Electoral failure could mean hard times for South Dakota's cannabis industry
On Nov. 8, South Dakotans rejected a ballot measure that would have legalized marijuana in the state among anyone 21 years and over. Now, the more than 100 businesses clamoring for a piece of this industry will have to attempt to sustain themselves on a few thousand medical patients.
SIOUX FALLS, S.D. — When the regulatory structure for medicinal marijuana in South Dakota became ready for patients, businesses and doctors over a year ago, many entrepreneurs entered the burgeoning space, many of them likely banking on voters approving the adult-use cannabis measure on the Nov. 8, 2022 ballot.
However, with that initiative rejected by voters, and a more than two-year minimum wait before adult-use cannabis can be passed in 2024 and regulated in the following legislative session, the plans for those behind the 96 registered dispensaries and dozens of cultivation centers in the state have changed.
“A lot of them are going to go belly up,” said Rep. Ernie Otten, vice chair of the summer study committee that looked at ways to improve the rollout of the state’s medical program.
The reason for that is a simple math problem. As of Nov. 28, 5,300 South Dakotans have been approved for patient cards. Between Oct. 17 and Nov. 28, the number of patient cards grew by 30%. Suppose patient cards continue to climb and reach 10,000 by the middle of next year, which would be more than the 6,000 patients that Rep. Otten said the legislature expected when setting up the program.
While the actual annual average spend varies by state, in Arkansas, which has a medical program but no adult use, the average medical patient is projected to have spent just over $3,000 on cannabis this year.
In that case, a rough estimate of the statewide medical market could be $30 million annually, not nearly enough for 96 dispensaries to both keep up with costs and return profits to their investors.
“Our business has the resources to sustain itself for a while, and we're going to be OK, but there's going to be a lot of those dispensaries probably not making it across the finish line,” Emmett Reistroffer, the manager of the Genesis Farms brand, which has licenses for 10 dispensaries, a manufacturing center and a cultivation center in South Dakota. “I would suspect some of them were probably folks that got into the industry hoping for recreational. They didn’t get it, and now they have to go back to the drawing board.”
Still, Reistroffer said he and the small group of ownership, despite believing in the good that cannabis can do, would “like to turn a profit” at some point, which would require voter approval of adult-use legalization.
Even if cannabis entrepreneurs are able to stay afloat, some are already cutting their investments back, which they say hurts local economies across the state.
Donnie Pereira, the vice president for BBS Midwest, which backs several brands across the region and has licenses for a handful of dispensaries and cultivation centers in South Dakota, said the electoral result scaled back their plans for a BesaMe Wellness location in Mitchell at the former Runnings building on Burr Street.
“It was going to be an $18.5 million project. And we're probably going to stop at about $10 million because you don't want to overshoot your market, right?” Pereira said. “But with that being said, that's $8 million that’s not going to get paid to contractors, electricians and plumbers, not to mention the number of employees that will now be hired versus what would have been hired.”
Jack Mitchell, the CEO of the Missouri-based hospitality and cannabis business behind BesaMe wellness and several other cannabis brands, said several investors watching South Dakota either scaled back their capital or did not invest entirely due to the Nov. 8 result.
Cannabis entrepreneurs stress wider economic costs of measure failure
Pereira and others in the industry pointed out that South Dakota would have been uniquely positioned to benefit economically from recreational legalization.
In the southeast corner of the state and along I-29, those in the industry say dispensaries in South Dakota would have seen traffic from Iowa, Nebraska and Minnesota residents, bringing in tax revenue from non-residents.
“I don't think people realized if they would have passed adult use, they would basically access markets that are probably at least five times, maybe 10 times the medical market,” Mitchell said. “Because you get the Nebraska markets, all of Omaha, you would get the northern Iowa market and you get western Minnesota and even Wyoming.”
Should one of these states jump ahead on adult-use legalization, the spending and tax revenue could move in the other direction.
Pereira and Reistroffer also argued that the economic effects would not be solely in the eastern part of the state, saying recreational cannabis in the Black Hills and at national draws like the Sturgis Motorcycle Rally could have increased revenues from the already-strong summer tourism industry.
Those behind the successful campaign to stymie adult-use cannabis don’t see the potential economic downsides as a net loss for the state.
“We have to think about the motivation for organizations. When you're in business, your basic goal is to make sure you have as many people able to access your product as you can,” said Jim Kinyon, an addiction counselor who headed the opposition committee Protecting South Dakota Kids. “But there's also a bottom line with regards to what happens in our communities. And what the costs or the consequences are of continuing to liberalize the use of a substance.”
Still, those in the industry say the focus is on staying afloat and eyeing 2024 for another opportunity to legalize cannabis for adult use.
“We're proud to create economic activity with the millions of dollars we've invested,” Reistroffer said. “The hundreds of contractors that we've hired, the real estate we've bought, the construction, all of that is a net positive for South Dakota. And we hope to continue to prove to policymakers and to the voters that a regulated industry is better than a black market.”