The New Mexico cannabis industry is watching closely as the state’s new regulator works through its rulemaking process to have regulations in place for adult-use sales to launch April 1, 2022.
The Cannabis Regulation Act, which cleared the New Mexico Legislature and received Gov. Michelle Lujan Grisham’s signature this past spring, became effective June 29 and allows adults 21 and older to possess 2 ounces of cannabis flower, 16 grams of cannabis extract and 800 milligrams of edible cannabis. Adults may also grow up to six plants at home for personal use, with a maximum of 12 plants per household, and cannabis odor and cannabis containers can no longer be used as probable cause for law enforcement to stop, detain or search a person.
The law also includes additional social justice and social equity provisions, such as automatic expungement and specific language that instructs the state to develop a plan to encourage and promote equity in the industry.
“There’s language in there to make sure that people who were formerly incarcerated and who had charges for cannabis-related offenses are able to participate in the new marketplace,” said Emily Kaltenbach, senior director of the Drug Policy Alliance. “We don’t want those individuals to be left out.”
New Mexico’s adult-use cannabis law also created the Cannabis Control Division to regulate and oversee the state’s medical and adult-use cannabis markets. The division published its first round of rules on June 29 and kicked off a public comment period to receive feedback on the proposed regulations. Regulators are currently revising the rules based on the comments received and will hold another hearing Aug. 6.
“The most important thing we’ve commented on was making sure that the equity and justice piece is thought about before the rules are finalized because we don’t want that to be left behind,” Kaltenbach said.
The state will ultimately license adult-use cannabis producers, manufacturers, testing labs and retailers, as well as research labs and vertically integrated cannabis operators. New Mexico will also issue microbusiness licenses to smaller cultivators and vertically integrated operations.
“These micros are essentially a way for these smaller operators to dip their toes in a new industry without having to pay high fees,” said Marissa Novel, chief marketing officer for vertically integrated medical cannabis producer Ultra Health. “[It’s] just a way to get those craft growers into the market.”
The cannabis producer microbusiness license allows cultivators to grow a maximum of 200 mature plants for a $1,000 annual licensing fee, while the integrated cannabis microbusiness license allows vertically integrated operators to grow 200 plants, as well as manufacture and sell cannabis products in a single location, for a $2,500 annual licensing fee.
The Drug Policy Alliance has submitted feedback to the Cannabis Control Division to support provisional licensing, Kaltenbach said, so that entrepreneurs will know whether they will be licensed before leasing a space or investing in other areas of their business.
The Cannabis Regulation Act requires the state to begin accepting applications for cannabis producers by Sept. 1, and the first set of rules promulgated by the Cannabis Control Division focuses on licensing these cultivators.
Water rights and water use will likely be a component of the application process, according to Justin Brandt, partner of Bianchi & Brandt.
“One of the application requirements for the producer license is going to be legal proof of water rights,” he said. “I don’t want to say it’s unusual, but it’s not something we see often at the application stage.”
Although there is a tight turnaround between the Aug. 6 hearing on the revised regulations and the Sept. 1 deadline to release the applications for producers, industry stakeholders believe the Cannabis Control Division can meet the timeline.
“I think everything indicates that the department is going to get all of this done by Sept. 1, and I think they’re pretty close,” Brandt said.
Local jurisdictions are also working to draft rules for the adult-use cannabis industry, Brandt added. While local communities cannot outright ban cannabis within their borders, they can draft their own policies and zoning requirements for cannabis businesses.
“Not only does the Cannabis Control Division have to promulgate their final rules for these licenses, [but] applicants have to look at the local level to see where they’re at there,” he said.
Navigating Growing Pains
Plant count limitations have been a hot topic in New Mexico’s medical cannabis industry for quite some time, with medical operators advocating for an increase in the number of plants they can grow, or removing the cap altogether.
Under the current regulations, medical cannabis operators can grow a maximum of 1,750 total plants, and Novel said there is an active lawsuit in New Mexico’s 1st District Court about whether this rule is valid based on previous litigation.
Under the most recent set of rules published by the Cannabis Control Division, the maximum plant count would be raised to 10,000 mature plants per producer, but Novel said supply problems could persist even if these regulations become final.
“Even though they proposed that 10,000 mature cap [on plants], those rules won’t be effective until later this year, maybe even this December,” she said. “That’s due to the licensing requirements—the division has 90 days to process licenses after that Sept. 1 deadline. December is a long way away. While the proposed rules are a step in the right direction, they really don’t impact what’s happening now, today, in the medical market.”
With New Mexico’s medical cannabis program continuing to enroll new patients, Novel is concerned about an impending supply shortage in both the existing medical and forthcoming adult-use markets.
“Right now, when we have adult-use sales looming in the spring—we know they’re coming—there’s not one more additional cannabis plant in production to meet demand for even one more patient in the program or an adult-use consumer,” she said. “As you may know, it takes four months for cannabis to fully mature, be harvested and reach the shelf. And even right now [in] our medical cannabis program, we’re enrolling thousands of people each month. That number just keeps growing. And the outdoor cultivation season is quickly coming to an end. So, we have all these moving parts, and still, there’s no additional production. So, it makes us nervous, and it should make the regulator nervous.”
Ultra Health is advocating for the state to issue an emergency rule that would raise or eliminate the plant count while the Cannabis Control Division finalizes its regulations.
“That rule could be active immediately for 180 days, and it could allow us to put more plants in the ground today rather than waiting until December to license existing and future operators,” Novel said. “We advocate for removing the 1,750 cap entirely because we know that the regulator wants to go to 10,000 mature plants, so why wait until December? We have 120,000 medical patients in our program that need their medicine to live their lives. It continues to be our biggest struggle in New Mexico, having adequate supply to meet demand. Unless there’s movement quickly, it’s going to continue to be an issue, even when [adult-use] sales begin.”
Serving a Broader Customer Base
Ultra Health plans to seek an adult-use license when the application becomes available later this year, and Novel said the company is already preparing for the application process.
The company has been monitoring the Cannabis Control Division’s proposed rules and has provided feedback during the public comment period. To prepare its comments, Ultra Health worked with NPG Consulting, the firm that works with the Colorado Department of Revenue to produce demand reports for the state, to commission a demand report for New Mexico.
“We worked with NPG to create this very robust demand report, and we learned that this industry could be as large as $786 million for both medical and adult-use by 2026,” Novel said. “That was really exciting insight because … now we have a roadmap that says if we have adequate plans, if we have a robust industry right out the door, then we can reduce and eliminate the illicit market and create an $800 million industry for the state of New Mexico.”
With this data in hand, Novel said Ultra Health can take an active role in the rulemaking process by providing informed feedback on the proposed regulations to hopefully help guide what the application and, ultimately, the industry will look like.
Ultra Health has also launched several expansion projects to prepare for legalization, deploying about $20 million to expand its retail, production, manufacturing and distribution operations across four New Mexico counties. This includes a newly contracted, 225,000-square-foot building in the southern part of the state that will be used for production, R&D and warehousing.
“It’s equipped with temperature-controlled processing rooms, [as well as] designated warehouses for processing materials and finished goods,” Novel said. “The ceiling heights are about 25 feet with water systems, so it’s basically a large-scale operator’s dream building. … It did not come cheap, but we knew that the forthcoming activity levels would be bigger than we could really imagine, so we chose to dream big.”
Ultra Health has also invested in additional outdoor farmland in Tularosa, as well as a 50,000-square-foot distribution space that will act as a distribution hub to transport cannabis from its Bernalillo campus to Southern and Southeastern New Mexico.
The company is also expanding its water rights; in 2018, Ultra Health purchased 200 acres of land and 1,000-acre feet of water to feed the plants, and earlier this year, the company added another 150 acres of farmland and 750-acre feet of water.
“We knew that water would be a major issue during the onset of legalization and afterward,” Novel said. “There is unfortunately a drought in New Mexico, and we took the initiative years ago to be that responsible operator, where we’re going to go secure water rights from the Tularosa basin that has more water than that area near Albuquerque and Bernalillo where a lot of people live. We knew this was going to be an issue, and we’ve essentially been playing the long game. And it’s really starting to pay off.”
Ultra Health currently operates 25 retail locations, with 15 more in the pipeline. Novel said the company plans to have 50 operational dispensaries by the fall of 2022.
“It’s really about furthering the convenience aspect of our business model,” she said. “We want to make sure that New Mexicans and those spending time in New Mexico have ample convenient options to choose from when they want to shop at a legal, regulated source. That’s a huge part of getting the illicit market into the regulated market.”
“We’re also excited about revitalizing some of the smaller, rural New Mexico areas,” Novel added. “We want to offer individuals good-paying, stable jobs that can turn into lifetime careers. A lot of these small towns, they don’t have new businesses coming to town, so the job market suffers. But if you allow those cannabis operators to come in and give those good wages and create that activity that the local jurisdictions can then tax, a rising tide lifts all boats. It’s an opportunity for those smaller communities to be revitalized and have that business opportunities that they’ve been looking for.”