of the money they make will leave the state, and we won’t create wealth in this community. So, I think they should move to the back of the line.
Living in NYC, I’ve noticed the legacy entrepreneurs starting to operate more freely in the open. What kind of repercussions do they face, or will the government look the other way?
I think the definition of the legacy market is complicated and nuanced. The time spent as an [cannabis] entrepreneur risking everything on the line qualifies someone as a legacy operator, meaning the risk they take if they get caught and lose their freedom and family. If that’s not the case, I struggle to call someone legacy because you’re just unlicensed and looking to seize an opportunity. If you set up a shop on West 4th Street selling cannabis because you saw an opportunity, and you don’t think the state’s going to shut you down, I don’t believe the state will look too kindly on those operations. And once we have a licensed, regulated marketplace, the state cannot allow unregulated cannabis operators to exist, especially on the retail side. You can’t have these unlicensed stores that you see in California on every other block. That will not work.
The state needs to provide a viable path to licensure for legacy operators, including cultivators, delivery services, and people operating members clubs. And that includes tax and criminal amnesty, where they have a guaranteed path to disclose this information safely.
An often-overlooked provision allows for a membership-only club if you have a nonprofit. But, that’s not what these entrepreneurs are doing. Hey, the state spent fifty years being very effective at finding these operations and investigating them, arresting and destroying families; I think they can put their heads together to find a way to give them licenses. They should devote as many resources as necessary to do so. Because if this is really about restorative justice and establishing a fair marketplace, not one that looks like California, then New York’s legacy marketplace needs to move into the regulated market.
There are about twelve hemp farms and extractors operating in New York State, and they’re patiently waiting to flip over to marijuana. How do you see this unfolding?
Again, it’s another complex and nuanced question. There are a little over a dozen compliant and licensed farmers and processors with very sophisticated infrastructure. It just makes sense to use that infrastructure for THC and license these operators
On the hemp side, there are 700 licensed hemp farmers. I’ve worked with dozens and dozens of hemp farmers through my work with the Cannabis Growers and Processors Association. The reality is the vast majority of hemp farmers do not have the infrastructure, knowledge, or expertise to begin cultivating cannabis and be successful off the bat. That doesn’t mean they shouldn’t have an opportunity to learn, develop and invest.
Farmers can grow outside, but they still need to dry and cure in a controlled environment to hold genetics. Most cannabis sold in New York is produced in indoor greenhouses and a controlled environment, which will probably become the norm and require tremendous investment and expertise. And it will require a certain amount of failure for people to get their systems correct.
I do believe that there’s a place for hemp farmers. Still, I worry that we’ll have a similar situation with hemp. It becomes a highly commoditized and over-saturated marketplace where people spend a lot of money that they don’t necessarily have.
Incubators and accelerators will give someone basic knowledge to social equity entrepreneurs. Still, many need programs to help them succeed if they are new to the business. Do you see the NY state social equity programs as a good resource for supporting them? The state should not throw them a bunch of money and wish them good luck. That seems like a recipe for failure.
You are correct, and it seems no state has been able to roll out social equity in a way that genuinely meets its intended goals. We have yet to see how successful incubator programs will be. It’s a long-term play and won’t happen overnight, and it will be multi-years to set up the support systems for entrepreneurs.
There are significant barriers to entry that will keep social equity entrepreneurs from entering the space and from being successful.
Another one is capital. Governor Hochul recently announced the new $200 million fund for social equity applicants.
One that gets overlooked, especially by regulators, is compliance. Most businesses do not have in-house compliance experts or attorneys; we’re talking about small businesses. If you create a marketplace that requires you to operate at a pharmaceutical level, you will stifle the market and generate failure amongst many entrepreneurs.
Lastly, the state should not go too far in taxation. We’re looking at tax rates that will not make the marketplace competitive, and the state needs to change that. We’ve learned that from California. It’s a mess. In my opinion, it’s greedy on the part of the state, and it’s short-sighted. We know that the lower the tax rate, the more gross receipts you have. And therefore, the higher revenue should not be a money-making industry for the state. Yes, directly attributable sales tax revenue is a way to increase revenues to the state, but they should be looking at economic development. For example, they should consider the people moving here and paying property taxes and payroll taxes. That should be their ROI. Not on sales tax.
I’m worried about the New York growers losing business to states like California once the borders open because they have the perfect environment for cultivation.
Well, that’s a huge threat. NY growers cannot compete on a commodity basis with Oregon, California, Nevada, and Arizona because they can grow higher amounts of low-quality cannabis. If New York growers could produce craft quality products, that’s really where the cultivators will excel.