Will established medical cannabis operators let small growers take root in new Mexico?

Jun. 27—Matt Muñoz is eager to find a niche market in the state's soon-to-be-legal recreational cannabis industry.

He has worked as a paralegal and a lobbyist — experience he believes will prove useful as he begins to navigate industry rules and regulations still under development. He also has some past experience with cannabis: a brush with the law in high school that led to a possession charge and 10 days in jail. The old charge was removed from his record long ago.

Muñoz, 38, sees a new state law legalizing recreational cannabis as a rare opportunity to get a foothold in a brand-new industry — and create a standout brand.

"This is a once-in-a-generation opportunity for a lot of us," said Muñoz, a native New Mexican who lives in downtown Albuquerque.

He and his partners envision a microbusiness that tackles all aspects of cannabis production and sales on a small scale, from growing plants to manufacturing products to opening retail shops.

When lawmakers crafted the Cannabis Regulation Act — which allows adults 21 and older to use recreational cannabis and grow it for personal use beginning Tuesday and calls for legal sales by April — many envisioned a program that would make it as painless as possible for small-scale entrepreneurs like Muñoz to get into the business. But he and other newcomers are expected to face stiff competition from established medical cannabis companies planning to expand into recreational sales.

These large operations are likely to dominate the field, at least in the beginning.

The 34 licensed producers, manufacturers and retailers in the state's 14-year-old Medical Cannabis Program have an obvious edge: They're not starting from scratch.

They have the necessary infrastructure, from buildings and security cameras to access to water and capital, giving them a huge head start in what some advocates foresee as a big moneymaking enterprise.

Jefferson King, marketing director for Everest Cannabis Co., said existing medical marijuana businesses that branch into recreational sales are poised to have an early hold on the market.

"Being established certainly makes it easier to transition into a recreational market," he said.

Everest, a midsize medical cannabis company planning to open a dispensary in Santa Fe by the end of the summer — its eighth store but its first in Northern New Mexico — is "definitely venturing into the recreational side," King said.

King predicts "a lot of smaller companies are going to be rising up," particularly with proposed regulations he said are being designed to support microbusinesses.

"There certainly will be enough market share," King said. "When you consider the population of New Mexico and the fact that anyone over 21 will be able to buy cannabis, it seems like there's going to be enough business to go around."

But getting started will be challenging.

"It's a very expensive industry to get into," King said, adding that raising capital and finding a place to grow and sell cannabis are among the biggest obstacles.

Muñoz and his partners plan to start small, initially growing up to 200 plants.

They've created a business plan and budget, and they are seeking a facility and developing a security plan — criteria to apply for a production license — but they are bracing for challenges.

The well-positioned medical cannabis industry looms large among their worries.

"That's a major concern for us," Muñoz said. "They're going to have a huge advantage, at least at first."

Newcomers also are likely to face competition from established growers in the state's burgeoning hemp industry who plan to transition at least part of their acreage into cannabis.

Manuel Otero, a fourth-generation farmer in Los Lunas who has been growing hemp — as well as hay, alfalfa and other products — is eager to see the state's final rules for recreational cannabis producers so he can jump in — perhaps as soon as this year.

He said he plans to go big.

The transition from hemp to cannabis should be "semi-easy," Otero said.

He now grows 4 acres of hemp and envisions dedicating about 2 to 3 acres to cannabis.

Otero isn't worried about medical cannabis companies dominating the industry. He believes they might end up reaching out to farmers like him in search of more cannabis to market or use in manufacturing products.

"As long as those buyers stay consistent and don't get greedy — yes, I can make a profit," he said. "We're going to outfarm them all day long."

Willie Ford, managing director of Reynold Greenleaf & Associates, an Albuquerque-based consulting firm for cannabis businesses, said money "is going to really rule" who succeeds in the new industry.

"Those who have the access to capital, like out-of-state corporations, they're going to be able to really do things that the little guys can't," Ford said. "My big fear is that some of these [microbusinesses] are going to come in and sink their life savings into an industry that may not even be possible for them to succeed. You know, it's almost like the state is giving them false hope."

Ford decried what he called a "rushed legislative effort," saying state government is promoting the idea that small operators will be able to get into the industry but didn't "put anything in place [in the law] to protect them."

"We are New Mexican citizens who run these medical programs because that's the way it was legislated, and now we're going to be seeing a big inrush of MSOs — multistate operators — who are interested in coming in and sinking a lot of capital and resources into dominating the New Mexico market and taking that money out of New Mexico," he said. "That breaks my heart."

David White, founder of Organtica, which has been in the medical cannabis business since 2009, said his company will probably wait a year and then reevaluate whether to expand into the recreational industry. For him, ensuring patients have access to their medicine is paramount.

"We really are focused on making sure that our patients don't suffer [during] this transition period," he said. "We think it's going to be very chaotic."

Trends in other states that have legalized recreational cannabis, such as Colorado, indicate the state's supply could become "pretty tight," White said, "and we want to make sure that patients are able to get what they need during that period."

For New Mexico's more than 117,000 medical cannabis patients, "this is not a fad," White said. "It's not recreation. This is their medicine."

White said he hopes medical cannabis companies won't dominate the industry and that microbusinesses will thrive, as envisioned by the new law.

"We really encourage the microbusiness, so much so that we're working with a few potential candidates and will do everything we can to help them achieve licensure," he said, adding Organtica isn't charging entrepreneurs for those services.

"We truly believe in the microbusinesses being able to shore up the market so that we're not dominated by one, two or three really big producers, because we don't think that that does the plant, nor the community, any good," he said.

Muñoz and others with plans for small businesses believe they will be able to offer something patrons can't find elsewhere: a taste of New Mexico.

"People like the boutique, the intimate experience of something homegrown," said Erica Rowland, a farmer and medical cannabis user in Bernalillo County.

Though she's only planning to grow cannabis initially, Rowland, whose family has farmed for at least 60 years, has a long-range view of what smaller businesses like hers can offer customers.

"I see a new lifestyle, a consumption lounge lifestyle, a removal of the stigma associated with cannabis. That's the ultimate goal for me," she said.

Muñoz said he believes cannabis microbusinesses are the ones that will give the state's new recreational industry a high-profile identity.

"Microbusinesses should be treated like microbreweries," he said. "That's our business model: quality over quantity. We want to focus on customers who want a local IPA as opposed to a national brand beer. I think people will pay a little bit more for that local touch. That is going to be our niche."

Muñoz and his partners, Andrew Brown and Erika Hartwick Brown, are working to raise $500,000 to start the business. They've obtained $300,000 in pledges so far.

Every new obstacle they face seems to raise the price tag.

He also is looking into commercial water rights, a requirement for cannabis growers. He said he's budgeting $10,000 a year for water.

Microbusinesses like theirs, which integrate production and sales, can only market their own products, cutting their potential profit margin. And they must reserve 25 percent of their products for medical cannabis companies in case of a shortage.

Muñoz wonders why he can't sell those products directly to medical cannabis patients.

Rowland said holding 25 percent for medical cannabis companies "is a service to those who built this program"

Her biggest concern is that state regulations for production might not be finalized until September, when most of the growing season for cannabis will have passed.

How, she wonders, are 200-plant producers like her expected to turn out a crop for next year, when legal sales kick in?

The new law gives local governments oversight on cannabis business locations and times of operation, which she said could lead to changes that affect her farm.

"How can we bulk up inventory without putting extreme investments in infrastructure while dealing with uncertainty about county zoning?" she asked.

Rowland already has water rights at her farm, where she grows alfalfa and flowers. She pays the Middle Rio Grande Conservancy District about $175 per year for those rights, a minor cost. But she estimates she will pay at least $100,000 to build a security fence and install cameras on the 5-acre property her family has farmed for at least 60 years.

That, she said, will be a heavy financial lift.

Follow Daniel J. Chacón on Twitter @danieljchacon.