Whitney Economics has often described the cannabis industry as a race to the starting line. There has recently been a lot of changes and proposed changes to marijuana and hemp policy. From re- or de-scheduling to the changing of the legal definition of hemp and limits on the level of THC per container, there are a lot of “what-if” discussions happening and a lot of uncertainty as a result.
Our original intent of this part of our newsletter was to provide a breakdown in hemp and marijuana policies and outline the implications. It seems, though, that everyone has an opinion on what is going to happen, and every opinion is different. The key message from our perspective is this: Only time will tell.
While everyone is getting spun up on the possibilities, the one thing we know for certain is that things are all in a state of flux and we can only influence the things we can control.
How many times have we been told that the full federal legalization will occur imminently? How many times have we seen policies proposed that could ruin our businesses only for them to NOT come to fruition. With all of these mental gymnastics, we are in a classic example of the concept of running to stand still. “Running to stand still” describes being trapped in a cycle where your efforts to escape a situation only keep you in the same place, or even make things worse. This seems to be the perfect descriptor of the cannabis and hemp industries right now. Here are a few examples:
Hemp Update
The U.S. Congress, through an appropriations bill, changed the federal definition of hemp and also set federal policy related to the per container THC limits. On the surface, this has the potential to have significant impacts on not only the hemp-derived cannabinoid sector, but also on hemp fibers and grains. Many of the politicians who voted in favor of this ban (in order to end the government shutdown) said that they were forced to choose between ending the shutdown or opposing the hemp ban. In response to this legislation, banks are already pulling back service offerings, investors have taken a pause and farmers are not considering planting. There are few, if any pivots for product manufacturers, so this is a threat to the $28.4B – $35.0B industry and its 328,000 workers.
Now that the legislation has been signed into law, there has been a flurry of analysis that examines the impacts and what corrective actions should be taken. Several solutions, from extending the enactment period to repealing this law all together, have been proposed. Currently the law remains in place and the clock is ticking and state legislatures are starting to act. The damage has already been done, so now it is more about how much and how far the impacts will be. President Trump recently instructed his staff to work with congress to enact changes to the legal definition of hemp, mainly at the product level. There is confidence that changes will be made to the law, but the timing of this and in what form these changes will be is still TBD. So, uncertainty will remain in the interim.
Marijuana Re-scheduling
Although there have been discussions for several years on marijuana reform, rescheduling has been prominently in the headlines as of late. In fact, President Trump just signed an executive order instructing the U.S. Attorney General to expedite the process of reclassifying marijuana. Despite the executive order, nothing has changed with respect to marijuana being a Schedule 1 drug until this process is complete. Rescheduling would change the designation from a Schedule 1 drug, with no medical benefits, to a Schedule 3 drug designation similar to Tylenol with codeine. It seems from our perspective that many industry observers do not understand how marijuana would be impacted by a Schedule 3 designation. Some say that there would be a serious impact on small businesses through forced consolidation. Others opine that it would be the end of the dispensary system in some states due to the fact that Schedule 3 drugs require DEA and FDA licensing in order to be legally sold and that it must be sold in pharmacies. Some others have said that states have long ignored federal scheduling laws and that the effects of a rescheduling would be minimal.
In discussions with thought leaders in this space, it is clear that there will be some form of 280E federal tax reform, but it is not clear who will be eligible for and benefit from the tax changes. A banking seminar recently acknowledged that FINCEN policy will still be in effect and banking fees will still be elevated. Banking compliance requirements will still be robust and interest rates will still be elevated, but premiums may be reduced. Others have said that this will only apply to the medical sector and not adult-use. The key theme here is that nobody really knows until the event occurs and the rules are published. So, the federal illegality remains in place, as do the levels of uncertainty.
What Do We Know Right now?
Right now, cannabis operators are continuing to do more with less. Wringing out every ounce of cost in order to keep their heads above water. Operators are still struggling with profitability in an environment with price compression and lower margins. It is critical that while all of this uncertainty abounds, businesses remain vigilant and focused on the current environment rather than get caught up in the unknown. I am advising operators and policymakers to prepare for change, but nobody knows what that change currently looks like. So, it is important for hemp and marijuana operators to remain operationally disciplined and adhere to the current rules and not get too far ahead of themselves. It is better to survive long enough to see the future, instead of focusing on the future and not being able to survive. While we are finishing the race to the starting line, we are still running to stand still.
Hang in There, Baby.
