Out of the Shadows — or Back In?

Legal Cannabis Markets Promised Legitimacy, but the Illicit Market Thrives On

Too often, Chad Steelman fails to embrace the nirvana of his setting instead of his unrelenting stress. After all, he is working amidst an emerald forest in Humboldt County, California, where a vast open garden of cannabis plants sweetly flowers, where enchanting mountains descend in layers towards the sea beneath an alluring sky.

Steelman, 47, with short coiffed brown hair and a long flowing beard, graying on its edges, sometimes catches himself in the moment. “I love growing weed,” he says. “The best part is just being with the plants, watching them from beginning to end, being out in this beautiful weather and seeing the bald eagles.” And then there are all those other times, including that episode in the hotel room in Los Angeles. It was just before a business meeting with a licensed California dispensary negotiating to stock his sun-grown cannabis. Steelman’s arms seized up. He became winded. His chest wasn’t crushing in and he wasn’t sweating in the usual signs of a coronary emergency. Yet he went to the hospital anyway, convinced he was having a heart attack.

He wasn’t. But that’s when he realized it: the wrenching pressures of moving from the cannabis illicit market to his new place in California’s state-regulated market were killing him. He used to be an illicit grower, supplying couriers shipping Humboldt Gold to suppliers and dealers on the East Coast. Now, he was a licensed, branded operator, with a mountain of taxes and fees from Humboldt County and California. He faced oversight and inspections on water use, erosion, grading, forest and wildlife protection, pesticide use and product purity from a regulatory apparatus including local code officers and regulators from as many as 19 state agencies working with the California Bureau of Cannabis Control.

“With the state, I expected a nightmare. I expected to be pulling my hair out,” he tells me. He would have to pay California $148-a-pound ($9.25 per ounce of dry flower) under Proposition 64, which legalized adult recreational use in 2016. He would need to seek out, and contract with, licensed distributors — not illicit market weed runners — to get his product to legal retailers. And yet it was the demands and tax bills from his own county that had him teetering on the edge.

“I feel like I’m screwed either way at this point,” he protests. “I feel like there was higher integrity in the illicit market … The people trying to control the cannabis economy are ruining people’s lives.”

“I feel like there was higher integrity in the illicit market … The people trying to control the cannabis economy are ruining people’s lives.” – Chad Steelman, Humboldt County grower

Steelman had believed he was destined for Humboldt County and its cannabis culture that flowered beneath the redwood curtain of the Emerald Triangle. The tri-county region, including Mendocino and Trinity counties, has bloomed with secluded marijuana farms since San Francisco’s 1967 Summer of Love, when hippies and nature-seeking back-to-the-landers trekked into the forests. The region became America’s most renowned place for illicit cannabis cultivation and illicit market transport.

Steelman was a soccer star in Pennsylvania, talented enough to play two years in college at Eastern University outside of Philadelphia, all while savoring cannabis. After knee injuries felled his athletic ambitions, he transferred to the University of Colorado in Boulder, where he paid for his first year of tuition by growing indoor weed. He first came to California in 1991 as a Deadhead, following the Grateful Dead to concerts in Sacramento and the San Francisco Bay Area. He came back in 1996 to work on a Humboldt cannabis farm. After returning to Boulder, federal agents kicked in his apartment door as his roommates were doing bong hits. The agents wanted to know why his four-wheel drive vehicle had been found in a guerrilla grow on federal Bureau of Land Management property. “I had no clue how it got there,” says Steelman, who left his rig behind with a Humboldt pal. “I thought they could tell me.” The feds left without arrest.

After careers as a cartographer for a Boulder map-making company and as an insurance adjuster in Florida writing up disaster estimates following 2004’s Hurricane Charley and other weather events, Steelman returned to Humboldt. Lured by an ex-high school teammate who also savored soccer with sativa, Steelman put a down payment on 160 acres. He joined in an illegal cannabis venture that soon afforded him accelerated mortgage payments.

But four years later, his pal was busted back east. For Steelman, it was a screeching siren to go legit. He began talking with Humboldt officials who were working on regulations to bring people into compliance as licensed producers. He signed on as a pre-regulation local registrant. By then, California was moving toward a state-governed cannabis market. Lawmakers were debating rules to move beyond the state’s nebulous system of medical cannabis dispensaries that operated as “collectives” collecting “donations” to share medicine raised by patient cultivators. In 2015, Gov. Jerry Brown signed business rules to regulate medical marijuana as a state-permitted industry. Proposition 64’s passage followed, and lawmakers consolidated medical and adult use regulations in 2017. The message was clear: Just as Colorado, Washington and Oregon had begun two to four years earlier, California was on a mission to end the era of cannabis as a criminal culture, to lure producers from the darkness and end the illicit market.

“When I got involved in registration, you could see the writing on the wall,” Steelman says. For this one grower, legalization was the path forward — however daunting and maddening the journey might be.

An Illicit Market Still Robust

Federal marijuana prohibition — the essential kindling for a blazing illicit market — continues. And despite 30 states and the District of Columbia having legalized cannabis in some form, most states — even many with legal use — have no permitted marijuana sales or ban transactions for cannabis flowers, waxes, edibles or other products. Thus, with premium prices to fetch from illegal trafficking, the illicit weed trade thrives on. Just as Steelman was, people are still lured to California from other states and, indeed, other countries. Many are drawn less for the promise of legal cannabis than the bounty of the illicit market.

“Especially in California, you are just not going to shut down the illicit market overnight,” says Beau Kilmer, co-director of the Rand Drug Policy Research Center and co-author of “Marijuana Legalization: What Everyone Needs to Know.” “It will take several years. There are large numbers of states that still don’t have [cannabis] stores or delivery. And prices and selections in the illegal market will continue to shape decisions consumers make.”

“Especially in California, you are just not going to shut down the illicit market overnight … It will take several years. There are large numbers of states that still don’t have [cannabis] stores or delivery. And prices and selections in the illegal market will continue to shape decisions consumers make.” – Beau Kilmer, co-director of the Rand Drug Policy Research Center and author

This year, the Arcview Group, an Oakland marketing research firm that advocates for the legal marijuana economy, estimated California consumers would spend $9.2 billion on cannabis. But, only 40 percent — $3.7 billion — was forecast to come from state-licensed retailers. As it turned out, Arcview vastly overestimated the number of permitted retailers that would exist by now in California’s frustratingly slow march to regulation. Thus, the illicit market share for cannabis could be substantially more.

In January, a California Department of Food and Agriculture study estimated that more than 80 percent of cannabis produced in the state flows into the illicit market. Much is being trafficked to distant states, such as Texas, Georgia, Pennsylvania or Connecticut, the price climbing with each highway mile. Some is being dumped on the cheap in California for consumers turned off by dispensary prices. In all, the report said, California produces 13.5 million pounds of cannabis a year, more than five times the 2.5 million pounds consumed by state residents.

In Oregon, which legalized adult use and retail sales of cannabis in 2014, a law enforcement task force report estimated in August the state produces 2 million pounds of cannabis — and that as much as 1.6 million pounds is being illicitly trafficked. It said Oregon cannabis has been seized in 37 states.

The question rings as loudly as ever: Is marijuana legalization making inroads on its promise of shrinking the illicit market?

“The question rings as loudly as ever: Is marijuana legalization making inroads on its promise of shrinking the  market?”

“From where I sit, the answer is no,” says McGregor Scott, the United States attorney for the Eastern District of California in an interview in his 10th floor office in downtown Sacramento. “When you have more than 80 percent of marijuana in California being illicit market, it is hard to get around that number when you’re talking about whether [state] legalization has had an impact.

“When you have an industry that has operated outside the law for decades and people have made lots and lots of money, it is very naïve to say people will play by the rules set by the state.”

“When you have an industry that has operated outside the law for decades and people have made lots and lots of money, it is very naïve to say people will play by the rules set by the state.” – McGregor Scott, the United States attorney for the Eastern District of California

Investigating the continuing lure of the illegal market, federal authorities tracked into money transfers from Chinese banks for suspicious real estate purchases in the U.S. They discovered hundreds of illegal residential grow rooms in Sacramento, Seattle and neighboring cities, as well as a vast Chinese-funded illicit outdoor cultivation near Denver.

In national forests and on public lands in numerous states — particularly in California and Oregon — criminal networks, many from Mexico or cartel-connected drug rings in California’s Central Valley, are causing massive environmental destruction from invasive cultivation, as Bruce Kennedy detailed in DOPE’s previous investigative piece, “Just How Green Is Your Cannabis?: Despite Legalization’s Momentum, Sustainable Cannabis Cultivation Remains an Afterthought.”

Cannabis legalization in the states is credited for a huge drop in marijuana seizures at the Mexican border in recent years. But in Mexico, cartels — diversifying with methamphetamine, cocaine, heroin and a particularly dangerous new drug, fentanyl — still fight over power and smuggling channels to El Norte. Despite hopes of some legalization advocates, cannabis liberalization in the north hasn’t eased bloodshed in Mexico. In fact, narcotics-related homicides are spiking anew, blamed for most of a record 29,000 murders in Mexico last year, with the toll expected to top 30,000 in 2018.

“I think that was a naïve impression,” says Victor Clark-Alfaro, a Tijuana human rights advocate and professor of Latin American studies at San Diego State University, echoing that “naïve” charge. “It will not help reduce the violence here. Of course not.”

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