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Jonathan Holm, manager of the Grand Rapids branch of Michigan Beverage Co., said his company works with 20 cannabis growers in West Michigan. Michigan Beverage supplies beverage-grade carbon dioxide systems that growers use in their operations to boost plant yields by 20-30 percent. Jonathan Holm, manager of the Grand Rapids branch of Michigan Beverage Co., said his company works with 20 cannabis growers in West Michigan. Michigan Beverage supplies beverage-grade carbon dioxide systems that growers use in their operations to boost plant yields by 20-30 percent. PHOTO: KATY BATDORFF

DEVELOPING AN INDUSTRY: Companies race to supply Michigan’s fledgling cannabis industry, yet avoid the spotlight

BY Sunday, August 04, 2019 07:34pm

West Michigan businesses are building strategies to accommodate and support the grand opening of the state’s new billion-dollar cannabis industry, although many still crowd behind a self-imposed shroud of secrecy. 

Pioneers of the cannabis supply chain may face a murky regulatory environment in the first few years of recreational legalization, particularly as the state’s newly formed Marijuana Regulatory Agency (MRA) processes and approves business license applications. The MRA must license all growing and processing facilities, operations that test for safety and potency, transporters and retail provisioning centers. 

However, companies outside of the licensing system — involved in everything from equipment and packaging to construction and legal and financial services — expect to profit as the industry develops. 

One company that’s found strong demand from indoor growing operations within the cannabis industry is carbon dioxide provider Michigan Beverage Co., a division of Detroit-based Leonard Fountain Specialties Inc., known as Leonard’s Syrups.

“Once the legalization hit, the phone calls started really coming in,” Jonathan Holm, manager of Michigan Beverage’s Grand Rapids branch, told MiBiz

For more than a half century, Michigan Beverage has provided carbon dioxide to the beverage industry for use in soda and beer. Holm opened the West Michigan branch of Leonard’s Syrups three years ago, just as cannabis legalization groups were gathering signatures to include the initiative on the 2018 ballot. 

“Plants love carbon dioxide,” Holm said. “One of the first things we talked about was the legalization of marijuana, how that was probably going to happen right around the corner and who can we contact in our industry that deals with growers.” 

Grow operations use Michigan Beverage’s systems to increase the concentration of carbon dioxide by four or five-fold compared to ambient air. The carbon dioxide helps cannabis plants grow faster and with stronger stems and branches that lead to plants that hold more flowers. 

In an enclosed grow room, cannabis plants can drain natural amounts of carbon dioxide within just a few hours, slowing photosynthesis, the process that plants use to grow.

“We actually run a gas line into their grow room and it runs at a very, very low amount of (additional) CO2,” Holm said. 

While carbon dioxide is typically around 300-400 parts per million (ppm) in the air we breathe, the ideal concentration for cannabis grow rooms is 1,200-1,500 ppm, or 0.12-0.15 percent.

“It’s a very low amount of CO2 being used, but I’ve heard it increases the yield of the plant by anywhere from 20 to 30 percent,” Holm said. 

Holm has worked in “beverage gases” like carbon dioxide and nitrogen for 15 years. When he discovered the value of his product in the cannabis industry, he looked to learn from similar businesses that had established themselves in other states with legalized cannabis.

“I actually flew out to Colorado, met with a CO2 company out there and they gave me tours of all the grow houses that they were servicing at the time,” he said. “Then it was just kind of a waiting game and trying to gather as much information as possible.” 

The West Michigan branch of Michigan Beverage started with a couple of medical marijuana clients when it opened, according to Holm. Now that legalization has passed, the company has serviced nearly 20 growers in West Michigan, none of whom would go on record for this report, and another 20 to 30 operations on the east side of the state.

By comparison, about 70 sites owned by 29 companies have been licensed by the MRA to grow cannabis. 

Keeping quiet

Although established businesses in industries like contracting, engineering, HVAC, packaging and software are marketing themselves as offering solutions to the cannabis industry — whether via trade shows, networking groups and directories like Grand Haven-based Cannabiz Connection — many West Michigan executives still remain apprehensive about going public with their new ventures. 

For this report, MiBiz reached out to companies in a range of ancillary industries to discuss their approach to the growing cannabis market, but most declined to discuss their involvement on the record. 

“In an emerging market that is very new to most, we want to approach it with caution to be sure we are not offending anyone with specific beliefs or opinions,” said an executive at a West Michigan-based packaging company who asked not to be identified. 

Some development companies told MiBiz that they needed to assess whether the gains from taking on work in marijuana businesses would outweigh possible reputational consequences for their firms. An executive at a local contracting firm was assessing whether it’s hypocritical to work on marijuana businesses while also having a zero-tolerance drug policy for the company’s workforce.

Despite the reluctance to discuss their strategies in approaching marijuana-related businesses, the companies that get involved in the industry early on could find that they’re able to establish long-lasting business relationships. 

“This is an industry that is very loyal; they remember who their friends are and who was there from the beginning,” said Josh Hovey, spokesperson for the Lansing-based Michigan Cannabis Industry Association, a nonprofit trade group that advocates for legal cannabis businesses and cannabis issues in the state. “The businesses that want to serve this market, they’re scrambling to get in fast. They are going to be the ones who lead the market, and everyone else is going to be scrambling to play catch up.”

Emerging market

Uneasiness and uncertainty abound in Michigan’s cannabis industry. Each segment of the market has faced ambiguity as it deals with ever-changing regulations and the learning curve associated with bringing the industry out of the black market. 

Still, the legal market is growing at a rate beyond expectations.

With more than 294,000 current medical marijuana cardholders, Michigan is home to the second-largest medical marijuana market in the nation. Medical marijuana in the state generated more than $42 million in sales since the first state-licensed businesses opened in November, according to data from the Michigan Department of Licensing and Regulatory Affairs (LARA), which includes the MRA. 

“This is not a new industry,” said Tami VandenBerg, a Grand Rapids-based bar owner and cannabis advocate. 

“It’s been underground. That is why nobody knows exactly how big this is going to be, but we know it’s going to be big,” VandenBerg said. 

An economic analysis conducted by the East Lansing-based Anderson Economic Group LLC estimated the recreational market will exceed $1 billion annually within its first few years.

As well, a job boom could follow, according to experts. Official agencies such as the U.S. Bureau of Labor Statistics ignore jobs related to the cannabis industry because the drug remains illegal at the federal level. However, a study by Seattle-based Leafly, a private equity-backed cannabis information resource, found legal cannabis has so far created 211,000 full-time jobs nationwide. The cannabis workforce increased by 21 percent in 2017 and another 44 percent in 2018, according to the report. 

“This is not just going to benefit people directly in the business,” VandenBerg said. “There are going to be all kinds of ancillary businesses that are already popping up. It’s been really fun to see how it’s going to benefit all kinds of different sectors.” 

Shaping an industry

VandenBerg, who submitted one of the more than 90 applications the city of Grand Rapids received for new cannabis businesses earlier this year, also serves a board member of the newly formed West Michigan Cannabis Guild

The Guild is one of several trade organizations in the region that have surfaced to connect people who aspire to build companies and careers in the cannabis industry. 

“There’s a great network of people out there who are all consulting with each other,” said Amy Jonker-Broersma, managing partner of Grand Rapids-based Jonker Law PLLC. “It’s business owners and consultants and attorneys, and everyone is trying to figure this out together.” 

Jonker-Broersma, whose legal experience is concentrated in banking and finance regulation, has seized an opportunity in the highly-regulated and quickly-developing area of cannabis businesses law. 

“As an attorney, it’s always really interesting to see a whole new area of law develop and it’s rare that you get in on the ground floor and get a chance to help shape it,” she said. 

Jonker Law currently represents several clients involved in the cannabis industry, including the West Michigan Cannabis Guild.

“People are really being very entrepreneurial around all of this, not just because it’s a new industry, but because their business models have to work around the problem of a lack of (clarity in the) regulation even though it’s a heavily regulated industry,” she said. 

In the 10 years since medical marijuana was legalized in Michigan, the state’s courts have flooded with cases concerning medical marijuana businesses and individual rights, causing regulations for the industry to be written on a case-by-case basis. At this point, the court system may be the best way for the recreational cannabis industry to gain “hard and fast rules,” according to Jonker-Broersma. 

“We’re talking about an industry that has been underground for so long,” she said. “Anyone who supported that also had to be underground, so now we’re seeing various service companies that can actually, hopefully, be all the way above board with the work that they do.”

Finding solutions

Because of marijuana’s federal classification as a controlled substance, the cannabis industry continues to struggle with access to banking and financial services. 

That’s because banks that back cannabis businesses could be cut off from federal insurance and national electronic payment networks, and are vulnerable to persecution under federal law, according to experts.

However, newly proposed federal legislation known as the SAFE Banking Act would give financial institutions legal protection to do business with the cannabis industry in states where it is legal. Michigan Gov. Gretchen Whitmer joined a bipartisan coalition of 19 governors in June to call on Congress to pass the bill. 

“If you think about how much banking and financial services impact a business, if you had to open a business without any banking services, that really requires business owners to be entrepreneurial,” Jonker-Broersma said. 

In an industry that is projected to balloon to more than $1 billion dollars within a few short years, cannabis companies have so far been forced to deal almost exclusively in bundles of cash. Solutions such as PayQwick of Michigan LLC, a Rockford-based financial company that allows businesses to pay bills and collect payments electronically, have popped up to fill part of the void.

“Storing large amounts of cash and having to ship things in cash puts a real restriction on your ability to conduct day-to-day business,” PayQwick of Michigan President Jim Dimitriou told MiBiz

Cash-exclusive businesses run into trouble paying landlords, utilities, payroll and tax expenses that have all been pushed to mostly electronic platforms, said Dimitriou, adding they also face serious security risks. With PayQwick, businesses can track and transport cash into the PayQwick system and bank accounts to send invoices, transfer money electronically and pay bills.

“Bringing some sort of banking services to the industry is essential in helping it to grow or thrive and survive,” he said. “All of these businesses are licensed by the state. They are legal under state law, and they go through a lot of scrutiny. There’s no reason why they shouldn’t expect the same or similar type of banking services as any other business.” 

PayQwick also acts as a compliance company, strictly monitoring cash “from seed to sale,” according to Dimitriou. 

“We have to tag-and-trace that money to make sure that it was part of a licensed, legal transaction,” he said. 

Lending gap

After the cash is successfully vetted, PayQwick works with an unnamed “local banking partner” to report the money to the government and deposit it into the federal banking system. The confidentiality of the banking partner is required by contract, according to Dimitriou. 

“They don’t want to be out,” he said. “They’re not ready for that.” 

Beyond federal risks and the “cumbersome” undertaking of compliance monitoring, the bank is using the third-party system to shield it from the “reputation risk” of working with cannabis-related businesses, Dimitriou said.

“They’re afraid that one of their bigger, non-cannabis customers might frown on this,” he said. 

While a third-party solution for moving money between bank accounts is needed in the industry, traditional bank lending still remains out of reach for cannabis businesses, Jonker-Broersma said. 

In addition to regulatory risks for the banks themselves, buildings and equipment used by cannabis-related businesses could also hypothetically be seized by the feds, making it hard for companies to collateralize a loan.

“Lending doesn’t fit our current model,” Dimitriou said of PayQwick. “Part of the reason why is that it’s just a step too far for the banks at this point in time, and ultimately, you have to come from the banks. There’s a large network of private investors that are looking to lend money to people, but that’s just how the industry gets by until banking steps up into it.” 

MiBiz Staff Writer Sydney Smith contributed to this report. 

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