Deep Dive: Cannabis Testing Compliance Costs

This Deep Dive provides an overview of the expense of cannabis testing compliance for cannabis companies in California via a 2020 peer-reviewed research study. This article is a living document that is updated regularly based on the release of new research on this topic.

An April 2020 research study entitled "Costs of Cannabis Testing Compliance: Assessing Mandatory Testing in the California Cannabis Market" that was published in the journal PLOS ONE investigated the costs incurred by a cannabis cultivation or processing or manufacturing company to comply with mandatory cannabis testing laws.

The research leveraged primary data from California, "the country’s largest and oldest legal cannabis market," which it compared to that of other states in which medical or adult-use cannabis laws have been passed.

"We use state government data, data collected from testing laboratories, and data collected from lab equipment suppliers" to run a set of simulations to estimate the cost per pound of compliance with California's testing regulations, reported the study's authors.

"As of mid-2019, 32 of 50 states had some form of legal medicinal cannabis system in place," reported the study. It explained that, since 2012—when Colorado and Washington State implemented adult-use ("recreational") cannabis laws—"11 of those states have legalized and regulated adult-use cannabis."

"We use state data, that collected from testing laboratories, and that from lab equipment suppliers" to estimate the cost per pound of compliance with testing regulations.

The researchers explained how California was the first U.S. state to "decriminalize the sale of medicinal cannabis with the 1996 passage of the Compassionate Use Act (Proposition 215)." Seven years later, the Golden State passed Senate Bill 420 which "set out more specific rules for the operation of medicinal cannabis collectives and cooperatives."

The study noted that this legislation did little to regulate the "cultivation, manufacturing, and sale of cannabis in California," something that resulted from "a wide variety of local ordinances, with little intervention from the state government."

The study noted that California ushered in adult-use cannabis legalization in November of 2016 with passage of the ballot initiative Proposition 64, also known as the Adult Use of Marijuana Act (AUMA) that was approved by 56 percent of voters.

"Subsequently, the Medicinal and Adult-Use Cannabis Regulation and Safety Act of 2017 (MAUCRSA) created a unified framework for the state licensing of cannabis businesses and the taxation and regulation of adult-use and medicinal cannabis," reported the study's authors.

The study noted that cannabis safety regulations, including those that require testing for contaminants or other potential health hazards to consumers, "generally add costs to production" and that one of the largests costs is "mandatory testing of all legal cannabis." In the state of California, which was the case study focus for this study, such testing involves looking for more than 100 potential contaminants, "including pesticides and heavy metals."

The study's authors claimed that theirs was the first research to "comprehensively examine the economic challenges of cannabis testing and estimate the cost of testing compliance per pound of cannabis marketed in a legal and licensed cannabis market."

The study claimed it was the first to "comprehensively examine the economic challenges of cannabis testing and estimate the cost of testing compliance per pound of cannabis."

The study reviewed and compared the "allowable tolerance levels for contaminants in cannabis" to other crops in California. In addition, it reviewed rejection rates in the state since mandatory testing began in 2018 under MAUCRSA. "We compare these with rejection rates in other U.S. states where medical and recreational use of cannabis are permitted," reported the researchers.

The scientific investigation employed data from major testing laboratories in California, several cannabis testing equipment manufacturers, the Bureau of Cannabis Control (including geographical location information), and Cannabis Benchmarks. It used this data to determine "average wholesale batch sizes to estimate the testing cost per pound of cannabis legally marketed in California."

The study observed that all U.S. states that have "legalized, taxed, and regulated recreational cannabis and most states that have legalized and regulated medicinal cannabis" require testing for potential contaminants that include fungus, mold, bacteria, mycotoxins, pesticides, and sometimes extraction solvent residues. This includes "testing and labeling of potency (as measured by concentrations of cannabinoids such as the phytocannabinoid tetrahydrocannabinol, or THC, and cannabidiol, or CBD)."

The research reported that Colorado was the first state to introduce enforcement of "potency and homogeneity tests for retail cannabis products in 2014." Washington State requires testing labs to perform "potency tests, moisture analysis, foreign matter detection, microbial and mycotoxin screenings, and (for extracted cannabis, e.g. cannabis oil) screenings for residual solvents."

The study explained that some states, including California and Colorado (but not Washington), require "more sophisticated and costly wet-lab tests for pesticides and heavy metals." In California, one of the state's departments determined maximum allowable amounts for 66 pesticides, "including zero tolerance for trace amounts of 21 pesticides and low allowable trace amounts of 45 other pesticides." In addition, California requires testing for 22 residual solvents and a range of heavy metals and other types of contaminants.

Some states require "more sophisticated and costly wet-lab tests for pesticides and heavy metals."

Interestingly, the study estimated that in 2016, prior to passage of Proposition 64, total California cannabis production was "approximately 13.5 million pounds of raw flower, with roughly 80 percent of this production illegally shipped out of the state." It noted that "informal evidence suggests that pesticide residues were common in cannabis products in the pre-regulated market" and cites a 2017 investigation that reported that 93 percent of 44 cannabis samples from 15 retailers in California featured pesticide residues.

To calculate its estimates, the study developed a series of formulas that took into account the data retrieved from the major testing labs and other sources. This detailed analysis included average transportation costs, the impact of unsuccessful tests, the maximum and average daily testing capacity of labs, and overall operational efficiency.

The study determined the costs and economics of several aspects of the testing infrastructure of legal states such as California, including the expenses of both establishing and operating a licensed and compliant testing laboratory for medical and adult-use cannabis.

The research determined that the minimum capital investment to operate a licensed cannabis testing laboratory, including compliant testing equipment, to be "substantial."

"We estimate that in small labs, capital investment in equipment is about $1.1 million; in medium-sized labs, it is about $1.8 million; and in large-scale labs, it is about $2.8 million" and that these costs "represent less than 15 percent of total annual expenses."

The study found that the annual operating costs of such laboratories range from "$1.4 to $2.2 million for small labs, $2.7 to $3.7 million for medium-sized labs, and $6.2 to $8.1 million for large labs." The researchers noted that consumables are the largest portion of annual costs in large labs, whereas labor is the largest cost share in small laboratories. In medium sized operations, "consumables and labor have about equal shares of annual costs."

The annual operating costs of such laboratories range from "$1.4 to $2.2 million for small labs, $2.7 to $3.7 million for medium-sized labs, and $6.2 to $8.1 million for large labs."

The study reported that large labs supply "almost half the testing services for cannabis sold through licensed retailers in California." Medium-size labs accounts for about 24 percent of cannabis testing, while small labs cover roughly 30 percent of cannabis testing. The researchers found the "weighted average of testing cost from our simulations" to be about $504 per sample."

The study found that batch size "significantly affects" the per-pound testing cost of cannabis in legal markets, "especially when batch size is smaller than 10 pounds." It observed that a batch size of one pound, to reach the retail market, would carry a total cost of testing of "about $641 when the expected rejection rate is equal to zero." As one would expect, testing costs increase as rejection rates go up. Thus, the total testing cost of a pound "increases to $714 if the expected rejection rate is equivalent to four percent" and $791 for a rejection rate of eight percent.

The scientific investigation reported that batch size "varies widely" and that the maximum batch size permitted in California is 50 pounds. It noted that many batches are smaller than 15 pounds and assumed "an eight-pound average batch size in the 2019 California market." It also noted that it expects average batch size to increase in the future "as cultivators become larger and more efficient and take advantage of the opportunity to save on testing costs."

Some testing laboratories re-test batches "when samples barely fail one test" to reduce the probability of false positives. Labs that feature such a policy have reported "up to 10 percent in variation in test results from the same sample." Some labs report that roughly 25 percent of samples need to be re-tested to ensure the accuracy of results.

The study's authors concluded that "testing itself is costly" and "losses inflicted by destroying cannabis that fails testing is a major component of overall costs." Thus, producers and processors that submit for testing batches that pass inspection necessarily save significantly on testing overhead.

The study explained that higher testing costs further strain legal cannabis companies by harming their price competitiveness with the "untaxed and unlicensed segment."

The research explained that testing for pesticide residues, particularly in states featuring "low or zero tolerance levels...are the most demanding requirement and result in the greatest share of safety compliance testing failures."

The study explained that higher testing costs further strain legal cannabis companies by harming their price competitiveness with the "untaxed and unlicensed segment" (underground or "legacy" operators) of the market. It added that regulations and testing "may improve the perceived safety and quality of cannabis in the licensed segment, thus adding value for some consumers."

Price-sensitive consumers, however, are predicted to shop on the "unlicensed segment" when they perceive legal cannabis to be too expensive. The researchers recommended further studies that investigate the costs of cannabis testing and regulatory enforcement across states "to assess implications for consumer and community wellbeing and competition with unlicensed cannabis."

View the original study.