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Conversion Oil May Be Coming To Michigan: The Beginning of the End of Licensed Outdoor Cultivation?

By: Scott Roberts and Louis Magidson

Some of the most popular cannabis products across the industry are cannabis-infused edibles and cartridges. Cannabis-infused edible products are produced by licensed processors, who use an intensive process that involves extraction equipment needed to extract concentrated oil from cannabis plant matter before adding that oil into normal baked goods or other confectionary goods. This distilled oil, also referred to as “distillate”, is also used for vaporized cartridges. Michigan’s Cannabis Regulatory Agency (CRA) recently proposed a new rule that would allow licensed processors to purchase industrial hemp for the purpose of producing conversion oil to be used for cannabis products for sale in Michigan’s licensed cannabis market. 

Conversion oil is very similar to the distillate oil described above, differing only in that it is derived from industrial hemp before it undergoes the process of converting certain cannabinoids into high potency THC. Industrial hemp is deemed an agricultural product that cannot contain more than 0.3% THC to pass compliance. This limit generally means that industrial hemp is not used for cannabis products marketed to consumers. If the proposed changes to R 420.1001 – R 420.1003b are passed, there will be an entirely new market to which industrial hemp growers may sell. This market will be composed of licensed cannabis processors looking to produce this conversion concentrate oil in order to create cannabis-infused products and edibles at a discounted price compared to purchasing cannabis from licensed Michigan cultivators. 

Who Would be Affected?

For many Michigan licensees, this is a big deal. For processors without any outdoor cultivation, opening the door to conversion oil will likely save them from the costs of creating product. This would be due to the fact that the oil is no longer derived from products grown by MRTMA or MMFLA licensed growers, who must invest substantial capital into finding properly zoned property. Additional costs stem from compliance efforts related to the CRA’s stringent security rules, in addition to license assessment fees that currently stand at $40,000 per each MRTMA Class C license. Hemp growers do not have to incur such costs, and as a result, hemp is substantially cheaper to produce. 

This sounds great to licensed Michigan cannabis processors, as they will have access to much cheaper alternatives to create their concentrate oil. On the flip side, this may sound rather unappealing for licensed cannabis growers and especially for licensed outdoor growers. Outdoor growers currently dominate the processor market for cannabis biomass from which to make distillate. They have invested substantial money into their farms under the assumption that only cannabis grown under the MRTMA or MMFLA can make its way into Michigan’s licensed system. Many would stand to lose much of this investment if cheap, out-of-state hemp is allowed into the market. 

Indoor growers may not be as concerned with this issue as their cannabis is priced higher, making it less desirable for processors to purchase and convert into distillate / oil. However, this would also affect indoor growers, as it would reduce the market for their “trim,” which is often used to produce distillate as well. For licensed outdoor cultivators in Michigan, this could be the beginning of the end of their business. Most outdoor cultivators convert much, if not all, of their outdoor flower into distillate. If a cheaper source of distillate is available, then they will no longer have a market for their biomass. While this is unlikely to happen immediately, this rule change is still a “foot in the door” for converted oil. Once the door opens completely, and the THC restrictions are eventually lifted, many outdoor farms will inevitably go out of business.

This would also have the effect of increasing the licensing assessment fees for all licensees. As noted above, the licensing assessment fee for one MRTMA Class C license is currently $40,000. Outdoor cultivators usually have more than one Class C license, which generates a substantial amount of money and is used to fund CRA’s operating activities. If many of the outdoor cultivators go out of business, as they cannot compete with cheaper, less regulated hemp producers who are not subject to such fees, then CRA will be forced to make up this shortfall through fees to other licensees. 

Not the End of Outdoor…Yet

This may be bad news for outdoor growers, but these effects are unlikely to be seen right away given the language of R 420.1003(b). First, cannabis products containing conversion oil must be labeled as “synthetic,” which is likely to turn off some consumers. Second, this section of the proposed rules puts a strict limit on the THC levels of products produced from conversion oil derived from industrial hemp. After completing all of the required safety compliance testing, all THC infused products (tinctures, lotions, etc.) made from this industrial hemp conversion oil will be limited to 20 milligrams per container while edible cannabis products made from this conversion oil will be limited to 10 milligrams per container. These limits are likely to result in little consumer interest in these products compared to the typical 100 milligram edible commonly sold at Michigan cannabis dispensaries. However, many cannabis insiders are speculating that the language of these proposed rules is just the first step of slowly normalizing conversion oil in the Michigan market.

If these rule changes are passed, additional rules could simply raise these THC concentration limits to competitive values and allow processors to fully transition to producing their products entirely from the much cheaper alternative, industrial hemp conversion oil. As a result, licensed Michigan processors will be the main advocates for these proposed rules, while licensed outdoor growers will strongly oppose the rules, as it could very well spell the beginning of the end of their business. They simply cannot compete on pricing given the substantial compliance and licensing costs imposed on licensed cannabis cultivators.

Why Change the Rules?

The State of Michigan believes the practice of creating this conversion oil from industrial hemp is already occurring, but without its regulatory purview, which the new rules will change. Under the proposed regulations, a processor/producer of industrial hemp conversion oil will be able to make the oil only after written approval from the CRA. To get this approval, producers will have to submit extensive plans that lay out the entire process from acquiring the industrial hemp, to identifying potential contaminants, to what amount of the product is used for conversion and what is excluded as waste. Without written approval from the CRA, industrial hemp cannot be used to create conversion oil. The idea here is to limit which cannabis products become available to consumers without proper safety testing.

Additionally, the proposed rules will eliminate the requirement that the industrial hemp used for products in Michigan must be tested according to the Michigan Department of Agriculture and Rural Development. Instead, industrial hemp will be able to be tested according to the regulations of any department of agriculture. This indicates an intent by lawmakers to allow industrial hemp into Michigan from any other state that has been approved by that state’s department of agriculture and rural development or its functional equivalent. This will give Michigan cannabis processors greater freedom in choosing the most competitively priced industrial hemp, as their market will expand to other states that are perhaps better suited to produce industrial hemp at lower costs. Yet, it would mean less tax revenue for Michigan.

Not a Done Deal Yet

As of the writing of this article, the rules are still set for public comment and have not been finalized. There will be a public hearing held by the CRA on these proposed rules on Wednesday, February 16, 2022. This hearing will be located at 2407 North Grand River Avenue, Lansing, Michigan at 9:30 AM. This hearing offers an opportunity to parties interested in the Industrial Hemp Rules for Marijuana Businesses to have their opinions heard and questions answered. 


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