Cannabis Musings - April 7, 2025

Some thoughts on what tariffs mean for US cannabis.

Friends, in case things weren’t weird enough, it seems like things have significantly weirder in just the past few days. Unless you’ve been farshnoshket for the past week, you’ve noticed that the tariff thing happened. It’s worth thinking through what it all might mean for the US cannabis industry (assuming things haven’t changed again within the minutes after this installment of Cannabis Musings gets posted, which is very possible, because who knows anymore).

Curiously, the fact that (non-hemp) cannabis is still illegal means that the tariffs will mostly pass over the industry. We’ve talked before about the fact that state-licensed cannabis isn’t imported, and what imports did to the cut flower trade in the US. Someday, when we have federally-legal cannabis, we’ll possibly see imported cannabis, but until then, it’s all domestic, so no tariffs there. We take the wins where we can find them, even when they’re inadvertent.

Ancillary products, on the other hand, will likely go up in price. From packaging to exit bags to vape equipment, many of the tchotchkes that go into the production and sale of cannabis come from overseas. Although maybe we’ll see some sellers/resellers of those goods absorb some of the tariff costs, I’d be shocked if some (if not all) of those costs weren’t passed through, which will then just shift the same passthrough problem to operators and dispensaries: how much of a retail price bump will consumers tolerate?

Certainly, that’s an easier question to answer in states where there are fewer dispensary choices and pricing remains robust, but in states that have mature, well-serviced (or even saturated) markets, retailers don’t enjoy much pricing power. Will everyone raise their prices simultaneously (which then gets into antitrust fun (i.e., price fixing)), or will they engage in some tactical game theory relative to their competitors? If producers and retailers can’t raise prices to fully offset the cost of ancillary goods, they’ll end up absorbing those costs, further eroding already cuspy net margins and exacerbating the economic problem of running a US cannabis business.

The 2022-23 period provides us with some color on this point – when inflation spiked during the disruption caused by the global pandemic, prices for most consumer goods rose, but cannabis prices didn’t follow suit. We talked about this curious phenomena at the time, speculating that the cannabis marketplace simply couldn’t/wouldn’t tolerate price inflation, given the spending habits of buyers and the continued competition from the unlicensed market (when you operate outside of supply chains and, well, the law, you’re not subject to their whims). If we indeed head into a recession, see interest rates drop (dropping returns on savings), and watch nest eggs decline in value, the picture for consumer buying power will only get muddier. Az s'is nitto in top, is nitto in teller. (“If there's nothing in the pot, there's nothing on the plate.”).

On a more macro level, the uncertainty in business and capital markets generally that the tariffs hath wrought is already throwing a wrench into M&A and investments in the US. And it’s not like the cannabis industry was already enjoying a plethora of capital activity – we talk about that unfortunate fact in these Cannabis Musings nearly every week. The few investors (mostly high net worth folks) who are still willing to put capital into state-legal cannabis may indeed pull back further, following the macro trend towards reducing risk in the face of volatility.

One other bright spot from all of this is that, part of the White House’s stated goal is to reduce interest rates, particularly on 10-year Treasury Notes. Although the approach towards the economy to achieve this goal is somewhat akin to John Wick’s approach towards avenging the death of his dog, lower interest rates could help reduce the cost of borrowing (to the extent the industry has access to debt) to assist in dealing with the looming cannabis debt “maturity wall”, that leveraged loan liquidation of alliterative lunacy. Lower prevailing rates might also make the generally higher rates enjoyed by cannabis lenders even more attractive to investors looking for a bigger rate spread against Treasuries, but if the already few lenders to the industry can’t attract that investor capital to fund those refinancings because of macro economic conditions, that spread may not be enough of a difference.

My former boss, Sam Zell, taught me that business hates uncertainty. It explains a lot about what has plagued the cannabis industry for many years, and what has exacerbated the problems of still being federally illegal. From constantly wavering rumors about federal cannabis policy, to not knowing what’s going to happen in the states (e.g., Florida), to the rescission of the Cole Memo, to a federal court opening up the hemp floodgates in a trademark case, to states not doing their part to counter the unlicensed markets despite the entire premise of licensed cannabis being the displacement of those same markets, we know very well what uncertainty looks like.

The current conflagration of uncertainty sparked by the tariffs announcement is only going to make things even more difficult for the cannabis industry, even if it won’t be as directly impacted by those levies as others.

Oy gevalt.

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© 2025 Marc Hauser. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. The foregoing represents my own views and not those of Jardín.