Product Inversion is New York Cannabis Market’s ‘Dirty Little Secret’

New York cannabis regulators still don’t have a universal seed-to-sale tracking system fully implemented two years after launching adult-use sales, and that was a cause for concern for at least one board member during this week’s regular meeting.  

New York’s licensed dispensaries are projected to sell more than $820 million in adult-use cannabis in 2024, pushing their cumulative total north of $1 billion since the state’s December 2022 market launch, according to sales figures presented by Office of Cannabis Management (OCM) Policy Director John Kagia on Dec. 10.

While New York’s two-year sales figure lies in the shadows of other states that haven’t recently launched adult-use markets—including Missouri, Maryland and New Jersey —Kagia touted the recent trends, including roughly $26 million per week in cannabis retail revenue in November.

“Since the market launched essentially at the beginning of 2023, we’ve now generated $918 million [in retail revenue],” he said during Tuesday’s Cannabis Control Board (CCB) meeting. “Based on the estimates for what we’re looking to do through the end of the year, we will comfortably break that billion-dollar mark. … That’s a billion dollars worth of legal retail cannabis sold to adults in New York State. It’s a billion dollars of cannabis that is not being sold in the unregulated market.”

That’s roughly $100 million in tax revenue generated over two years for state coffers, Kagia said.

After having fewer than 30 dispensaries open throughout 2023, New York now has 261 retail facilities serving adult-use customers as of Dec. 6.

Amid the recent uptick in sales figures and dispensary openings, CCB Board Member Dr. Jennifer Gilbert Jenkins, Ph.D., asked Kagia if the OCM is tracking metrics for the success of the state’s licensed cultivators and processors.

“Are we looking at how much is being grown, what they’re yielding, what the market value is, what they’re making?” Gilbert Jenkins asked. “Because I am hearing from a lot of processors and growers that they’re still struggling, and I’m trying to put those two pieces of the puzzle together to be able to see, if we’re selling so much in our stores, how are our processors and our growers still struggling?”

Through a “Seeding Opportunity Initiative,” New York’s regulators provided the state’s hemp farmers the exclusive opportunity during the 2022 outdoor season to be the first to grow cannabis for the state’s adult-use market. That opportunity backfired, however, when those farmers had nowhere to sell their crops during New York’s sluggish retail rollout in 2023, as stories of farmers sitting on rotting biomass and financial hardships inundated front pages last year.

RELATED: ‘The Lost Year’: New York’s Adult-Use Cannabis Industry Grapples With Sluggish Rollout

Kagia assured Gilbert Jenkins that the OCM is tracking metrics for cultivators and processors, despite not presenting those metrics at this week’s CCB meeting.

“This is one reason why we are so bullish, or so excited, about having the seed-to-sale system in place, which will enable us to do this in a more systemized and almost real-time way,” he said. “As it currently stands … because we don’t have the seed-to-sale system in place, we have several different reporting streams all coming into us that tell us a different part of the story.”

Seed-to-sale tracking not only provides state regulators with rigorous inventory control systems to help ensure there’s no unregulated inversion or diversion of products in the federal illegal landscape, but it also offers a safe supply chain for consumers. For example, if there’s a product batch that tests positive for a banned pesticide or unsafe mold levels, then that entire batch can more sufficiently be recalled from the retail market.

As New York regulators work toward fully rolling out a seed-to-sale tracking system next year, all licensees are required to notify the OCM by Jan. 17 that their current inventory tracking system vendors will integrate with the state’s BioTrack THC tracking system, including an application programming interface (API) that will transmit data electronically to the office.

As part of this rollout, the state is covering the first year of BioTrack’s tag costs for cannabis cultivators and processors, OCM Acting Executive Director Felicia Reid said during Tuesday’s meeting.

“I’ve heard so much from industry stakeholders and community members about the importance of seed-to-sale—that is, tracking, monitoring and knowing what’s in our cannabis ecosystem,” she said. “We also launched BioTrack API for licensee integration to assist with compliance.”

In responding to Gilbert Jenkins, Kagia said he believes it’s true that there are still a lot of New York producers sitting on products and biomass that they’re struggling to sell through the supply chain.

“As we get more stores open, we believe that that sell-through is going to happen at an increasingly quickened pace,” he said. “So, the solve is always going to be to increase the speed with which doors are getting open. … But I think your point is fair and accurate, that even as products are moving quite strongly through our retail sell-through, that pace has not yet been enough to offset the capacity that our producers built for, given the rate that retail stores are opening.”

Gilbert Jenkins cut him off.

“I would like to disagree with that,” she said. “My next question is, how are we validating that the products in stores are actually coming from New York State? Because the rate of inversion in this market is the dirty secret that everybody is talking about—that we’re not bringing up in these slides here—that the amount of product that’s coming into our legal, authorized dispensaries from out of state is displacing New York product.

“And so, I would love for us to be able to try and track that a little bit better and focus some enforcement on supporting our New York growers and our New York processors so that we’re not telling the story that there aren’t enough stores open, or conversely that we have too many farms, because I don’t think that that’s a fair picture. We need to actually look at, are we truly selling New York products?”

As New York regulators struggled to open licensed dispensaries under a social-equity approach marred by underfunded initiatives and lawsuits last year, media reports mounted that California cannabis was “showing up” on and “flooding” unlicensed dispensary shelves in New York despite interstate cannabis commerce remaining federally prohibited.

But those reports were regarding unlicensed vape shops, smoke shops and convenience stores filling a demand gap in New York amid the OCM’s funding and legal hurdles.

It wasn’t until more recently that a board member offered concerns that OCM officials overseeing the regulated marketplace could not definitively attest to the inventory, and thus the safety, of products in licensed dispensaries two years after adult-use sales commenced.

“I think that’s something that we need to gather data on,” Gilbert Jenkins said.

“We take any charges, allegations or claims of inversion, or diversion for that matter, extremely seriously,” Kagia said. “And we’ll kind of pursue those very intentionally. It’s something that we will not tolerate. But this market was intended to be for New York-grown, New York-bred product, and we remain immovable, kind of committed to that point.”