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New York’s Office of Cannabis Management still has a lot of work to do, but John Kagia sees some serious green shoots.
As the OCM’s director of policy, Kagia oversees policy development and implementation for the Empire State’s medical, adult use, and cannabinoid hemp programs. He’s also a familiar face to anyone who regularly watches Cannabis Control Board meetings, at which he regularly presents data on the statewide legal cannabis market’s performance.
Before joining the OCM, Kagia had worked in the legal cannabis industry since 2014. As a cannabis industry analyst, he’s contributed research about topics including emerging global markets, investment and capital flows, supply chain trends, product innovation, and evolving consumer behavior.
In two separate interviews with NY Cannabis Insider, Kagia spoke at length about consumer trends, how regulatory decisions are affecting New York’s legal cannabis market and how the OCM balances its mandate to build a newly legal industry with its responsibility to protect public health and safety.
The following interview is Part 1 of a two-part Q&A
This Q&A has been edited for length and clarity.
Based on the numbers you’re seeing, how many dispensaries across New York State do you think would be sufficient to to serve the market, but not so much that it could create an oversupply issue?
We know that the state can support several-thousand retail licenses, or several-thousand licenses across the supply chain to build this market. But obviously there’s still several things that we’re monitoring very closely that will enable us to dial in what that optimal number is going to be. We have a massive unregulated market problem, and we are addressing that very aggressively right now. By some estimates, there are 1,500 to 2,000 illicit dispensaries — at least there were — in New York City alone, maybe double that number, once you consider the entire state.
We certainly think there are more illicit dispensaries than would be needed on the legal side to support the severity demand. I don’t think we will need 2,000 dispensaries to meet the demand in New York City. I think we have seen many of these unlicensed stores really suffer because of how intense the competition has been.
But in terms of making a final or precise estimate of the exact numbers needed to create a stable market; I think it’s still a little premature for us to be able to dictate that, because we are still so early in this process. We are seeing a good inflow of consumers from the unlicensed market into the legal one. We are seeing a good transition as we shut down the illicit shops of those consumers moving to the legal market. We’re not yet willing to commit to what that optimal number is going to be, partly because we are still going through this process as this market transitions From unregulated to legal.
Oversupply has become an issue in some legal states, including California and Oregon. Are there any factors in these states that New York should avoid, in order to prevent an oversupply issue here?
I think that there’s several issues that have led to the oversupply challenges that we’ve seen in other jurisdictions.
One is the uncapped approach to licensing, where almost any qualifying applicant — without consideration of the dynamics in the market — are being issued a license. In the states that have been most progressive in the way that they’ve issued licenses, you’ve tended to see these oversupply issues manifest very quickly. While I certainly don’t need to disparage or speak negatively about our fellow regulators, we have certainly seen in some jurisdictions a massive surge of — particularly production side — licensing that very quickly, it turns into oversupply. The prices have crashed, and that has led to leakage out of the regulated markets into the unregulated market.
Indeed, I actually think that, and I think it’s fairly well documented that a fair amount of the cannabis we are seeing in the unlicensed shops in New York is being leaked out of other jurisdictions where oversupply and overcapacity has been an issue.
A second issue has been the licensees operating in the absence of real time market information. If growers don’t know how much product is coming out of the field, if growers don’t know how many retail stores are going to be operating at a given time, if the producers don’t have a good sense of the state of consumer demand, they can’t calibrate their operations accordingly.
One way to mitigate that is a good feedback mechanism where licensees — producers in particular — are getting a sense of what is selling, how much is selling. Then they can plan their production accordingly, rather than operating blind and thereby being somewhat uninformed about how much demand that is likely going to be for each production cycle.
The OCM is really focused on that issue as a priority: creating data-driven insights that are as current as possible, so that there’s good visibility into where the market is going. Our seed-to-sale system, I think, is going to be an important part of that. We think insightful data into the market’s behavior can be critical to allowing producers to scale up their production in line with where the market is growing.
New York is standing up a seed-to-sale tracking system, but it’s illegal market is flooded with weed from the legal market in states like California, which also have these tracking systems. If these systems aren’t preventing diversion, is it worth the effort to do this in New York?
I think there’s several ways in which I would think about the seed-to-sale system beyond it purely being an unregulated activity deterrent.
At a minimum, the seed-to-sale system enables us to track products from the time they are seeds in the ground to the time they leave a dispensary in a consumer’s bag. This gives us — as the regulator — visibility into the flow of these products through our ecosystem. I think this is critically important.
We are trying to take lessons from other jurisdictions in terms of the challenges that they might have faced in the deployment of their seed-to-sale systems to try and build as many safeguards to prevent both diversion and inversion as a regulatory matter.
These are really complex systems, and we certainly understand that other jurisdictions have seen people try to game the system, to find gaps in the administration of those systems, to behave in an unregulated way. We will certainly be keeping a very close eye on that and taking appropriate measures if we find instances where people are diverting or inverting product out of our regulated market. I think we have been explicitly clear that that is something that we will not tolerate and to which we would hold licensees who may be engaged in those activities to account.
But that’s not the only reason why we think a seed-to-sale system is valuable. If we take a step back and really appreciate the fact that in New York, this is the first instance in which legal, regulated cannabis is being made widely available in our society. We have signals, but we don’t have any idea yet how this market is going to grow and evolve. Our ability to understand, for example, how biomass is transitioning into processed products, and how those processed products are selling through our ecosystem — I think that’s invaluable insight.
We have the opportunity to gain insight into the biochemistry of the plant, so that we’re matching the product formulations with the public health outcomes that we’re seeing. This data gives us deep visibility into that, because it enables us to track individual products with their certificates of analysis through their life cycle. We have the ability to monitor product quality issues in terms of what’s passing, what’s failing, and how our quality standards — and the achievement of our quality requirements by both cultivators and processors — is evolving over time. This is all data that would be profoundly challenging to collect in a rough and ad hoc way, if everybody was just submitting things like randomized forms and tables.
The seed-to-sale system gives us a really coherent way to monitor this market, because cannabis is a regulated substance. Cannabis is an intoxicant, and I think we have a duty and an obligation as regulators and as government that is deeply concerned about the public health implications to try and collect as much data to help us understand and refine our policy making, and indeed to steer the market toward behaviors that both optimize market outcomes, and ensure that the public safety and public health risks are well managed.
The Cannabis Control Board recently pared back some of the packaging and market marketing standards. Are there any other regulations that the OCM is looking at as being possibly overly burdensome, or counterproductive?
We think the packaging, marketing, labeling and advertising rules were a good place for us to begin our review of regulations based on the feedback that we were getting from the market.
These are probably going to be the one area where the proposed changes and regulations are going to be most immediately impactful once these rules are adopted, because they are meaningfully impacting several aspects of market growth.
They’re impacting consumer capture: if you very tightly restrict how our retailers, our businesses, can engage with consumers, then it means that our licensees are at a disadvantage against the unregulated market, where there are no rules.
The PMLA rules are materially impacting the efficiency with which our retailers, in particular, can manage their inventories. For example, right now we have a blanket prohibition on discounting cannabis products. This is really challenging for our retailers, because it means that if you have a product that is not doing well, you can’t just discount and promote the discount on that product so you can get it off your books. That’s making it quite challenging for our licensees to operate efficiently.
These rules are also impacting retail visibility at a time when we’ve got a mass proliferation of unlicensed stores. So we think it’s important to change some blanket prohibitions, like the proposed rule changes around billboards, and signage. If the amended PMLA regulations receive final approval, companies will be allowed to set up billboards that notify consumers about where you are and how to get to your location. The proposed changes to signage rules would allow companies to have as many signs as they want fixed to their buildings, and also up to three signs not actually attached to their buildings.
The proposed amendments to the PLMA rules offer a really important and timely way for our retailers to gain greater visibility and manage their inventory more efficiently and engage with consumers through loyalty programs, and the like more effectively start building that customer loyalty.
We’re still looking at this very closely, but I hope part of the takeaway from our proposed revisions to the PLMA is that we are approaching this market with the ethos of: start low and go slow. There are public health and safety considerations associated with the legalization and normalization of cannabis in our society, and we didn’t want to just kick the doors open and let anybody do anything that they wanted in this market. But we are looking very closely at the performance of the market, learning from how these rules are impacting the size growth and evolution of the market, and are very willing to review and consider the areas where there may be opportunities for refinement as needed to ensure that we are achieving optimal outcomes of successful, sustainable market growth — while ensuring we continue to preserve public health and safety.
There’s an argument that making it easier for people to get and maintain a cannabis business license would be better for the market (including social equity applicants), how much is the OCM considering the risks of over-regulation? Is this on the OCM’s radar?
I think we have a robust regulatory frame, because this is still a controlled substance, and we do have very real public health and safety considerations.
Cannabis is a very valuable product. We want to make sure that our licensed and regulated spaces are safe — both for employees and consumers. The real public health and safety considerations around how our licensed operators should think about who they’re selling to and, where appropriate, be concerned about overconsumption or selling to people who are intoxicated. Concern about selling to minors in particular, remains strong, and this is part of the reason why we’re moving so aggressively now against the unregulated market. Additionally, testing is absolutely necessary.
Those really are the broad pillars of our regulations; the key things that we are concerned about. In terms of building an equitable and sustainable market, we do have these other rules around ownership structures, and the flow of capital through these markets. These are done precisely to try and ensure that the market remains both equitable, sustainable and competitive. Part of the reason why the state went to such lengths to think through how to build this regulated structure was because we had seen the outcomes in other markets. We’re just trying to mitigate several things from potentially happening in this market.
One risk is very rapid consolidation fueled by the largest vertically integrated companies. You have seen this in some jurisdictions — I’ll use Florida as an example. It’s a vertically integrated medical market, but in that market you have single operators who have 150+ dispensaries under their umbrella. The net effect of having such consolidation under single corporate umbrellas means that it is almost impossible for a mom and pop operator to now secure a license and compete in Florida, because of the size of the companies that you’re competing against.
We also want to avoid undue influence, which is where you have the deepest-pocketed companies buying shelf space, influencing the sell-through of their product — so deeply subsidizing the promotions of their product on retail shelves, and thereby undermining the ability for the mom and pop producers, to secure shelf space.
Packaging regulations require (often expensive) child-proof containers for flower, but it’s not really possible for small children to accidentally become intoxicated by eating raw flower. Why does New York have this requirement, and are regulators reconsidering it?
I think this is a really good reflection of our orientation to rulemaking as we develop policies for what is going to be a newly regulated intoxicating substance in our communities.
I just want to be careful about suggesting that there is no risk to a child ingesting significant amounts of raw cannabis. It’s not that they’re necessarily going to get high, it’s not been decarboxylated, but I don’t want to suggest that there’s no potential risk there.
We are looking very closely at ways to minimize the packaging requirements — not just because of the potential additional costs it creates by requiring these packages be child-proof, but also because we are very sensitive to the environmental impact of our packaging requirements.
As we were deploying our regulations, there was a clear intent that we wanted to start with a consistent standard: make everything child-proof. This was to give us time to actually evaluate the best ways to approach child safety requirements, and also incorporate them more broadly into a sustainability plan that considers the environmental impact.
We are looking very closely at this, we’ve got folks looking into it. I don’t want to suggest that there are going to be any changes made immediately around this. But we wanted to take the time to understand the science deeply, and then come back with rigorous and well-supported recommendations on where there might be room for changes, just as we did on the first round of PLMA proposals.
I think the idea that we would have gone live without any child protection considerations before we’d had the opportunity to look at the science and look at the sustainability options, I think would have been imprudent. We certainly hear that question, and we think it is one worth exploring. We’re just taking the time to try and get it right.
On a policy level, what do you think has been the OCM’s biggest mistake, and what has been the biggest triumph?
I don’t think that I’d call it a mistake, because it is the reality of the kind of ecosystem in which we operate, but resourcing the agency, I think, has continued to be a challenge.
I have been blown away by how hard the resources we have have been working under very constrained conditions. We have grown very quickly. When I joined the agency, we were roughly 150 people. We’re now at roughly 180 two years later. But given the scope of the mandate: building a market of this complexity from scratch; candidly, I think we could double our staff tomorrow and still wouldn’t be perfect.
There are rules and structures to the way in which you can hire and bring people on in government — this isn’t the private sector, where you can flip a switch and have 300 people sitting in a room tomorrow. Again, I wouldn’t call it a mistake, but I would call it a meaningful challenge: adequate resourcing to ensure that we can do all of the things that we would like to do, and our wish list is very long.
And when you say resources, you mean staffing resources?
Staffing primarily. But staffing limitations, it has cascading implications across everything else that you’re trying to do. Staffing, I think, would be the tip of the spear of things that have been a material challenge. One of the things I would say about the recent OGS assessment of the office is that it really identified the need for more staff at the office, given the scale of our mandate.
I understand, given the spotlight we are under, given some of the challenges folks are facing in the market, that we need to be very careful about how we talk about triumphs or successes. Right now, we still have a huge amount of work to do, and that doesn’t change.
But I also think there isn’t sufficient consideration for what we’ve been able to achieve with a very small team moving at a breathtaking, breakneck pace. I will say things like the number of licenses that we have issued — which is not enough — but the amount that we have been able to get out in the time that we have gotten them out (the turnaround time from the time we open a file to the time we get a license out the door) has far outpaced most other jurisdictions. New York didn’t have a robust medical market, so we are one of the few adult-use states that has built the adult-use market from the ground up. I think that’s quite noteworthy.
The work we have done specifically around social equity — maybe this, to me, would be one of our great successes — but there had been long deliberation around the idea that in order to get social equity qualifying applicants into the program, you had to create special programs for them. You had to do what most of the jurisdictions have done, which is launch the market and then set up a parallel or standalone social equity program.
One of the phenomenal achievements of the OCM was, by going out and engaging the public before the application window opened (the dozens of road shows that we did both virtually and in person across the state), we were able to get 70% of our applicants to fall into one of our social equity buckets: service-disabled veterans, distressed farmers, women owned businesses, minority owned businesses, and people from communities disproportionately impacted by cannabis arrests.
One of the stories that number tells me is the lack of participation of social equity stakeholders in other jurisdictions. We used to get told that they didn’t want to participate because they weren’t interested. I think what OCM has shown is that it is a question of outreach. Just sharing this information and helping people understand the process by which they can have a seat at this table has really challenged the way people previously approached social equity.
I think this has been a powerful testament to the foresight that the leadership of OCM had to go out and tell the story and get people thinking about and believing that they could be participants and stakeholders in this market.