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Why California won't necessarily grow (all) America's marijuana

California is a U.S. leader in many crops, but some constraints that may prevent it from dominating the marijuana market across the U.S., at least for awhile.

SALINAS, Calif. — This state has long been dubbed America’s salad bowl, because of the ability of California’s industrial-scale farms to produce food in mass quantities. Beginning this year, it will also begin widespread legal production of a very different crop.

The grower of more than one-third of the nation’s vegetables and two-thirds of its fruits and nuts is expected to begin providing an outsize share of its marijuana, after the drug became legal for recreational use on Jan. 1. But it's still not clear who will produce all that pot: small growers, who have been cultivating it for years; big agribusiness, with the resources for mass production; or the black market, which will probably ignore the state's expensive new growing rules.

That uncertainty is because marijuana remains illegal under federal law and will be highly taxed and expensive to produce under California law. That could slow the state from taking a leading production role nationally, at least for legal cannabis, in the near term.

California is already an outsize contributor of black-market marijuana for the rest of the country, with more than four-fifths of the 13.5 million pounds grown in the state last year ending up in other markets, according to the state Department of Food and Agriculture. Much of that marijuana has come from the Emerald Triangle, in the verdant northern reaches of the state. Estimates suggest the state has produced as much as 80 percent of the nation's illicit marijuana.

Steve DeAngelo, the executive director of Harborside in Oakland, one of the state’s biggest cannabis dispensaries, and also a partner in a marijuana cultivation venture, hopes that the state can take nearly as dominant a position as legal use spreads across the country.

“I see it as California’s natural legacy, its destiny," he said, "to supply 50 percent of the legal U.S. cannabis market."

Players who hope to strike it big in the state’s newly legalized environment — under a ballot measure approved by voters in November 2016 — are setting up farms throughout California, from former flower hothouses in the Salinas Valley, to Silicon Valley warehouses, to farms in the high desert community of California City.

The principals include people like DeAngelo, the pot evangelist who sold his first joint at age 15; the son of reggae icon Bob Marley; former heavyweight boxing champion Mike Tyson; and Jeff Brothers, a one-time Republican Party leader who plans to have military veterans tend his greenhouses.

Image: Steve DeAngelo makes the first legal recreational marijuana sale to Henry Wykowski at Harborside in Oakland
Steve DeAngelo makes the first legal recreational marijuana sale to Henry Wykowski at Harborside. Elijah Nouvelage / Reuters

Brothers, who ran cut-flower farms in Salinas for decades, said California’s climate, labor pool and deep experience in agriculture make it a natural to become a national leader in legal marijuana production.

“When we no longer have a moratorium on delivering cannabis across state lines, California will end up in the position where it ends up in virtually every other agricultural commodity, which is in a very strong position or at the top,” said Brothers. “I like to say these operations will become like a Mondavi or Gallo of the industry.”

The ban on interstate shipments of marijuana remains in place, because the federal government still deems the substance an illegal “Schedule One” drug. The U.S. Drug Enforcement Administration (DEA) has long resisted petitions to change that status, which groups marijuana alongside drugs like LSD, peyote and heroin. All are deemed to have “no currently accepted medical use and a high potential for abuse.”

The divide between the states and federal government became more pronounced last week, when Attorney General Jeff Sessions announced that he would give federal prosecutors the power to prosecute marijuana crimes. It was not immediately clear whether U.S. attorneys would act on that power, but it was a marked contrast from an Obama administration policy that shielded legalized marijuana from federal intervention.

Image:Sol Orchard President & CEO Jeff Brothers surveys old cut flower green houses on a property along Spence Road in Salinas that he will be converting for marijuana farming.
Sol Orchard President & CEO Jeff Brothers surveys old cut flower green houses on a property along Spence Road in Salinas that he will be converting for marijuana farming.Peter DaSilva / for NBC News

That hard line against pot also flies in the face of public opinion and the law in 29 states, which allow marijuana to be used for medical purposes. Eight states, including California, now also allow pot to be used for recreational purposes.

Some states that have legalized recreational cannabis use, like Colorado, have seen legal cultivation skyrocket, said Tom Adams of BDS Analytics, an industry analyst based in Boulder, Colorado. Grow houses have mushroomed around the Rocky Mountain state and driven out most black-market competitors, with only about 20 percent of sales now going to illicit operators, Adams said.

This may be partly because legal pot is price-competitive with the illegal product, since Colorado has kept taxes relatively low, with a 15-percent excise tax and sales taxes that average 6 percent, depending on locality.

The state of Washington, in contrast, levies a 37 percent excise tax on legal marijuana sales, in addition to sales taxes that average nearly 9 percent. That is keeping as many as half of Washington's cannabis buyers on the black market, where taxes are not levied, according to BDS Analytics.

Advocates of legal marijuana fear that high taxes in California — with state and local levies reaching 30 percent and higher — could also leave a sizable portion of the nation's biggest market to illicit dealers.

Image: A worker holds a 30 day-old cannabis plant.
A worker holds a 30 day-old cannabis plant.Peter DaSilva / for NBC News

The strict regulatory framework in California is estimated to add $560 a pound to the cost of wholesale pot. That may be sustainable if indoor-cultivated pot prices remain above $2,000 a pound wholesale. But growers worry that a glut from new cultivation will push the price sharply downward.

“Right now is the biggest time ever for cowboy production,” said Bernard Steimann, CEO of People’s dispensary in Orange County, and also a partner in grow houses in the Salinas Valley, who fears competition from unlicensed competitors.

Growers say they face several other hurdles that make the push into mass marijuana cultivation something less than a gold rush.

One challenge is high costs. Contractors for everything from fencing to septic tank servicing also see an opportunity in marijuana and are charging more. “For anything you want, there are two different prices — one for the cannabis grower and one for the noncannabis grower,” said Sergio Silva, a 35-year veteran of farming in Salinas, who has partnered with Steimann to grow marijuana.

Another challenge is building infrastructure. To grow at the maximum rate — turning five harvests in a year — farmers need extra light. But several Salinas-area growers said their utility company, Pacific Gas & Electric, has said they will have to wait a year, maybe two, for the capacity they need to fully light their grow houses. (The utility said the work takes up to six months.)

Image: Old cut flower facilities along Spence Road in Salinas will soon be converted to grow marijuana.
Old cut flower facilities along Spence Road in Salinas will soon be converted to grow marijuana.Peter DaSilva / for NBC News

The state was contemplating another brake on mega-growers: a one-acre limit on farms for the first five years after legalization. Such limits are designed to prevent agribusiness from overwhelming the long-time growers — many in the north end of the state — who had established the industry during its many decades on the margins. But when interim regulations were issued in November, the one-acre limit was not included.

Hezekiah Allen, executive director of the California Growers Association, who represents long-time pot farmers, said the failure to limit the size of farms “rolled out the red carpet to big multinational conglomerates” to take over the pot industry.

DeAngelo, of Oakland’s Harborside dispensary, said that there will always be room for smaller operators but that some California farms need to go big to compete with other states and to make prices low enough for everyone to enjoy the benefits of pot.

“That is what we do really well in California,” he said. “Produce good, high-quality crops in mass and at a low cost.”