Cannabis Musings - November 18, 2024
Where we are today - a consideration.
Friends, as further proof that cannabis is becoming normalized, Freakonomics Radio did a series on cannabis. Interestingly, the first episode was about one of our favorite topics around here – the intersection between cannabis and alcohol. “Is America Switching from Booze to Weed?”, the title asks, although, curiously, the episode never really addresses its own question, instead dedicating most of the episode to history and the medical effects of the products. It does, however, offer listeners a very public radio-esque joke on nomenclature:
You may know it as weed or marijuana or hemp or pot or, if you’re old enough, maybe you know it as grass or reefer or herb. It has gone by many names in many places and many times. Mary jane, sticky icky, chronic, devil’s lettuce, gas, ganja, 420, dope, green goddess, flower, zaza, blaze, bud, shake, skunk, greenery, kush! We’re just going to call it cannabis.
Of course, these Cannabis Musings have been talking about the natural synergy between the alcohol and cannabis businesses since its early days 6 years ago, a reminder about how long we’ve been addressing the same problems and questions. Indeed, the state-licensed cannabis industry is remarkable for both how much and how little progress it seems it’s made over the past decade (yet another example of the quantum duality of cannabis).
Coincidentally, friends of the newsletter at California craft producer, Proof Cannabis, recently asked me the question, “Have we finally hit bottom?” It’s a great question in the context of looking back at where we’ve been and where we’re going with U.S. cannabis. It’s also an impossible question to answer, but let’s think about it anyway.
Dating myself, I’m a child of the Just Say No and D.A.R.E. generation, a time when a very special episode of The Facts of Life addressed whether teens should smoke pot (no) and if you could use a bong to store jelly beans (ill advised). Contrast that messaging from First Lady Nancy Reagan and the Reagan administration’s war on drugs with where we are today – a pending rescheduling in play, legalized cannabis in 38 states, and federal departments (primarily the DOJ and FDA) that haven’t shut the whole thing down (albeit as a matter of grace).
Federal cannabis policy has eased significantly while teen cannabis use continues to drop, in defiance of the fearmongering. Cannabis amazingly became a real issue during the recent presidential campaign, and Congress has introduced multiple legalization bills in recent years. Sure, none of that led anywhere, but the fact that we’re having that conversation at the highest levels of the federal government says a lot. The continued failure of the SAFE® Banking Act to pass (other than supplying reliable amusement to these Cannabis Musings), the lack of a Cole Memo 2.0 (however toothless), and the delays in rescheduling are mere speed bumps - from a policy perspective, both federal and state, I truly think we’ve risen from the bottom, and we’re (most likely) not going back down.
On the other hand, oy gevalt, are things dire out there. Remember the MJBizCon parties from 2017-2019? Remember when money was cheap and easy? Remember when the future was bright, cannabis stock prices were astronomical, and everyone (well, except these Cannabis Musings – always the skunk at the picnic) thought the gravy train would never end? Az a glick ahf mir! (“I should have such good luck!”). Things went from bad to worse when equity capital dried up and companies turned to debt. The reckoning is now just beginning.
One very bad sign is the lackluster earnings being reported by public cannabis companies for the third quarter. Revenue seems to be down across the board. There’s still growth in the states where legalized cannabis is still fairly new – Ohio, New York, New Jersey – but the legacy states continue to sag. A familiar pattern - revenues initially soar as a state’s licensed market is born and wholesale prices rise because supply can’t keep up with demand. Over time (and it’s not that long), revenues flatten out as the in-place demand is satisfied, wholesale prices crater as a result of overproduction, eventually leading to stagnation. Eventually, the industry is going to run out of states and need to find other ways to expand the customer base.
So, the U.S. has an industry with massive, but highly localized, macro growth prospects. Not enough capital to pay the overabundant taxes, let alone fuel the growth needed to mature. Competition from not only the embedded, unlicensed cannabis market, but also hemp-derived THC products. State systems that are both supportive and harmful. Supply chains that don’t work. Agencies that aren’t enforcing laws to eradicate, or at least hamper, the unlicensed market, made even more complicated by the desire to not restart the war on drugs. See supra. A national consumer base that continues to support legalization, but not enough to effect real change and persuade the handful of Senators whose vote would make the difference to overcome a filibuster that it’s worth the political capital to make the move. What works everywhere else usually doesn’t work in cannabis, so the industry has had to create an entirely new playbook.
Oh, and Instagram banned everyone. Again.
What’s at the root of all of these problems? Federal cannabis policy. See supra. Not just that cannabis remains federally illegal, which is honestly most of the problem, but the fact that federal policy remains completely unpredictable (thanks to friend of newsletter, Kevin, for framing the thought that way). When the industry heated up in 2017-18, most fantasized that legalization was just around the corner, shortly after SAFE v.1 was to be enacted. These Cannabis Musings were early pessimists, frequently referring to those expectations as “farkakteh,” but it took a cannabis stock crash in 2019 and eight more failed iterations of SAFE to get the industry to take off those rose-colored glasses. The lesson is that the only thing we can ever really expect from the federal government is to have no idea what’s happening or when. We can’t continue to delude ourselves that it’s going to do anything to make our lives easier. At best, we can probably expect that the feds aren’t going to shut the whole thing down. Probably.
I also don’t think that we can expect to make as much material progress on the state level as we’ve seen over the past decade. A remarkable amount of change has been made over that period, leaving less room for growth (market-wise and policy-wise). The industry is going to need to expand its consumer base to find continuing growth. For example, I think that the licensed industry should take note of the quick consumer adoption of so-called “intoxicating hemp” drinks. It was of course helped by the fact that the products are sold in liquor stores and the like, distributed by alcohol beverage distributors that have the capabilities of handling the products, and allowed to be shipped. And it doesn’t help that dispensaries aren’t really set up to store and shelve a wide selection of THC drinks. However, drinks are easy. So are tinctures, capsules, edibles. They’re a low barrier to entry into trying cannabis, and the industry needs to find more ways to target folks outside that satiated cannabis consumer base. Not everyone wants to be a connoisseur – plenty of people are perfectly happy drinking light beer.
Where does that leave us? Well, I’ve been working in this industry for almost seven years now (which makes me both a veteran and a sheyfele (“little sheep”)), and I marvel at the progress we’ve made, the result of tireless efforts of advocates, professionals, entrepreneurs, and enthusiasts. At the same time, the business side has generally deteriorated over that period of time. There are pockets of success for sure, but they’re few and far between, and the fundamental problems that have caused that destruction of capital are unlikely to change in any material way any time soon.
Oych mir a leben? (“This you call a living?”).
How do we fix the problem then? We’ve talked about this before – the industry needs a strong trade group that represents all constituencies to pool resources and effect change at the federal level. We’ve got to focus our attention and our money at one single goal – full federal legalization (which, again, almost definitely won’t happen without an entire regulatory and tax framework ala alcohol). Work the narrative and change the minds of the Congresspeople (and their voters) who are reluctant to spend their political capital making it happen. This is the one thing that would benefit everyone working in the licensed industry, solving pretty much all of our problems. Short of that, vos iz der chil’lek? (“what difference does it make?”). We also need strong trade groups at the state levels advocating for regulatory improvements and a reasonable level of enforcement. These already exist in some states, for sure, but they need money to engage in effective lobbying efforts.
I don’t think it can get much worse, but I don’t think it’s going to get better any time soon unless we make it happen, collectively.
Be seeing you.
© 2024 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.