Cannabis Musings - November 3, 2022

Friends – I got into a friendly Twitter debate earlier this week, and just as one should never go in against a Sicilian when death is on the line, one shouldn’t go in against an ex-lawyer from New Jersey (born and raised!) on Twitter. The topic was one that’s interested me for a long time –how cannabis imports might change the US marketplace post-legalization. We’ve discussed this topic before in these Cannabis Musings (apologies that I don’t have a link), but I thought it was worth reexploring in more detail.

You may recall that, earlier this year, Democrats in the Senate introduced the Cannabis Administration and Opportunity Act (CAOA), which won’t pass, but if it did, it would legalize cannabis federally. Separately, Senator Nancy Mace (R-SC) introduced the States Reform Act (SRA), which also won’t pass, but likewise would legalize cannabis federally if it did, which it won’t. Curiously, neither of these bills (that won’t pass) included language banning the import of cannabis. Indeed, the CAOA even contemplates taxing imports.

What does it matter if neither of these bills are going to pass anyway? To me, it sends a signal that Congress isn’t too concerned about limiting the international cannabis trade, as compared to the states’ approach to the interstate cannabis trade. Longtime readers of these Cannabis Musings will know that I’ve been kvetching about how state laws are almost certainly violating the dormant commerce clause (not legal advice), the court-made doctrine based on the Commerce Clause of the Constitution that (very generally) says that states can’t impose an undue burden on interstate commerce. Like banning products from another state.

Let’s pretend the federal government legalizes cannabis and indeed allows for the import of products into the US. A handful of thoughts come to mind.

First, it would be really weird if Congress allowed for cannabis to come in from overseas, but also affirmatively allowed states to continue to limit interstate commerce, as has been proposed by some (such as Prof. Robert Mikos at Vanderbilt Law) based in policy/equity.

Second, even if Congress stayed silent on interstate commerce in legalization (neither the CAOA or SRA say anything about it), I’d expect the states to fight hard to keep their limitations in place. To be clear, legalization isn’t necessary for someone to challenge these state laws, but I think it would create a strong catalyst for it. So there could still be some weirdness post-legalization while that fight plays out.

Third, and here’s the part where I’m plagiarizing my old Cannabis Musings, the industry really needs to think about what all this would mean for domestic cultivation. I think the analog is the cut flower (the pretty kind, not the cannabis kind) trade. Cut flower production was huge in the US until the mid-20th century, when production took off in South America at a much lower cost. US cultivation of cut flowers never really recovered, other than for small producers.

Would the same thing happen to US cannabis cultivation? I have no idea, but it seems kinda plausible to me. There certainly are already licensed growers in South America such as Clever Leaves that are producing at scale and exporting globally. Now, whether it’s cost effective is another thing, and that’s where my Twitter counterpart took issue with my thesis. Fair point! (If you’re expecting me to have done any actual research into cost/pricing, you haven’t been reading these Cannabis Musings for long enough, but #Cannabis Twitter doesn’t know that.) However, I can’t imagine production and transportation getting more expensive over time as companies scale and global commerce increases.

The other counter to my thesis made by my sparring partner is that US cannabis customers are too discerning for mass-produced generic cannabis, so it simply won’t compete with the more specialized varieties of US cannabis. I think, however, that this is taking too narrow of a view of the future of US cannabis. His point may be somewhat correct regarding today’s average cannabis consumer, but I think it’s wrong going forward.

I’ve always speculated that this industry will eventually look like the beer industry – a handful of companies producing highly-branded, widely-distributed, mass-produced products with little typicity (to borrow a wine word); many regional, local, and hyperlocal producers of artisanal products for enthusiasts; and very little in-between. Beer isn’t the only CPG that has this kind of market structure, but it’s the best analogy I can think of. It’ll be an hourglass-shaped market.

It’s going to take a long time to get to that point (though it’s starting to shape up that way), but it will be driven in part by the need for the industry to attract customers who are new to cannabis. Growth in legacy states continues to flatten out in part because that base of legacy users is finally being satisfied. The newer uses who will drive future growth and expansion aren’t going to be as interested in high-end cannabis by their very nature – new wine drinkers don’t demand Domaine de la Romanée-Conti (very high-end Burgundy), they drink inexpensive, mass-produced wines, and there’s nothing wrong with that. Form factors (insider term!) such as beverages and edibles continue to improve in technology and provide the convenience and accessibility necessary for broad consumption. Nationally-recognized branding is still in its infancy.

In short, I think that there will eventually be demand for both high-end, locally-produced, artisanal domestic cannabis, and lower-quality, mass-produced, generic cannabis, whether it’s produced domestically or outside of the US. There’s room for both the expensive stuff and the cheap stuff.

What does it mean then for US cultivators if my thesis is correct? Whatever happens, it’ll be fartoost. As far as I can tell, the industry isn’t really talking about this, but I think it should be.

Be seeing you.

© 2022 Marc Hauser and Hauser Advisory. 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. Subscribe to Cannabis Musings at hauseradvisory.com.