Legal marijuana in California as a business was supposed to be a no-brainer. How could it not be profitable in a liberal state pushing 40 million residents where some of the best weed in the world has been grown for decades? But nearly three years after Proposition 64, the law legalizing the adult use of the drug, was passed, California cannabis producers are not seeing the windfalls predicted. They tell Sharyn Alfonsi that regulations and a robust black market are cutting into legal pot profits. Alfonsi reports from Northern California’s “Emerald Triangle” on the next edition of 60 Minutes, Sunday, October 27, at 7:30 p.m. ET and 7 p.m. PT on CBS. 

“The regulated market has been a fraction of what everybody expected it to be,” says Mikey Steinmetz. So far, he hasn’t seen the profits promised to investors who put up $175 million to seed his pot processing center, a sprawling warehouse where he shows Alfonsi tens of thousands of pounds of cannabis being processed for sale to retailers. And those retailers are a big part of the problem – there aren’t enough of them. “There’s less retailers in California than there are in the State of Oregon,” he tells Alfonsi. California has nearly 10 times the population of Oregon.

The California law gives local governments the right to regulate the pot shops so towns can prohibit them. A whopping 80% of the state’s towns and cities have turned legal pot shops down.

The law also calls for strict regulation and fees that can hamper licensed growers like Casey O’Neill, who served time for cultivating pot when it was illegal. Turns out O’Neill’s vision of earning a lucrative living doing the thing he loves was just a pipe dream. After jumping through all the regulatory hoops with costs of $50,000 over a few years, he says there was no profit in growing his 45 plants. “Permits, for consulting, $2,500 a year for the water board discharge permit. It’s $750 a year for the pond permit. It’s $1,350 application fee to the county, plus another $675 when they actually give you the permit annually,” O’Neill says.

The black market growers are the ones making the money says Mendocino County Sheriff Tom Allman. “The black market has greatly increased,” he says. That product takes customers away from California’s legal growers. Black market growers also sell their illegal weed out of state, a market closed to California growers who may only sell in-state. So the black market growers have a huge market. Allman says, “Once a week we get a call, it’s usually some trooper back east, you know, at 3:00 in the morning, who stopped a car for not having a taillight. Says, ‘You won’t believe it. You know, we got 35, 40 pounds.'” 60 Minutes was told by highway patrols in six states east of California that they have seized up to three times more pot on their roads since Proposition 64 was implemented.

In a state, much of the illegal weed isn’t just being sold by shadowy dealers, but in illegal storefronts in strip malls, where buyers aren’t being taxed at 45% and the dealers don’t buy expensive permits from the state. Legalization has actually made illegal weed cheaper and easier to buy. It’s frustrating for entrepreneurs like Steinmetz. “Unlike other industries, we have this kind of in-the-shadows, unspoken-about competitor, right? So it’s not like California is fully raging, fully legal.”

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