Inside Oklahoma's Medical Cannabis Oversupply Issue

Regulated medical cannabis supply in Oklahoma outpaces demand by at least 32 times and could serve all cannabis consumers (patients and non-patients) 4.5 times over, according to a recent study conducted by Cannabis Public Policy Consulting.

The Oklahoma Medical Marijuana Authority (OMMA) ordered the statewide study as the regulatory agency was aware of the oversupply issue but did not know how big the problem was, says Porsha Riley, OMMA public relations manager. "We commissioned this study for that reason, which allowed us to now have data to address these issues."

The study speaks to the likelihood of an illicit market operating within the state, which poses an immediate threat to public health and safety, Riley says, adding that the OMMA plans to address these issues head-on through a multi-pronged approach.

The oversupply is also directly impacting operators.

Arshad Lasi, CEO of The Nirvana Group, a vertically integrated cannabis company in Oklahoma, told Cannabis Business Times in an email that one of the main challenges is price compression.

"The surplus causes prices to drop, and it becomes competitive for businesses to operate. But we've been able to navigate this highly saturated market by producing only what we know we're able to sell, focusing on quality and communicating the quality of our products," Lasi said. "We don't overproduce; we stay conservative and only produce what we know we're going to sell so we don't have to waste product by either throwing it out or selling it in bulk at a discount."

Lasi said the company has learned to adapt to the state's oversupply problem and is conservative in its plans to develop and expand the business in Oklahoma and other states, but is looking forward to the OMMA addressing these issues to improve the market and ease saturation.

Into the Weeds

While the supply is there, so is demand. According to the study, consumer demand is behaving as expected and is relatively consistent across the state.

So, what are the main factors leading to the oversupply issue in Oklahoma?

According to Riley, the state's lack of production management tools and free market approach are critical factors.

"When State Question 788 was passed in 2018, legalizing medical cannabis here, there were no production management tools that capped the number of plants grown per site or the number of grow facilities in Oklahoma," Riley says.

Additionally, there are no caps on the number of cultivation licenses, which created an early influx of growers that remain in the market, according to the study.

"The main factor is that so many licenses have been issued; there are so many producers, and everyone thinks they are going to be able to sell, even with our state's market being medical only," Lasi said. "So, you have many producers with no limitations on what they can produce, resulting in a massive excess stock of product with nowhere to go because there are only so many patients."

According to the study, Oklahoma's low barriers to entering the market may have also worsened the oversupply issue. Previously, the application fee for a cultivation license in Oklahoma was $2,500 and was the only fee associated with acquiring a license. That number is meager compared to other states, which typically have an application fee and other licensing or annual fees.

For example, in California, the application and annual license fees for cannabis cultivators vary based on the size of the facility, type of production, and lighting. These fees can range from $130 to roughly $9,000 for an application fee and $1,200 to approximately $78,000 for a license type.

In May 2022, Oklahoma lawmakers approved a measure to broaden the license fees for growers, processors, and retailers—implementing a tiered approach like California.

The measure, House Bill 2179, distinguishes grower license types into two categories: indoor, greenhouse or light deprivation, and outdoor, and fees are based on the square feet of canopy or acres the grower estimates will be harvested for the year. For example, fees range from $2,500 to $50,000 for an indoor, greenhouse, or light-deprivation medical cannabis grow facility, according to the bill text.

"Higher capacity cultivators using more square footage or manufacturers who have higher outputs will pay a higher license cost in order to mitigate and reduce businesses producing an excess amount of products," Lasi said. "Because when a producer has too much inventory, they'll likely end up trying to find other sources to sell it off, which paves the way for the illicit market and bad actors to thrive."

Despite some operators being on board with the state's new licensing structure, others are challenging the measure.

On June 30, a group of petitioners–Jed Green, founder of Oklahomans for Responsible Cannabis Action; Pharside LLC, a cannabis grower and processor in Lexington; Oklahoma Natural Cures LLC, a medical cannabis dispensary in Warr Acres; and Bingo 101, a medical cannabis processor in Oklahoma City, collectively filed a lawsuit against the OMMA arguing that H.B. 2179 is unconstitutional and will only hurt legitimate businesses.

The OMMA told Oklahoma's News 4 that they cannot speak to pending litigation but that the Attorney General's Office will represent them in the lawsuit.

The Multi-Pronged Approach

The OMMA, Oklahoma's Bureau of Narcotics and Dangerous Drugs, and the legislature have identified urgent points impacting Oklahoma's oversupply of regulated medical cannabis and have developed a multifaceted approach to address these issues head-on.

Some of these actions written in the study include, but are not limited to:

• "Pursing production management tools such as extending the moratorium on cultivation licenses until 2026;
• Incorporating a tiering system of cultivation to better track and account for supply;
• Using sophisticated regulatory technology to identify priority areas for enforcement and the use of enforcement staff;
• Increasing enforcement and program staff presence regionally to address license sprawl;
• Authorizing officers to seize and destroy cannabis product that is unaccounted for in track-and-trace systems;
• Permitting unscheduled inspections from state police officers; and
• Authorizing the investigation and enforcement of any violations of the laws regarding medical marijuana, including medical marijuana business licenses held by commercial growers, processors, transporters, researchers, education facilities, and waste disposal facilities."

The OMMA is also taking an extra step to ensure all licensees are compliant.

"We've identified eight compliance priority areas and increased enforcement efforts among several other initiatives because we care about patient safety, and we want to safeguard the integrity of our market," Riley says. "In tackling this issue, we're inviting necessary collaborators to the table because, at the end of the day, we need our partners, the legislature, [stakeholders]. It's going to be a joint effort, and those conversations have been started."

These licensee compliance areas written in the strategic response include:

• Ensuring all inventory is properly tagged;
• Monitoring and enforcing the legal limits on sales;
• Ensuring licensees have the required COAs on site from testing labs;
• Addressing instances where multiple licensees are associated with a single location;
• Ensuring licensees adhere to waste disposal guidelines by transferring waste to designated facilities within 90 days;
• Closely monitoring the transfer of cannabis along the supply chain;
• Requiring licensees to properly document and execute plant destruction procedures to prevent the diversion of medical marijuana through unauthorized means;
• Preventing the misrepresentation or misuse of patient licenses.

Looking ahead, Riley says the OMMA envisions a safe, fair, stable, and balanced market and plans to use data from the study to get there.

The agency also wants to remain transparent with the public and will continue providing updates on its progress.

"We have implemented key performance indicators to measure the success of our response efforts," Riley says. "And through reporting and regular communication, we aim to keep all stakeholders informed in what we're doing. "