In May 2019, there were 4,400 reports of tornadoes, hail and high winds across the U.S. That’s the highest number of similar weather incidents on record since 2011. This increasing number of weather incidents has a huge effect on the cannabis industry, which has turned more frequently to outdoor cultivation since legalization.
While outdoor cultivation can develop the flavor of the cannabis crop, much like wine, it also brings with it some unique challenges. Each component of the weather – wind, rain, temperature – plays a role in whether a crop succeeds or fails. While conditions one year may easily lead to a bumper crop, the conditions the following year may not be as favorable. And as the weather becomes more volatile due to climate change, growers are ever more at risk, especially when they aren’t insured.
Unfortunately, traditional crop insurance isn’t available for outdoor cannabis cultivators, primarily because of a lack of data on yield performances – and the impact the weather has on yields. Insurance companies don’t create policies until they have the data to back the policy. But meanwhile, the growers are assuming all the risk.
Enter parametric insurance. Parametric insurance is a program that pays out after a certain parameter is met. In the case of cannabis growers, the parameters are weather-related. The policy is triggered when the weather varies from the average – if there is too much rain during a specific period of time, for example, or an occurrence of large hail. Because the policy is related to average weather, it has to be tailored to the specific growing region – which means the parameters for Colorado won’t be the same as a policy for Maine.
For cannabis crops, coverage can be created for the following parameters:
Rain (recorded in inches of rainfall over a period of time)
Wind (recorded in miles per hour)
Early freezing (using recorded temperatures)
Hail (measures intensity and size of the hail)
Drought (for non-irrigated plots)
Once a parameter has been set, the policy starts to pay out at the strike point, or the average measurement specified in the policy. Coverage continues to pay out until the exhaust point, or the entire limit of the coverage is paid out. It works well because it’s straightforward: The further away from the average, the more the likelihood of catastrophic loss.
Parametric insurance isn’t for everyone. It’s a program designed to fill gaps that exist within the traditional insurance system. Nor is it designed to stand alone. But it can protect outdoor cannabis cultivators from weather risks that are truly beyond their control, especially given the hardening property insurance market.
In addition, it works for two simple reasons:
Simplicity: Recorded weather events leave no room for ambiguity or dispute. You don’t even need an adjuster to guide the claims process. The official weather data proves what happened.
Correlation: There is a high degree of correlation between measurable weather events and potential damage to outdoor crops.
Parametric coverage is not widely available. Many insurance professionals may not even know of it. But with the property insurance market hardening and a growing need to protect you and your cannabis business from weather-related disaster, parametric coverage may be your best bet. Make sure you speak to a broker who knows about it.
As legalization of cannabis products from hemp to medical cannabis takes root across the U.S., there’s a growing need to understand and build good security practices. While many think of security as safeguarding assets like facilities and product, effective security does much more. It protects a business’ workers, providing them secure workplaces and incomes. Ideally, it reaches from supply chain to customers by ensuring consistently safe products.
To truly understand the value of this for a brand or for the industry as a whole, consider the opposite: the destructive effect – on a brand and on the industry at large – of unsafe or tampered product reaching customers, or of crimes occurring, just as the industry seeks to demonstrate its validity and benefits. Security is vital not only to individual farmers, processors or customers but to all who value what the industry brings to those who rely on CBD or medical cannabis products for their wellbeing.
Know the Threats.
Part of the learning process involves understanding the value of the product.Security is all about anticipating and reducing risks. These can include physical threats from natural sources – think flood, fire, tornado or crop fail – or from human threats. Human threats can arise from organized criminals, hackers, amateur thieves, vandals – or insiders.
As regulated industries, hemp and cannabis businesses also face risk of losses, which can be significant, from penalties ranging from fines to being shut down for non-compliance. While rules vary from state to state and continue to change, a disciplined approach to security is foundational to reducing risk at many levels. Rigorous operational processes must incorporate security that addresses risks at multiple points of access, transport and sale of products.
Learn the Rules.
In a rapidly evolving industry, one of the most important things producers can do is to learn. Security requirements vary by region and providers need to be aware of what is available. Get to know your state, local and federal resources for your operating area. California law, for example, specifies use of high-resolution video surveillance in dispensaries, while others do not.
Part of the learning process involves understanding the value of the product. With medicinal cannabis, it’s helpful to grasp both its commodity value and the street value that could make it attractive to thieves. In “Why Marijuana Plant Value is So Important for Adjusters,” Canadian Underwriter Magazine gave examples that indicate the size of losses that may occur in growing and processing operations:
“In the medical marijuana space, ClaimsPro has already seen losses primarily between $150,000 and $750,000. These losses, mostly on Vancouver Island, were for fire and water damage, as well as boiler machinery issues, physical damage to buildings and specialized greenhouse equipment, as well as extra expense and business interruption.”
The same article notes a claim over $20 million at another single flower greenhouse. Security needs to reflect what’s present on our premises.
Educating the community can reduce risk as well. Producers of industrial hemp may need to inform would-be thieves that what they are looking at is not street-valued product. To protect the crops, which are generally grown outdoors and do not require a full security detail, a best practice is simply posting signs on the property that say explicitly “No THC.”
Begin with a Risk Assessment.
Security begins with a professional evaluation of site vulnerabilities, examining key weaknesses that could be exploited by attackers. These include:
Monitoring access to the site is a foundational principle of security.
Design limited access points into the facility as well as prepare for possible facility breaches with perimeter access control, technological redundancies and ballistic glass for defensive architecture measures.
Look at route vulnerabilities as well.
Hedge site risk by not limiting your operation to a single site where one incident could wipe out an entire year’s crop.
The nature of threats is always changing. A 2018 Newsweek article described the struggles of legal cannabis farmers against illegal and potentially cartel-backed and violent operations in California. While a 2020 Business Insider report described indications that legalization was prompting some cartels to leave cannabis alone and move on to fentanyl and meth. “While Mexican drug cartels made their money predominantly from marijuana in past decades, the market has somewhat dissipated with the state-level legalization of cannabis in dozens of states across the US.”
Define Levels of Risk and Access.
The best security matches spending to risk in a commonsense way. Are you more at risk from the occasional smash and grab incident or is there reason to anticipate an organized assault? As in many industries, the greatest risk often comes from employee fraud or theft. Hiring carefully, paying fairly and training staff well are important to long term security.
How will the product be moved around within the facility and beyond it – and what staff are responsible for each part of the journey? Who can enter the cultivation areas and what protocols must they follow? On site staff should be trained on what to look for if they observe a security breach. Consider biometrics such as retinal scans, fingerprint scans or similar.
In cases where valuable product or cash is present, guards can play an important role. Harvest Connect uses only high-level former military or police officers in these roles, an approach recognized by many. Hunter Garth of Iron Protection Group notes they have “the ability to de-escalate a potentially harmful situation and the fortitude to see a mission through to completion, no matter what external circumstances may arise.”
Inventory and Transaction Controls
Inside threats from sloppy processes can be just as insidious as attacks. Poor tracking of inventory by Oregon’s legal cannabis producers made headlines in 2018 as The Oregonian reported, “U.S. Attorney Billy Williams told a large gathering that included Gov. Kate Brown, law enforcement officials and representatives of the cannabis industry that Oregon has an ‘identifiable and formidable overproduction and diversion problem.’’ Discipline, applied by state pressure but carried out by producers themselves, has begun to reduce the diversion of untracked product into the black market a year later.
Cannabis businesses need a professional approach to monitoring all product and money that moves through its systems. These operational processes can include time, date and attendance stamps on all inventory. Similarly, accounting systems and software must follow the highest professional standards. Lastly, when breaches occur, it is essential that fraud and theft are caught, eliminated and prosecuted as appropriate.
Nurturing an Emerging Industry
Security resources are an integral part of maintaining the integrity of a business’ supply chain. As the product moves from the fields to processing centers to consumers, purity assurance becomes an operational objective. Ultimately, protecting the product through secure and professional practices is the optimal way to serve customers, build a brand, and sustain the industry.
I had dinner last night with a friend who is a senior executive at one of the largest automobile companies in the world. When I explained the industry-accepted rate of 25-30% shrinkage in horticulture he said, “Are you kidding me? Can you imagine the story in the Wall Street Journal if I gave a press conference and said that we were quite content to throw away three out of every ten cars we manufactured?”
Yet, for all growers, operators and investors who complain about shrinkage, it’s an accepted part of the business. What if it wasn’t; what if you could shrink your shrinkage by 60% and get it down to 10% or less? How much more profitable would your business be and how much easier would your life be?
Let’s take the floriculture industry as our first example. You propagate chrysanthemums in February, they get repotted at the end of April and by the end of June, you might start to see some buds. In a very short time span your job changes from being a grower who manages 10,000 square feet of chrysanthemums to being an order taker. Over a period of eight weeks, you have to unload as many of those mums as possible. The sales team at Macy’s has more time to move their holiday merchandise than you do.
If you’re like most operations, your inventory tracking system consists of Excel spreadsheets and notebooks that tell you what happened in previous years so you can accurately predict what will happen this year. The notebooks give you a pretty accurate idea of where in the greenhouses your six cultivars are, how many you planted and which of the five stages they are in. You already have 30 different sets of data to manage before you add on how many you sell of each cultivar and what stage they were in.
The future of the industry is making data-driven decisions that free up a grower to focus on solving problems, not looking for problems.Then your first order comes in and out the window goes any firm control of where the mums are, what stage they’re in and how many of each cultivar you have left. A couple of hours after your first order, a second comes in and by the time you get back in touch, check your inventory, call back the buyer and she’s able to connect with you, those 2837 stage 3 orange mums are moving into stage 4. Only she doesn’t want stage 4 mums she only wants stage 3 so now you frantically call around to see who wants stage 4 orange mums very soon to be stage 5 mums.
And, the answer is often no one. What if you didn’t have your inventory count exact and now you have 242 yellow mums that you just found in a different location in your greenhouse and had you known they were there, you could have sold them along with 2463 other mums that you just located in various parts of your greenhouse.
It doesn’t have to be like that. We had a client in a similar situation, and they are on track to reduce their shrinkage to just a shade over 10%. The future of the industry is making data-driven decisions that free up a grower to focus on solving problems, not looking for problems.
And don’t think that shrinkage is an issue only in the purview of floriculture. It’s an even bigger problem for cannabis because of the high value of each crop. The numbers don’t sound as bad because unlike floriculture, you don’t have to throw out cannabis that’s not Grade A. You can always sell it for extract. But extract prices are significantly less per pound than flower in the bag.
Here’s how one grower explained it. “Because of the high value of the crop, and the only other crop I’ve worked with that high is truffles, you’re playing a much higher stakes game with shrinkage. Even if you try and salvage a bad crop by using all of the parts of the cannabis plant. Listen, the difference between Grade A and Grade C could be $1,000 for A while a pound of B/C is less than $400. If you produce a standard 180 to 200 pounds in your grow rooms, you’ve really screwed up. No operator is going to keep you if you just cost them $120,000.”
Did you know that the use of personal vehicles for transporting cannabis products is one of the most frequent claims in the cannabis industry? It surpasses property, product liability and even theft. Businesses are either unaware of the risks involved in using personal vehicles for transporting cannabis, or they aren’t taking them seriously enough.
Considering the strict statutes many states have placed on transporting cannabis should be reason alone to be more diligent. For example, the California Bureau of Cannabis Control’s proposed regulations require cannabis business owners to ensure their drivers have designated permits to transport the product. The state’s current legislation mandates inspections at any licensed premises, and requires employers to provide detailed tracking and schedules on the transport of product. Further, the state prohibits using minors to transport cannabis, and considers it a felony to do so.
Regulatory concerns, combined with the potential liabilities that could come from driver behavior, are keeping insurers from offering auto coverage to the cannabis industry. In fact, just four insurers currently offer the industry auto coverage, with premiums running as high as $17,000 per auto on average. It is important to note that personal auto insurance falls short because it doesn’t cover cargo loss.
Alternatively, because the stakes are so high, many companies are using courier services to transport cannabis product. But cargo insurance is still an issue. Without it, the care, custody and control of someone else’s products, and insurance limits are lacking. Even when the courier has cargo coverage, because they are delivering for multiple companies, the claims payout would have to be split amongst all the customers – likely below the value of your loss.
Consider the following best practices when transporting cannabis:
Conduct background checks/review DMV records. Uncovering any potential driver issues prior to hiring is critical. Look for previous DUIs or drug related history. Employees who might use product before getting behind the wheel are a significant danger to other drivers and a major liability to the employer. Even after hiring, be on alert for signs that indicate poor driving performance. Use check-in/check-out processes for all drivers, and conduct regular vehicle walk-arounds to look for scratches, dents or other damage that otherwise might be unreported to the employer.First, and most importantly, assess your risk mitigation options. Then, put processes in place as soon as possible to eliminate risk.
Implement quarterly driver training. Educate employees on proper procedures. While minor fender benders and sideswipe accidents are most common, even these can be costly if not handled properly. Once law enforcement get involved in an accident the car’s transportation of cannabis could become a secondary issue. Teach drivers how to handle accidents while on the scene, including informing law enforcement about the cargo and the employer.
Use unmarked vehicles. Drivers carrying a significant amount of product and/or cash are tempting targets for thieves. Company cars used for transporting product should be newer, and have no fleet serial numbers or anything identifying the company.
Require increased personal liability limits. If an employee is using their own personal vehicle for business purposes, the business owner should require that person carry more than minimum limits of personal liability. Ideally, they should have $300,000 or more, at an absolute minimum $100,000.
Get started now
First, and most importantly, assess your risk mitigation options. Then, put processes in place as soon as possible to eliminate risk. Secure the right insurance coverage, and ask your broker/underwriter to provide any additional recommendations to best mitigate your transportation, delivery, and cargo exposures.
In the last four articles, I have outlined areas that impact your operations as they apply to laboratory quality programs. But this article will take a different path. It will focus on protecting your crop and brand along with any business that utilizes your crop, such as dispensaries or edible manufactures in the court of public opinion.
Now, the elephant in the room for cannabis companies is the difference between rules written by the state and their enforcement by the state. There are many anecdotal stories out there that can be used as case studies in identifying ways to protect your brand. Remember, consumers and the media caught them, not the regulators.
Cheating in the cannabis industry: growers, dispensaries, edibles manufactures, etc. This includes:
Finding laboratories that will produce results that the client wants (higher potency numbers)
Not testing for a particular contaminant that may be present in the cannabis product.
Selling failed crops on the gray or black market.
Claiming to regulators that the state rules are unclear and cannot be followed (e.g. So, give me another chance, officer)
So why should you be worried? Because, even if the state where you operate fails to enforce its own rules, the final end-user of your product will hold you accountable! If you produce any cannabis product and fail to consider these end-users, you will be found out in the court of public opinion by either the media or by the even more effective word of mouth (e.g. Social Media).
So, let’s take a look at some recent examples of these problems:
Each of these reports lists contamination by microbial stains or pesticides as being rampant within the California market whose products are used for medical or recreational use. Just imagine the monetary losses these cannabis businesses faced for their recalled cannabis product when they got caught. Remember, consumers and the media caught them, not the regulators.Institute a quality program in your business immediately.
How can you be caught? There are many different ways:
So, what should you do to produce an acceptable product and provide reasonable protection to your cannabis business? Institute a quality program in your business immediately. This quality program will include areas of quality assurance and quality control for at least these areas.
Processing or formulating
Training of staff
Setting up and supporting these programs requires that your upper management impose both a rigorous training program and make employee compliance mandatory. Otherwise, your business will have an unreasonable risk of failure in the future.
Further information on preparing and instituting these types of quality assurance and quality control programs within your business can be found at the author’s website.
Earlier this week, a series of wildfires began ripping through Napa, Sonoma and Mendocino Counties, causing mandatory evacuations, rampant property damage and taking the lives of at least 17 people. Extraordinarily high wind gusts up to 50 mph have swept through communities in Northern California, leaving complete destruction in its wake.
According to The Washington Post, flames have reached more than 170,000 acres since Sunday when the fires began. The cause is still unknown. The President declared a state of emergency, allowing emergency funds to go to clearing debris and supplies for shelters. Nearly 25,000 have fled their homes to shelters in seven counties.
The area is well known for its wine production, an industry that is taking a very hard hit from the wildfires. It is also known as a productive cannabis growing area as part of the Emerald Triangle, synonymous with high quality, outdoor cannabis farms. A number of cannabis farms have been severely impacted by the flames.
We’ve received numerous reports of growers fleeing their homes and farms to get to safety. The LA Times reported that at least seven cannabis farms have been engulfed in flames. According to Amanda Reiman, vice president of community relations at Flow Kana, a distribution company working with cannabis farmers in the Emerald Triangle, they are in active evacuations and the fire is only about 5% contained. “It will be a while before we know the extent of the damage to our farmers and our community,” says Reiman. “The Emerald Triangle is a large region and central Mendocino county contributes a lot. Our farmers are resilient, but right now we are all focused on safety and vigilance.”
Kristin Nevedal, founder and chair of International Cannabis Farmers Association (ICFA), says she’s received information about cannabis farms being destroyed. “The true extent of damage to farms, lives and communities won’t unfortunately be known for sometime,” says Nevedal. “There is no rain in the immediate forecast, conditions are dry and we have had high winds.” Nevedal says the damage goes way beyond just a business setback. “Traditional sun grown cannabis farmers often live on the property they farm, so for many, a forest fire can mean not only loosing the crop but also their homes,” says Nevedal. “While there are fire insurance policies available for houses and outbuildings, the operational infrastructure components and the crop itself can be challenging or impossible to insure.” She says things like water storage tanks, water supply systems, irrigation systems, fences, water pumps and solar systems might not be insured at all. “Law enforcement in Mendocino is coordinating, to the best of their ability, with evacuees who have fire damage or have been evacuated, to insure public safety while assisting folks with repopulating their property and/or assessing the status of fire damage,” says Nevedal.
Because California is expected to implement their full adult use legalization in early 2018, the wildfires are particularly devastating to businesses that have been gearing up for the new market. To make matters worse, the fires came during peak harvest time, while growers are cutting plants and preparing their entire crops for distribution and sale.
Devika Maskey, founder of TSO Sonoma, a cannabis farm in Sonoma County, could only speak briefly because her farm is under evacuation orders. “We are getting all personnel off the hill to safety,” says Maskey. “The wind will be picking up to 40-50mph again later today.” Those high winds have the potential to spread the flames quicker, destroying more property and putting more lives at risk.
Maskey says the wildfires are having an enormous impact on their crops this year. “We do not have enough time to harvest the outdoor crop,” says Maskey. “So far there has been clear skies, but if the fire gets closer it can taint the buds with a smoky smell and flavor.”
Maskey says she has a number of friends in the cannabis space that have been severely affected already. “We do have a few friends that have lost their farms already,” says Maskey. “About a dozen other friends and family members who have lost their homes.” In Sonoma County alone, 5,000 people have been evacuated to shelters as of Wednesday morning, reports The Washington Post. “This has been a devastating week for many people and businesses,” says Maskey. “Our priority is getting everyone off the hill and to safety.” If you want to help the cannabis growers impacted by the fires, Maskey recommends donating to this growers relief fund or donate to the North Bay Fire Relief fund here.
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